SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended August 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 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 of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 First Avenue South
P. O. Box 8020
Wisconsin Rapids, Wisconsin 54495-8020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (715) 424-4444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock, $.01 par
value
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 30, 2001:
$3,313,344
Number of shares issued and outstanding of each of the registrant's classes of
common stock as of November 30, 2001:
Class A Common Stock, $.01 par value: 49,826,455 shares
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE:
Proxy Statement for 2002 annual meeting of shareholders (to be filed with the
Commission under Regulation 14A within 120 days after the end of the
registrant's fiscal year and, upon such filing, to be incorporated by reference
into Part III, to the extent indicated therein).
PART I
Special Note Regarding Forward-Looking Statements
We make certain "forward-looking statements" in this Form 10-K, 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 return to profitability, sales and marketing
strategies, expected levels of trade and marketing spending, anticipated market
share of our branded 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 our Northland and Seneca brand
names, regain lost distribution capabilities and branded products market share
and generate increased levels of branded product sales; (ii) the ongoing impact
of the continuing significant industry oversupply of cranberries; (iii) the
development, market share growth and continued consumer acceptance of our
branded juice products, including consumer acceptance of our "27% Solution";
(iv) the disposition of certain litigation related to the sale of the net assets
of our private label juice business; (v) the impact of the marketing order of
the United States Department of Agriculture relative to the 2001 crop year, as
well as the cranberry purchase program adopted by the United States Congress;
(vi) agricultural factors affecting our crop and the crop of other North
American growers; and (vii) our ability to comply with the terms and conditions
of, and to satisfy our responsibilities under, our new credit facilities and
other debt agreements. 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-K. We disclaim any duty to update these statements or other
information in this Form 10-K based on future events or circumstances. Please
read this entire Form 10-K 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 and recent debt and equity
restructuring.
Item 1. Business.
Restructuring Transaction
During fiscal 2001, we were in default under the terms of our loan
documents with our then-current bank group and other third parties. We had
difficulty generating sufficient cash flow to meet our obligations on a timely
basis, and were often delinquent on various payments to third party trade
creditors and others. We failed to make certain scheduled monthly interest
payments under our revolving credit facility. We reached the point where we felt
it was imperative to reach an agreement with our then-current bank group and to
refinance our bank debt, or else we believed we were faced with liquidating or
reorganizing Northland in a bankruptcy proceeding in which our creditors would
have likely received substantially less value than we felt they could receive in
a restructuring transaction and our shareholders would have likely been left
holding shares without any value.
On November 5, 2001 (which was subsequent to the end of fiscal 2001),
in contemplation of completing a potential restructuring transaction, we
effected a one-for-four reverse stock split of our outstanding capital stock
(which was previously approved by our shareholders at our 2001 annual meeting of
shareholders). Additionally, in furtherance of the potential transaction, we
voluntarily delisted our Class A shares from trading on the Nasdaq National
Market and obtained quotation of our Class A shares on the Over-The-Counter
Bulletin Board under a new symbol ("NRCNA") effective on the opening of trading
on
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November 6, 2001. All share and per share information included in this Form 10-K
reflects the reverse stock split.
On November 6, 2001, we consummated a series of transactions with Sun
Northland, LLC (an affiliate of Sun Capital Partners, LLC, a private equity
investment firm headquartered in Boca Raton, Florida), which we refer to as "Sun
Northland", and with members of our then-current bank group and our new secured
lenders, Foothill Capital Corporation and Ableco Finance LLC, that resulted in
the restructuring of our debt and equity capital structure and a change of
control of the company. We refer to these transactions collectively as the
"Restructuring." Generally speaking, in the Restructuring, Sun Northland entered
into certain Assignment, Assumption and Release Agreements with members of our
then-current bank group which gave Sun Northland, or its assignee, the right to
acquire our indebtedness held by members of our then-current bank group in
exchange for a total of approximately $38.4 million in cash, as well as our
issuance of a promissory note in the principal amount of approximately $25.7
million and 7,618,987 Class A shares to certain bank group members which decided
to continue as our lenders after the Restructuring. Sun Northland did not
provide the foregoing consideration to our former bank group; instead, Sun
Northland entered into a Stock Purchase Agreement with us (which we refer to as
the "Purchase Agreement"), pursuant to which Sun Northland assigned its rights
to those Assignment, Assumption and Release Agreements to us and gave us $7.0
million in cash, in exchange for (i) 37,122,695 Class A shares, (ii) 1,668,885
Series A Preferred shares (each of which will convert automatically into 25
Class A shares upon adoption of an amendment to our articles of incorporation
increasing our authorized Class A shares, and each of which currently has 25
votes), and (iii) 100 shares of our newly created Series B Preferred Stock,
which were subsequently transferred to a limited liability company controlled by
our Chief Executive Officer. Using funding provided by our new secured lenders
and Sun Northland, we acquired a substantial portion of our outstanding
indebtedness from the members of our then-current bank group (under the terms of
the Assignment, Assumption and Release Agreements that were assigned to us by
Sun Northland) in exchange for the consideration noted above, which resulted in
the forgiveness of approximately $81.5 million (for financial reporting
purposes) of our outstanding indebtedness (or approximately $89.0 million of the
aggregate principal and interest due the then-current bank group as of the date
of the Restructuring). We also issued warrants to acquire an aggregate of
5,086,106 Class A shares to Foothill Capital Corporation and Ableco Finance LLC,
which warrants are immediately exercisable and have an exercise price of $.01
per share.
In addition to the Restructuring, we also restructured and modified the
terms of approximately $20.7 million in outstanding borrowings under two term
loans with an insurance company, consolidating those two term loans into one new
note with a stated principal amount of approximately $19.1 million and a stated
interest rate of 5% for the first two years of the note, increasing by 1%
annually thereafter, with a maximum interest rate of 9% in the sixth and final
year. We also renegotiated the terms of our unsecured debt arrangements with
certain of our larger unsecured creditors, resulting in the forgiveness of
approximately $3.5 million of additional indebtedness previously owing to those
creditors.
As a result of the Restructuring, Sun Northland controls approximately
94.4% of our total voting power through (i) the Class A shares and Series A
Preferred shares we issued to Sun Northland, and (ii) the additional 7,618,987
Class A shares over which Sun Northland exercises voting control pursuant to a
Stockholders' Agreement that we entered into with Sun Northland and other
shareholders in connection with the Restructuring. Assuming conversion of the
Series A Preferred shares and full vesting over time of the options to acquire
Class A shares that we issued to key employees in the Restructuring, Sun
Northland owns approximately 77.5% of our fully-diluted Class A shares.
As of November 30, 2001, we were in compliance with all of our debt
arrangements. We expect that the Restructuring will provide us with sufficient
working capital and new borrowing capacity to once again aggressively market and
support the sale of our Northland and Seneca brand juice products in fiscal
2002.
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General; History
We are a grower, processor and marketer of cranberries, branded
cranberry products and fruit beverages. Our products include:
o Northland brand 100% juice cranberry blends (containing 27% cranberry
juice and marketed as The 27% Solution), which we sell through supermarkets,
drug store chains, mass merchandisers, club stores, foodservice outlets and
convenience stores;
o Seneca and TreeSweet bottled and canned fruit beverages, including
apple, grape, cranberry and orange juice products, and frozen juice concentrate
products, including apple, grape and cranberry juice products;
o Northland brand fresh cranberries, which we sell to retail and
wholesale customers;
o Awake frozen orange-flavored concentrate; and
o cranberry juice concentrate, single-strength cranberry juice,
cranberry juice puree, sweetened dried cranberries, chocolate-coated cranberries
and frozen and whole sliced cranberries, which we sell to industrial and
ingredient customers.
We also provide contract packaging services to third parties utilizing
our owned manufacturing facilities located in Wisconsin and New York.
In addition to producing and selling cranberry and other fruit
products, we are also a cranberry grower, with 24 cranberry producing marshes
and 2,524 planted acres owned or operated in Wisconsin and Massachusetts as of
November 30, 2001. We intend to pursue the sale of our Hanson, Massachusetts
marsh during fiscal 2002, and we are currently in negotiations with the lessor
of our leased marshes in Nantucket, Massachusetts to terminate that lease on or
about December 31, 2001. Upon sale of the Hanson property and termination of our
Nantucket lease, we will own or operate 21 cranberry producing marshes and 2,016
planted acres.
We also maintain multi-year crop purchase contracts with 47 independent
cranberry growers to purchase all of the cranberries harvested from an aggregate
of up to 1,960 contracted acres.
We began our business in 1987 as a cranberry grower and member of the
Ocean Spray Cranberries, Inc. marketing cooperative. In 1993, we left Ocean
Spray and introduced Northland brand fresh cranberries. In October 1995, we
introduced our family of Northland 100% juice cranberry blends. By June 1997, we
had successfully achieved national distribution. In fiscal 1999, we acquired the
juice division of Seneca Foods Corporation, including the right to produce and
sell nationwide Seneca brand products, TreeSweet and Awake brand names, as well
as additional processing, distribution and receiving facilities. In fiscal 2000,
we sold our private label juice business, which we acquired in July 1998 from
Minot Food Packers, Inc., to Cliffstar Corporation. In June 2001, we sold our
bottling and packaging facility in Mountain Home, North Carolina, to Clement
Pappas NC, Inc. In June 2001, we also sold our private label and food service
cranberry sauce business to Clement Pappas and Company, Inc.
Fiscal 2001
Fiscal 2001 was another challenging year for us following the difficult
year we experienced in fiscal 2000. During fiscal 2001, we continued to
experience cash flow difficulties. We were not in compliance with several
provisions of our former 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 the end of the fiscal year.
In addition, continued heavy price and promotional discounting by Ocean
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Spray and other regional branded competitors throughout fiscal 2001 resulted in
lost distribution and decreased market share of our products in various markets.
Although we were successful in retaining distribution in many markets, the lack
of sufficient working capital limited our ability to promote our products.
Although our products continue to be available in all 50 states, as of September
9, 2001, our Northland brand 100% juice cranberry blends were available in
supermarkets nationwide that account for approximately 78% of total grocery
sales according to data compiled by Information Resources, Inc. ("IRI"),
compared to 92% at the end of fiscal 2000. Additionally, IRI data indicated
that, for the 12-week period ended September 9, 2001, our Northland brand 100%
juice products achieved a 6.0% market share of the supermarket shelf-stable
cranberry beverage category on a national basis, down from a 10.9% market share
for the 12-week period ended September 10, 2000. Market share of our Seneca
brand cranberry juice product line for the same period decreased from
approximately 2.7% to approximately 0.4%, resulting in a total combined market
share of supermarket shelf-stable cranberry beverages for our Northland and
Seneca branded product lines of approximately 6.4% for the 12-week period ended
September 9, 2001, down from approximately 13.6% for the 12-week period ended
September 10, 2000.
An oversupply of cranberries resulting from three consecutive
nationwide bumper crops culminating with the 1999 harvest, followed by what we
believe was an inadequate volume regulation under the USDA cranberry marketing
order for the 2000 crop year, resulted in continued large levels of excess
cranberry inventories held by us and other industry participants. As a result,
the per barrel price for cranberries continued to decline through the first
quarter of fiscal 2001 and, while the per barrel price has subsequently
increased, it has not recovered to the extent we anticipated. As a result of
these factors, our cost to grow the fall 2001 crop and the cost of on-hand
inventories, including costs to be incurred, were in excess of market value, and
we determined that it was necessary to write down the carrying value of our
cranberry inventory by approximately $17.6 million in the fourth quarter of
fiscal 2001.
In the fourth quarter of fiscal 2001, as a result of the deterioration
in the long-term prospects for the cranberry growing and processing industry
over the summer due, in part, to the implementation of what we believe was
another inadequate volume regulation under a USDA cranberry marketing order for
the 2001 calendar year crop, continued large levels of excess cranberry
inventories held by us and other industry participants, forecasted future
cranberry market prices for the next several years, as well as continued
reductions in our anticipated cranberry and cranberry concentrate usage
requirements related to our recent decline in revenues and market share, we
decided to restructure our operations and identify various long-lived assets to
be disposed of, and we concluded that the estimated future cash flows of our
long-lived assets were below the carrying value of such assets. Accordingly,
during the quarter, we recorded an impairment charge of approximately $80.1
million related to writedowns to assets held for sale, property and equipment
held for use, and goodwill and other intangible assets.
As a result of these and other factors, in fiscal 2001, we (i)
recognized a significant loss from operations; (ii) were delinquent on various
payments to third party trade creditors and others; and (iii) failed to make
scheduled monthly interest payments under and otherwise remained in default of
our revolving credit facility. Notwithstanding these and other operational
difficulties, we continue to focus our efforts on a return to profitable
operations, rather than solely increasing revenues and market share, and we
expect that the recently completed Restructuring will provide significant
interest expense reduction and provide us with sufficient working capital and
new borrowing capacity to once again aggressively market and support the sale of
our Northland and Seneca brand juice products in fiscal 2002.
As we began fiscal 2001, our costs to manufacture branded products had
increased significantly due to our facilities not being utilized to capacity. As
a result, we took several steps during the fiscal year to reduce our
manufacturing costs, including:
o scaling back our manufacturing operations through the closure
of our Bridgeton, New Jersey bottling facility and the sale
of our Mountain Home, North Carolina facility;
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o redistributing production volume to our other facilities and
third party contract manufacturers; and
o reducing personnel in all remaining manufacturing facilities
to reflect current sales volume and production levels.
During fiscal 2001, we increased our focus on reducing costs and
improving cash flows from operations by conducting a strategic analysis of our
manufacturing processes, inventory management programs and information systems.
Based on the results of this analysis, we took additional steps in fiscal 2001
which we believe will reduce costs and improve profitability, including:
o implementing a strategy to distribute primarily from
production locations, reducing distribution points from eleven
in fiscal 2000 to seven in fiscal 2001 (including the closing
of our distribution facility in Eau Claire, Michigan that is
held for sale), in an effort to decrease total inventory
levels, increase product availability at remaining
distribution points and reduce product transfer costs;
o implementing an inventory control system based on sales
volumes to reduce finished goods inventory levels and increase
finished goods and non-cranberry raw material inventory turns;
o implementing a production planning and a material resource
planning system (MRP) driven by "needs" based forecasts
allowing use of "Just In Time" materials purchasing and
delivery;
o completing the conversion and continuing enhancement of our
internal information systems, allowing management to obtain
more detailed and relevant financial and operating information
in an efficient and timely manner to assist in the decision
making process; and
o reviewing marsh operations with the goal of reducing marsh
growing and operating expenses.
During fiscal 2001, we also took steps to enhance our control of all
trade spending in the retail grocery markets, including reducing the number of
trade promotions and promotion rates for all brands.
As referenced above, in the last quarter of fiscal 2001, we sold the
net assets of our private label cranberry sauce business and our manufacturing
facility in Mountain Home, North Carolina, to Clement Pappas and Company, Inc.
and Clement Pappas NC, Inc., respectively, for aggregate cash proceeds of
approximately $12.5 million. The proceeds of the sale were utilized primarily to
reduce our then-outstanding bank debt. Clement Pappas and Company, Inc. is
contractually obligated to make certain payments to us for a period of up to
five years from the closing date based on total case sales of cranberry sauce,
subject to an aggregate minimum payment of $1.0 million and an aggregate maximum
payment of $2.5 million. We also entered into a contract manufacturing agreement
with an initial term of one year following the closing date pursuant to which we
are required to manufacture certain quantities of juice products through Clement
Pappas NC, Inc. at the Mountain Home facility.
In fiscal 2001, we took additional steps which we believe will allow us
to remain competitive in the marketplace in fiscal 2002, including:
o enhancing our Northland 100% juice cranberry blends by
reformulating them to contain 27% cranberry juice (which we
refer to as The 27% Solution) in direct response to increasing
evidence of the potential health benefits associated with
drinking cranberry products containing the equivalent of 27%
cranberry juice;
o pursuing continued growth of our sweetened dried cranberry
market through business opportunities with industrial and
ingredient customers, both domestically and internationally;
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o exploring and utilizing alternate sales channels, such as club
stores and food service providers including restaurants,
hospitals, and schools;
o controlling spending at the trade and consumer level by our
sales organization in conjunction with Crossmark, Inc.'s
broker office network nationwide, with increased focus on each
customer; and
o adjusting corporate administrative personnel and functions to
reflect our current business needs.
We believe these and other efforts will help us meet our goal of
returning to profitability and help us to achieve (i) an increase in gross
margins in fiscal 2002 due to reductions in depreciation costs and other
overhead; (ii) lower operating expenses; and (iii) more efficient trade spending
due to the change in our promotional and pricing strategies.
In fiscal 2001 and 2000, we had revenues from one customer, Nestle USA,
of approximately $12.9 and $45.9 million, or 10.2% and 22.2% of our total net
revenues, respectively. In fiscal 1999, we did not have revenues from any one
customer that exceeded 10% of our total net revenues.
Branded Products
Products
Our family of Northland 100% juice cranberry blends is our primary
branded product. We introduced Northland 100% juice cranberry blends in late
1995 and achieved national distribution in the summer of 1997. In early fiscal
2001, we introduced The 27% Solution. As of September 9, 2001, our Northland
100% juice cranberry blends were available in all 50 states and in supermarkets
nationwide that account for approximately 78% of total grocery sales. We
currently produce and sell eight flavors, including traditional cranberry,
cranberry apple, cranberry raspberry, cranberry grape, cranberry peach,
cranberry cherry, cranberry blackberry and cranberry orange. We have five bottle
sizes, all in plastic, available in the general distribution, including 12, 46,
64, 96 and 128 ounce sizes. The 96-ounce size was developed specifically for the
club and mass merchandise channels.
We also produce and sell several varieties of Seneca, TreeSweet and
Awake brand products. At the beginning of fiscal 2001, we completed the national
rollout of the fifth Seneca brand cranberry juice drink flavor, ruby red
grapefruit. This product line also includes cranberry cocktail, cranberry apple,
cranberry raspberry and cranberry grape. As of the end of fiscal 2001, our
Seneca cranberry drink product line was available in supermarkets nationwide
that account for 23% of total groceries sales, according to IRI data. The Seneca
cranberry products were designed to compete against other non-premium cranberry
drink brands and to complement the Northland brand of 100% juice products.
Additionally, Seneca 100% apple juice frozen concentrate is the number
one selling nationally distributed frozen apple juice brand in the nation.
We also sell citrus juice products under the TreeSweet label. The
TreeSweet label is now focused on 64 ounce orange juice, converted from glass to
PET plastic in fiscal 2000, and 5.5 ounce and 46 ounce tin sizes. We also sell
frozen orange-flavored concentrate under the Awake label.
Our foodservice business manufactures and markets juice products in
industry-specific packaging to businesses and public institutions such as
restaurants, hotels, schools and hospitals. We offer our foodservice products in
a variety of sizes and package them under our own Meadow Valley label or under
our other brand labels such as Northland, Seneca or TreeSweet.
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In addition to Northland 100% juice cranberry blends and our Seneca,
TreeSweet and Awake branded products, we also grow and package Northland brand
fresh cranberries and primarily sell them in 12-ounce plastic bags to food
retailers and wholesalers during the fall. We also currently sell sweetened
dried cranberries to industrial and ingredient customers. In conjunction with
our fall 2001 sales of Northland brand fresh cranberries, we offered sweetened
dried cranberries, both coated and un-coated, for sale in bulk form to be
marketed to consumers through grocery store produce departments. We intend to
continue to explore opportunities to expand our sweetened dried cranberries
business in fiscal 2002.
Marketing
Our principal consumer marketing strategy for our family of Northland
100% juice cranberry blends has been to highlight the differences in flavor and
juice content between Northland brand 100% juice cranberry blends and many of
the competing products of Ocean Spray and others which have less than 100%
juice. In fiscal 2001, due primarily to our reduced revenues, cash position and
debt service obligations, we significantly decreased our marketing spending in
support of our branded products. However, our limited marketing campaign
continued to highlight the benefits of 100% juice, and we also focused our
marketing efforts on the first quarter fiscal 2001 reformulation of our
Northland brand juice products, known as The 27% Solution (which now include not
only 100% fruit juice, but also 27% cranberry juice). Currently, Northland is
the only 100% juice brand to contain 27% cranberry juice in every product sold.
We intend to highlight this fact in our marketing efforts in fiscal 2002, as
well as the potential health benefits of our newly reformulated products,
through reference to studies that have used the equivalent of 27% cranberry
juice to research the health benefits of cranberries.
We intend to focus our marketing efforts on:
o media advertising
- In the second and third quarters of fiscal 2001 we utilized
a new national magazine advertising campaign designed to educate
consumers about The 27% Solution and the potential health benefits of
juice products containing the equivalent of 27% cranberry juice. We
incurred approximately $780,000 of expense on media advertising in
fiscal 2001. In fiscal 2002, largely as a result of the equity capital
available to us from consummating the Restructuring, we intend to
increase spending on television advertising to emphasize The 27%
Solution point of difference to a broader audience with stronger
delivery of the message.
o sales promotion
- we offer purchase incentives to attract first-time buyers
and prompt consumers who already drink Northland 100% juice cranberry
blends to purchase more of our products. These incentives are done
through both "cents off" coupons and mail-in rebate offers. In fiscal
2001, we incurred approximately $0.5 million in expense to promote
these incentives compared to approximately $3.8 million in fiscal 2000.
In fiscal 2002, we anticipate that our fiscal sales promotion spending
will be greater than fiscal 2001 levels, and we currently intend to
allocate additional funds toward publicizing The 27% Solution message
through media advertising.
o packaging/labeling
- we revised our labeling for fiscal 2001 to focus on The 27%
Solution and to highlight the 27% cranberry juice content of all of our
Northland branded products, as well as the 100% juice content. The full
line of Northland 100% juice cranberry blends displays The 27% Solution
on the principal display panel, explains the benefits of The 27%
Solution on the back panel and, unlike our competitors, specifically
states the cranberry content above the Nutritional Facts Panel.
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Sales
In a reversal of recent trends, industry-wide dollar sales of
supermarket shelf-stable cranberry beverages declined during fiscal 2001, down
6% over our fiscal 2000. However, total category dollar sales still exceeded
$800 million for the 12-month period ended August 12, 2001. We believe this
sales decline was primarily due to heavy retail discounting during the past
year, primarily by our major competitors, which resulted in decreasing actual
dollar sales. We anticipate that industry-wide sales will continue to decrease
slightly in fiscal 2002 for the same reason.
The supermarket shelf-stable cranberry beverage category is composed of
cranberry drinks and cranberry juice blends. According to industry data, sales
of cranberry juice blends still accounted for over 24% of sales for the total
supermarket shelf-stable cranberry category, which is approximately the same
percentage as last year, with total dollar sales of over $193.5 million.
Cranberry drinks account for the remainder, at approximately $609.0 million.
We expect to realize increased sales of our branded juice products in
the coming year by:
o Working to regain sales distribution of our Northland and Seneca
brand products in retail grocery channels and expand alternative distribution
channels such as convenience stores, super-centers, mass merchandisers and drug
stores.
- In fiscal 2001, we made significant progress in introducing
our brands into new distribution channels. Late in fiscal 2000, we
introduced a new 12-ounce single serve bottle into convenience stores,
and we continued to expand that initial distribution in fiscal 2001. We
intend to work to increase distribution in new super-center outlets and
other distribution channels in fiscal 2002, which we hope will increase
overall sales and distribution in these growing business segments.
o Continuing to review and revise our trade promotion plans and control
trade promotion spending.
- On a periodic basis, we offer discounts on our products and
other trade incentives to retailers and wholesalers to temporarily
reduce the price of our products to consumers and to obtain store
display features and retail advertisements. These efforts help to
increase our product visibility and offer the consumer savings on our
products. We anticipate that we will continue these trade promotion
activities in fiscal 2002. In fiscal 2001, we substantially modified
our trade promotional strategies with the expectation of maximizing
value from our trade expenses. We intend to continue that focus in
fiscal 2002.
We will continue to work with Crossmark in most distribution channels
in an effort to improve our overall sales process. Crossmark will act as broker
for Northland and Seneca brands in 100% of the country, in most channels of
distribution, in fiscal 2002. In fiscal 2001, Crossmark represented Northland in
approximately 90% of the country. Crossmark employs over 10,000 people on a
nationwide basis. We expect that its access to state of the art management
systems will allow for greater focus on and implementation of our promotional
programs than we have been able to achieve to date. In addition, as a result of
our agreement with Crossmark, Crossmark will continue to focus on the Northland
and Seneca brands in the areas of sales management, field sales, sales
information and marketing, as specifically related to each individual market
region.
Our branded juice sales efforts in fiscal 2001 were coordinated by our
Vice President-Sales. In fiscal 2002, we intend to add field sales managers to
our branded juice sales team to supplement our current staff and help us to
focus our sales efforts in conjunction with Crossmark. In addition to their
experience with our branded products to date, our sales staff personnel have
prior sales experience working for companies such as ConAgra, Inc., H.J. Heinz
Company, Campbell's Soup Company, Sara Lee, SmithKline Beecham and
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Ralston Purina. Between our personnel and those within Crossmark, the
organization has current or past experience with nearly every major branded
grocery manufacturer in the country.
Competition
The consumer cranberry product beverage market is very price
competitive. Based on industry data, retail supermarket bottled shelf-stable
cranberry beverage sales were approximately $803 million for the 52-weeks ending
August 12, 2001, down from approximately $840 million during the previous year.
The shelf-stable cranberry beverage market is significantly larger if you
include all sales channels as opposed to just supermarkets. Most of the markets
in which we compete are dominated by Ocean Spray. Ocean Spray is an agricultural
marketing cooperative which has certain protections under federal antitrust
laws. Ocean Spray has over 700 member-growers, accounting for approximately 70%
of all cranberries grown in North America.
Northland 100% juice cranberry blends compete with:
o Ocean Spray's branded cranberry juice products;
o branded cranberry juice products of other regional producers; and
o private label cranberry juice products.
Our Northland branded juice products are 100% juice cranberry blends.
Beginning in fiscal 2001, the Northland brand contained 27% cranberry juice
across the line (known as The 27% Solution; previously, only our traditional
cranberry flavor contained 27% cranberry juice, and the rest of our blends
generally contained only up to 15% cranberry juice). Many of our competitors'
products are made up of much less than 100% juice, and many include much less
than 27% cranberry juice content. For example, many of Ocean Spray's cranberry
juice blends contain from 6% to 21% juice with the remainder being water and
high fructose corn syrup. Like Ocean Spray, many other competitors' juices use
sugar or corn syrup additives as sweeteners. We believe that we have an
advantage over many of our competitors due to the perceived health and other
benefits of our 100% juice products. We also believe that we have an advantage
because we are currently the only major manufacturer of 100% juice blends with
an entire product line that contains 27% cranberry juice, a formulation that
studies suggest is beneficial to human health. The success of our branded juice
products will continue to depend on whether consumers will think highly of its
quality and taste compared to that of our competitors' products.
Northland 100% juice cranberry blends are premium-priced products. Our
products compete mainly with other premium-priced branded cranberry beverages,
but also with private label products, which are usually lower-priced.
We expect that Ocean Spray will continue to compete aggressively
against our 100% juice cranberry blend products in response to The 27% Solution
initiative, by further increasing its trade promotion activity, reducing shelf
pricing and continuing an aggressive media advertising campaign. Ocean Spray has
significantly more experience in the fruit juice markets than we do, as well as
greater brand name recognition and greater marketing and distribution resources.
We also compete in the markets for frozen juice concentrate and
shelf-stable canned fruit juices and drinks with our Seneca, Treesweet, and
Awake branded products. Our principal competitors in the frozen juice
concentrate market include several established brand names such as Welch's,
TreeTop and Tropicana. Our principal competitors in the market for shelf-stable
canned fruit juices and drinks include Mott's, TreeTop, Minute Maid and many
regional brands. Many of these competitors have greater brand name recognition
and greater marketing and distribution resources than we do. We cannot be
certain that we will be
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successful in competing against these competitors. Ocean Spray does not compete
in either the frozen juice concentrate market or the shelf-stable canned fruit
juice market.
Industrial/Ingredients/International
Products
Following the fiscal 2000 sale of our private label juice business and
the fiscal 2001 sale of our private label and food service cranberry sauce
business, we recently consolidated our former Non-Branded Products Group into
our new Industrial/Ingredients/International Group. This group's products
generally include:
o cranberry juice concentrate;
o frozen and whole sliced cranberries;
o not-from-concentrate and single-strength cranberry juice;
o single-strength and concentrated cranberry purees;
o sweetened-dried cranberries, with and without chocolate
coating;
o custom blended cranberry and non-cranberry concentrate blends;
o brokered commercial products sold through strategic
partnerships; and
o processing of a variety of fruits into specified concentrates
and blends.
Sales
During fiscal 2001, cranberry concentrate continued to be our principal
industrial/ingredients product in terms of sales dollars. We realized
significant sales growth across the broad range of our industrial/ingredient
cranberry based product lines as well as custom blended non-cranberry juice
concentrates. Our sales of industrial/ingredient cranberry based products for
fiscal 2001 increased over the prior year. This achievement was fueled in part
through price increases as well as less competition.
Our industrial/ingredient sales efforts in fiscal 2001 were coordinated
by our Vice President-Industrial/Ingredient and conducted primarily through our
internal industrial/ingredient sales force as well as a limited network of
independent brokers.
Competition
We compete for the sale of cranberry concentrate, non-cranberry
concentrate blends, not-from-concentrate and single-strength cranberry juice,
and frozen whole and sliced cranberries to commercial and ingredient customers
including, but not limited to, juice processors, bakeries, re-packagers and
wholesale distributors. We believe our unique position as a vertically
integrated grower and processor of cranberries allows us to offer a long-term
reliable supply of high quality, competitively priced cranberry products
uniquely suited to the needs of our industrial, ingredient and international
trading partners.
International
International demand for cranberry products remains strong compared to
historical levels, and we believe this trend will continue in part due to public
awareness of research studies suggesting that the regular consumption of
cranberry products may provide health benefits, including maintenance of a
healthy urinary tract. With processing facilities that specialize in producing
cranberry concentrate and custom blends strategically situated in Wisconsin,
Oregon and New York, we believe we have advantages in providing cranberry
products to commercial customers throughout the world. Our sales of cranberry
concentrate and customized non-cranberry blends during fiscal year 2001 in the
international market exceeded prior year sales. We currently intend to expand
our international broker representation in fiscal 2002 in an effort to continue
growth in our international sales during the period.
-10-
Manufacturing
Receiving and Processing
An important part of our business strategy is our ability to process
our grown and purchased cranberries. We currently own processing facilities
located in Wisconsin and Oregon. We utilize our entire network of manufacturing
locations in the various stages of the processing of cranberries. For example:
o Raw cranberries are brought to our receiving stations. We
own a 172,000 square foot receiving station and fresh fruit packaging
facility in Wisconsin Rapids, Wisconsin. This receiving station, along
with contract receiving facilities in Wisconsin, Massachusetts, and
Oregon, clean and sort raw cranberries.
o After sorting, the cranberries we sell as fresh fruit during
the fall are stored in temperature-controlled facilities until they are
packaged and distributed for sale. Cranberries we use to make our juice
and other cranberry products are cleaned, sorted and stored in freezer
facilities around the country, including the owned 62,400 square foot
freezer facility in Wisconsin Rapids or at independent freezer
facilities, until they are sent to one of our processing plants.
o Frozen raw cranberries are pressed and concentrated at our
processing plants in Wisconsin Rapids, Wisconsin, or Cornelius, Oregon.
The resulting concentrated cranberry juice is stored frozen and then
shipped either to bulk ingredient customers or to one of our owned or
contracted bottling facilities.
Packaging and Bottling
Another important part of our manufacturing strategy is our ability to
bottle and package our branded products in strategically located areas, helping
to reduce freight and other distribution costs associated with shipping finished
goods to our national customers. We own and operate two bottling and packaging
facilities. These owned facilities along with our network of contract packaging
plants are strategically located to service customers throughout the country.
o In Dundee, New York, we own a bottling and packaging
facility totaling 139,000 square feet, including 40,000 square feet of
production area, 53,000 square feet of dry warehouse, 17,200 square
feet of freezer, and 21,000 square feet of cooler and bulk tank storage
area. This plant is capable of producing all sizes of PET bottles, a
full range of glass sizes, and 46-ounce tin cans.
o In Jackson, Wisconsin, we own a bottling and packaging
facility totaling 136,000 square feet, including 55,000 square feet of
production area, 70,000 square feet of dry warehouse and 5,000 square
feet of cooler and bulk tank storage area. This plant is capable of
producing all sizes of PET bottles (except 12 ounce), and two sizes of
tin cans (5.5 ounce and 46 ounce).
In addition to these owned facilities, we utilize three third party
contract-packaging providers to service the southeastern and western markets.
One is located in Fullerton, California, and produces PET bottled products. The
second plant is located in Ventura, California, and produces frozen concentrated
juice products. The remaining contract packaging facility is the facility
located in Mountain Home, North Carolina that we sold in fiscal 2001, which
produces bottles and frozen products primarily for distribution in the
southeastern market. All facilities are strategically located in high volume
markets to minimize freight costs and maximize service levels.
As a part of our manufacturing strategy, we provide contract packaging
services for third parties, and have aggressively sold excess line time at our
owned facilities to improve facility utilization and reduce production costs.
These contract-packaging arrangements are an integral part of production at our
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owned facilities. We believe we are an attractive contract packager for third
party beverage manufacturers primarily because:
o We have developed a solid production and quality control
program in conjunction with our own branded products which can be
adapted to the demands of other national brands; and
o Our plants are strategically located to reduce costs
associated with accessing certain high volume consumer markets.
Distribution
Our primary distribution strategy for fiscal 2001 was to maximize
distribution from our owned and contracted production locations and to minimize
distribution centers that are not associated with a production facility. While
keeping in mind that certain distribution locations are strategically important
due to distance from a production location or a large strategic customer, we
aggressively consolidated distribution locations in fiscal 2001 to improve
overall production costs and reduce finished goods inventory. During fiscal
2001, the distribution centers we utilized were reduced from eleven to seven. Of
the seven remaining distribution centers, all but two are either on the site of
or are directly associated with a production facility.
We have an internal transportation department that contracts with
independent carriers to distribute our products to grocery customers and
customers in other channels. We believe that the strategic locations of our
owned production facilities and the contract packaging plants, along with our
distribution strategy and our in-house transportation department, will lower our
overall costs as well as continue to provide timely response to customer
demands.
Agricultural Operations
We own or operate 24 properties and approximately 2,524 planted acres
in Wisconsin and Massachusetts as of November 30, 2001. We intend to pursue the
sale of our Hanson, Massachusetts marsh during fiscal 2002, and we are currently
in negotiations with the lessor of our leased marshes in Nantucket,
Massachusetts to terminate that lease on or about December 31, 2001. Upon sale
of the Hanson property and termination of our Nantucket lease, we will own or
operate 21 cranberry producing marshes and 2,016 planted acres.
In the fall of 2000 (i.e., fiscal 2001), we harvested approximately
267,000 barrels from 1,878 acres. The 2000 growing season was impacted by the
implementation of a federal marketing order which restricted the aggregate
volume of cranberries that growers in the United States could harvest. This
limit was approximately 85% percent of a given grower's historic average.
We also contract with other cranberry growers in Wisconsin and Oregon
to purchase their crop. In fiscal 2001, we bought approximately 219,000 barrels
of cranberries from other growers. As of November 30, 2001, we maintained
multi-year crop purchase contracts with 47 independent cranberry growers to
purchase all of the cranberries harvested from an aggregate of up to 1,960
contracted acres, subject to federal marketing order limitations. 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 in certain circumstances) and certain incentives
for premium cranberries. The ability to harvest our own fruit, combined with the
contracted acreage, provides us with geographical diversity in our crop and
spreads our agricultural risk.
In September 2000, we were unable to make certain payments due to the
growers under the terms of the contracts and we notified the growers of our
intention to also defer payments required under the contract for the 2000
calendar year crop. The contracted growers did, however, harvest and deliver
their 2000 and 2001 calendar year crops to us and we made the rescheduled 2000
calendar year crop payments in full to
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the growers during the year ended August 31, 2001. We are, however, in default
under the terms of the grower contracts. We intend to seek the necessary waivers
from the growers for the default.
In anticipation of the 2000 marketing order, we took acreage on several
of our locations in Massachusetts and Wisconsin out of production. For the 2000
growing season, we had 561 acres that were temporarily out of production. This
was done to reduce yields in order to comply with the federal volume restriction
and to reduce costs.
For the 2001 growing season, a new federal marketing order is in place
to restrict our cranberry deliveries to approximately 65% of our historic
average. In anticipation of this volume restriction, we placed 387 acres
temporarily out of production during the 2001 growing season. Our fall 2001
harvest (i.e., fiscal 2002) has been completed on our owned and leased marshes.
Production from 1,912 harvested acres totaled 381,000 barrels of cranberries.
During the fall 2001 harvest, we also purchased approximately 191,600 barrels of
cranberries from contract growers.
While we have increased our planted acreage over time mainly through
marsh acquisitions and our own internal planting program, we do not anticipate
adding additional acreage in the foreseeable future. We have determined that it
is no longer economically feasible to operate our Nantucket marshes, and have
entered into negotiations to terminate the lease for those marshes following the
2001 harvest. In addition, for the same reason, our Hanson marsh will not be
operated after the 2001 season and we will attempt to sell it during fiscal
2002.
The quality and quantity of cranberries produced in any given year is
dependent upon certain factors over which we have little or no control. For
example, extremes in temperature, rainfall levels, storms and hail, or crop
infestations can all adversely impact the production in any crop year. While we
make efforts to reduce the potential adverse effects these factors may have on
our internal crop, our cranberry production remains subject to these
agricultural factors.
We also purchase insurance coverage for most of our marshes which is
subsidized by the federal government. These policies help insure against bad
weather and other contingencies which may affect our crop. They generally insure
us for at least 50% of the average crop yield over the past 10 years on each
marsh.
Regulation
Cranberry Products Regulation
The production, packaging, labeling, marketing and distribution of our
fresh cranberries and cranberry juice products are subject to the rules and
regulations of various federal, state and local food and health agencies,
including the United States Food and Drug Administration, the United States
Department of Agriculture, the Federal Trade Commission and the Environmental
Protection Agency. We believe we have complied, and will be able to comply, in
all material respects with such rules, regulations and laws.
The Cranberry Marketing Committee of the United States Department of
Agriculture 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 and
fiscal 2001, the Secretary of the USDA, at the request and based on the
recommendation of the CMC, invoked volume regulations to restrict the
industry-wide harvest of cranberries for the harvests occurring in the fall of
2000 and the fall of 2001. In 2000, the volume of cranberries that growers in
the United States could harvest was limited to approximately 85% of a grower's
given historical production. In 2001, the limit was lowered to 65% of historical
production.
-13-
In addition to the volume regulations 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 made direct cash subsidies totaling $20 million to growers,
or approximately $4.00 per barrel for growers' 1999 crop. Of this, we received
approximately $1.2 million of payments during fiscal 2001. In addition, $30
million was designated for use 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. In addition, we were awarded
contracts and provided concentrate to other contract awardees which generated
net revenues of approximately $4.7 million during fiscal 2001 related to sales
under the USDA cranberry product purchase programs. These purchases will be used
in school lunch and other federal programs directed to the needy and
disadvantaged.
Environmental and Other Governmental Regulation
It can be difficult under federal laws for cranberry growers and other
developers to obtain permits to create new cranberry marshes in wetlands in the
United States. To do so, such growers must generally observe a "no net loss" of
wetlands policy. That is, they must show that the proposed development activity
will not result in a loss of wetland acreage, or they must restore the
functional value of acreage they propose to disturb. Given this strict
requirement, as well as water quality legislation in Wisconsin and
Massachusetts, we believe it is currently unlikely that we, or other cranberry
growers or developers in the United States, will be able to secure permits for
cranberry marsh development or expansion in wetland acreage. However, we and
other growers or developers may renovate existing wetland acreage from time to
time and replant older cranberry vine varieties with higher-yielding vine
varieties. Also, certain developers have created upland cranberry marshes, which
are marshes that are not on wetland acreage. We do not know whether upland
marshes, if successful, will increase the available supply of cranberries in the
future.
Pursuant to permits previously received, in the past several years
certain growers have planted, cultivated, and developed new cranberry-producing
acreage in several states and abroad, particularly in Canada. Many of these
previously planted acres have recently become productive or should become
productive in the near future.
We are currently taking steps to clean up certain contamination caused
by underground storage tanks at one of our marshes in Wisconsin, one in
Massachusetts and at our plant site in Cornelius, Oregon. We have removed the
tanks, or in the case of the Cornelius plant, the tank had already been removed
prior to our purchase of the property. Contamination from underground storage
tanks also exists at our Bridgeton, New Jersey, facility, at which we ceased
operations in fiscal 2001 and which is held for sale. We are currently working
with the former owner of the facility, who is contractually obligated to
indemnify us, to clean up the site. All of the sites have been reported to the
appropriate state regulatory agencies. In addition, all clean-up activities are
subject to state supervision. Based on information available as of August 31,
2001, we believe most of the costs of such activities will be covered by state
reimbursement funds (except in the case of the Massachusetts property), or
claims against the prior owners of the properties. We do not expect to incur
material liabilities as a result of these activities. We intend to continue our
efforts during fiscal 2002 to sell our Bridgeton, New Jersey property.
The Wisconsin Department of Natural Resources approved regulations
which became effective in May 1998 and which amended parts of the Wisconsin
Administrative Code to make it easier to obtain the DNR's approval to maintain
existing cranberry marshes and to obtain state water quality certification to
conduct activities in wetlands under a federal permit. However, as a result of
the continued federal restrictions on wetland development and the long lead-time
associated with the planting and maturation of cranberry vines, we do not expect
the regulations to materially affect the supply of cranberries in Wisconsin in
the near term.
-14-
We don't expect environmental or other governmental legislation or
regulation to have a material effect on our capital expenditures, results of
operations or competitive position, other than as we have described above.
Seasonality
Before fiscal 1997, our business was very seasonal because we sold most
of our crop to cranberry processors. Now that we have evolved from a cranberry
grower to a consumer products company, the seasonality of our business has been
reduced because we offer our products for sale throughout the entire year. We do
expect, however, that our results of operations will continue to fluctuate from
quarter to quarter depending mainly upon the level of media advertising and
other promotional expenditures in any given quarter, as well as seasonal sales
of fresh fruit.
Materials and Supplies
We buy bottles, caps, flavorings, juice concentrates and packaging from
independent third parties. We get most of the materials and supplies necessary
for growing and cultivating cranberries, including water and sand, from our own
marshes. We purchase and expect to continue purchasing most of our fertilizer
and pesticides from our subsidiary, Wildhawk, Inc. We purchase the rest of the
raw materials and supplies, including the materials used to package our fresh
fruit, from various sources.
If necessary, we believe we would be able to find other sources for raw
materials and supplies without a material delay or adverse effect on our
business.
Trademarks and Formulae
We own the Northland, TreeSweet, and Awake trademarks, which are
registered in the United States Patent and Trademark Office. We have also
entered into a 99-year license agreement with Seneca which allows us to market
and sell Seneca brand juice and concentrate. Although not registered, we do
believe we have rights under common law to use of The 27% Solution. The
Northland and Seneca trademarks are important in the sale of our branded
cranberry juice and other fruit juice and fruit products.
We use proprietary flavor formulations to make our cranberry blends. We
protect the confidentiality of these formulations by requiring co-packers to
enter into confidentiality agreements with us.
Employees
As of August 31, 2001, we had 403 full-time employees, as compared to
783 as of August 31, 2000. As of November 30, 2001, we had approximately 368
full-time employees. In addition to our full-time employees, we hired:
o approximately six seasonal workers during the 2001 crop cultivation
season;
o approximately 224 seasonal workers to harvest our crop in 2001;
o approximately 240 seasonal employees to operate the cranberry
processing facility in Wisconsin Rapids during 2001; and
o approximately six seasonal employees to operate the Cornelius, Oregon
fruit processing facility during fiscal 2001.
As a result of our continuing efforts to reduce costs, either through
attrition or permanent layoffs, our workforce was reduced by approximately 380
employees in fiscal 2001. The majority of this
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reduction, 210 employees, occurred during the first quarter of fiscal 2001 as a
result of the Bridgeton, New Jersey, plant closing and other administrative
downsizing. Our workforce was further reduced by 129 employees during the fourth
quarter of fiscal 2001 when we sold our former bottling plant located in
Mountain Home, North Carolina, to Clement Pappas NC, Inc.
Our collective bargaining agreements with unions representing the
former Minot employees in New Jersey have been terminated as a result of the
plant closing. In December 1998, we entered into a collective bargaining
agreement with a union representing the former Seneca employees in Jackson,
Wisconsin. That agreement covers about 89 employees and expires on December 28,
2001. We have commenced negotiations relating to a new collective bargaining
agreement with union representatives. We believe our current relationships with
our employees, both union and non-union, are good.
Item 2. Properties
In Wisconsin Rapids, Wisconsin we own three office buildings, including
our corporate headquarters, an office building near our processing plant and our
West Grand office. As a result of overall reduction in personnel, our office on
Industrial Street in Wisconsin Rapids was closed in January of 2001. Personnel
from this location were consolidated into our West Grand office. The office
building on Industrial Street has since been listed for lease and remains
vacant.
We own a 172,000 square foot receiving station, fresh fruit packaging
and concentrate facility located on 40 acres in Wisconsin Rapids. This facility
includes 62,400 square feet of freezer space, 45,000 square feet of cooler
space, 8,500 square feet of dry warehouse and 55,100 square feet devoted to
cranberry receiving and cleaning, fresh fruit packaging and concentrate
production.
We have leased approximately 90,000 first floor square footage of the
warehouse building located at our Bridgeton, New Jersey, facility to Courier
Systems, a warehouser and distributor whose main offices are located at Bayonne,
New Jersey. The term of the lease is one year commencing September 15, 2001.
Total available square footage of this facility is estimated at roughly 290,000.
We are currently attempting to lease an additional 45,000 square feet under a
comparable arrangement. We will continue to offer the remaining suitable space
for lease. We will also continue efforts to sell the facility.
In Dundee, New York, we own a bottling and packaging plant totaling
139,000 square feet, including 40,000 square feet of production area, 53,000
square feet of dry warehouse, 17,200 square feet of freezer space and 21,000
square feet of cooler and bulk tank storage area.
As indicated above, we sold our bottling and packaging facility in
Mountain Home, North Carolina to Clement Pappas NC, Inc. in June 2001. We
continue to manufacture some of our products at the facility pursuant to a
contract manufacturing agreement with Clement Pappas.
In Jackson, Wisconsin, we own a bottling facility totaling 136,000
square feet including 55,000 square feet of production area, 70,000 square feet
of dry warehouse and 5,000 square feet of cooler and bulk storage area. During
the last quarter of fiscal 2001, our lease with Seneca Foods Corporation of
approximately 26,300 square feet of the facility was terminated.
We own a 46,000 square foot pressing and juice concentrating facility
and dry warehouse in Cornelius, Oregon.
In Eau Claire, Michigan, we own a 79,000 square foot storage facility
and distribution center. This facility is currently being held for sale.
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We also own a 49,000 square foot receiving station located on a
seven-acre parcel of land adjacent to the Hanson Division bogs in Massachusetts.
We intend to pursue the sale of this property during fiscal 2002.
In addition to our facilities, we own 21 cranberry marshes and lease
another three (see Note 13 of Notes to Consolidated Financial Statements for
information about potential termination of certain of these leases). We have set
forth in the following table information about each of our 24 cranberry marshes
as of November 30, 2001. We own all of these marshes in fee simple (or we lease
or operate them, as indicated below), subject to mortgages. All of our marshes
have storage buildings and repair shops for machinery, trucks and harvest and
irrigation equipment. Each also has a house on site or close to the site which
serves as the marsh manager's residence. Many of our marshes also have
residences for assistant marsh managers. We believe that all of our facilities
are suitable and adequate for our existing needs. The Hanson Division marsh is
being held for sale and will not be operated following the 2001 harvest. We also
intend to cease operations at the Nantucket marshes pursuant to an agreement
with the Nantucket Conservation Foundation, Inc., from whom we lease the
property, and are in negotiations to terminate the lease on or about December
31, 2001.
-17-
November 30, 2001 Calendar Year
Approximate Approximate Acquired
Marsh Division Name and Location Marsh Acres Planted Acres or Leased
Associates Division (two marshes), Jackson County, Wisconsin..... 4,198 159 1983/1996
Meadow Valley Division, Jackson County, Wisconsin................ 2,150 77 1984
Fifield Division, Price County, Wisconsin........................ 2,460 196 1985
Three Lakes Division, Oneida County, Wisconsin................... 1,542 82 1985
Chittamo Division, Douglas and Washburn Counties, Wisconsin...... 620 55 1985
Biron Division, Wood County, Wisconsin........................... 473 212 1987
Warrens Division, Monroe County, Wisconsin....................... 160 63 1987
Trego Division, Washburn County, Wisconsin....................... 1,715 96 1988
Gordon Division, Douglas County, Wisconsin....................... 880 149 1988
Mather Division, Juneau County, Wisconsin........................ 2,500 148 1989
Nekoosa Division (two marshes), Wood County, Wisconsin........... 569 85 1989
Crawford Creek Division (two marshes), Jackson County,
Wisconsin...................................................... 304 135 1991
Hills Division, Jackson County, Wisconsin (1).................... 465 70 1991
Yellow River (two marshes), Juneau County, Wisconsin............. 1,714 252 1994
Dandy Creek, Monroe County, Wisconsin............................ 350 55 1996
Manitowish Waters (two marshes), Vilas County, Wisconsin......... 345 182 1996
----- -----
Total......................................................... 20,445 2,016
======= =====
Held for Sale or Lease to be Terminated - Marsh Division Name and
Location
Nantucket Division (two marshes), Nantucket County,
Massachusetts (leased) (2)..................................... 737 211 1990
Hanson Division, Plymouth County, Massachusetts.................. 2,025 297 1993
------- -----
Total......................................................... 2,762 508
======= =====
(1) We operate this marsh under a management agreement with the owner. The agreement, which expires
on December 31, 2001, requires us to manage, operate and harvest the marsh. The agreement also
requires us to purchase the harvest from the owner at a price equivalent to what we will pay our
independent growers, with revenues and expenses to be shared as defined in the agreement.
(2) See Note 13 of Notes to Consolidated Financial Statements
Item 3. 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
-18-
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 is to be collected 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").
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 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 us the required amounts due under it; (3) Cliffstar breached its
fiduciary duty to us 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 will be
submitted to arbitration for resolution. On April 10, 2001, the Court granted
our Petition to Compel Arbitration. Accordingly, the price dispute over finished
goods, work-in-process and raw material inventory is currently in arbitration.
We seek compensatory damages in an amount in excess of $5,000,000, plus punitive
damages for Cliffstar's breaches of its fiduciary duties and attorneys' fees.
Cliffstar has 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 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
-19-
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
counterclaims in all material respects.
As of August 31, 2001, we had a note receivable from Cliffstar with an
outstanding balance of $26.0 million and outstanding accounts receivable of
approximately $5.4 million. The action remains in the discovery stages. It is
our opinion, after consulting with outside legal counsel, that, (1) we have
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 us are valid and collectible; (2) we have strong factual
and legal defenses in all material respects to Cliffstar's counterclaims; and
(3) the note and accounts receivable due from Cliffstar as of August 31, 2001
are collectible. However, the resolution of the legal proceedings cannot be
predicted with certainty at this time. We intend to vigorously defend the
counterclaims and to pursue any 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. See Note 2 of Notes to Consolidated Financial Statements
for further discussion of principal and interest payments made by Cliffstar
during fiscal 2001 and 2000.
Item 4. Submission of Matters to a Vote of Shareholders.
We did not submit any matters to a vote of our shareholders during the
fourth quarter of fiscal 2001.
Executive Officers
As of November 30, 2001, each of our executive officers is identified
below together with information about each officer's age, current position with
us and employment history for at least the past five years:
Name Age Current Position
John Swendrowski 53 Chairman of the Board, Chief Executive
Officer and Treasurer
Ricke A. Kress 50 President and Chief Operating Officer
Richard P. Teske 57 Vice President and Chief Financial Officer
Kenneth A. Iwinski 39 Vice President - Legal and Secretary
William J. Haddow, Sr. 53 Vice President - Purchasing and
Logistics
Steven E. Klus 55 Vice President - Manufacturing
John B. Stauner 40 Vice President - Agricultural Operations
Robert M. Wilson 45 Vice President - Industrial/Ingredients
Nigel J. Cooper 44 Corporate Controller
Our executive officers are generally elected annually by the Board of
Directors after the annual meeting of shareholders. Each executive officer holds
office until his successor has been duly qualified and elected or until his
earlier death, resignation or removal.
John Swendrowski originally founded Northland in 1987 and has served as
our Chief Executive Officer since that time.
Ricke Kress was appointed President and Chief Operating Officer in July
2001. Previously he served as our Executive Vice President since October 2000;
Non Branded Group President since October
-20-
1999; and Non Branded Sales President since November 1998. Prior to that time,
he held several positions with Seneca Foods Corporation, including serving as
its Senior Vice President - Technical Services since June 1997, President-Juice
Division since October 1995 and Senior Vice President-Operations since June
1994.
Richard P. Teske was appointed Vice President and Chief Financial
Officer in January 2001. Previously he served as Financial Assistant to the
Chief Executive Officer since June 2000. Prior to joining the Company, he served
as Partner with Arthur Andersen LLP from August 1978 until December 1992 and
various other positions beginning in 1967. Mr. Teske has also owned Teske Rayala
Cranberry Company, a Northland contract cranberry grower, since 1993.
Ken Iwinski was appointed Vice President-Legal in January 2001 and
Secretary in October 2001. He joined the Company in November 1998 as Assistant
Corporate Counsel/Assistant Secretary. Prior to joining the Company, he
practiced law with the business law firm of Meissner Tierney Fisher & Nichols,
S.C., in Milwaukee, Wisconsin since May 1992.
Bill Haddow was named Vice President - Purchasing and Logistics in
September 1998. Before that, he served as Vice President-Purchasing,
Transportation and Budget since October 1996; Vice President-Purchasing and
Transportation from May 1993; and Assistant Vice President-Purchasing from 1989.
Steve Klus was appointed Vice President-Manufacturing in January 2001
as the Company underwent an internal organizational restructuring. Previously he
served as our Manufacturing Division President since September 1998. He joined
us in April 1996 as the Director of Strategic Product Planning. He was appointed
Vice President-Manufacturing in October 1996. Before that, he served as
President-Eastern Division of Seneca Foods Corporation in New York from May
1990.
John Stauner was appointed Vice President - Agricultural Operations in
January 2001 as the Company underwent an internal organizational restructuring.
Previously he served as our Agricultural Operations Division President since
September 1998; Vice President-Agricultural Operations since October 1996; Vice
President-Operations from May 1995; and Assistant Vice President of Operations
since we were formed in 1987.
Robert M. Wilson was appointed Vice President-Industrial/Ingredients,
which includes international and fresh fruit sales, in January 2001 as the
Company underwent an internal organizational restructuring. He joined us as our
Industrial-Ingredients Division President in April 1999 when we purchased
Potomac Foods of Virginia, Inc., a broker of fruit juices and other fruit
products. Before that, he was the President and owner of Potomac Foods of
Virginia, Inc., since 1986.
Nigel Cooper was appointed Corporate Controller in October 2000. Before
that he was a financial and accounting consultant with Resources Connection from
1999. Prior to that he held controller positions with InterAct Security,
Riverplace Inc., Separation Technology and W. Security Systems, Inc. He spent
four years with Price Waterhouse in the U.K. and is a Chartered Accountant.
-21-
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder Matters.
Sale Price Range of Class A Common Stock (1)
- -------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------
Fiscal Year Ended August 31, 2001
High $ 7.00 $ 7.00 $ 5.25 $ 7.41
Low $ 1.75 $ 1.00 $ 1.95 $ 3.00
Fiscal Year Ended August 31, 2000
High $ 29.00 $ 29.76 $ 27.00 $ 17.76
Low $ 20.00 $ 20.00 $ 13.76 $ 5.64
(1) All information in this table has been restated to give effect to the
one-for-four reverse stock split of our Class A Common Stock effected as of the
close of business on November 5, 2001. The range of sale prices listed for each
quarter includes intra-day trading prices as reported on The Nasdaq Stock
Market. These quotations represent inter-dealer prices, without retail mark-up,
mark-down, or commissions, and may not necessarily represent actual
transactions.
On November 30, 2001, there were approximately 1,130 shareholders of
record for the shares of our Class A Common Stock.
During fiscal 2001, shares of our Class A Common Stock traded on The
Nasdaq Stock Market under the symbol "CBRYA." On November 5, 2001 (which was
subsequent to the end of fiscal 2001), in contemplation of completing the
Restructuring, we effected a one-for-four reverse stock split of our outstanding
capital stock (which was previously approved by our shareholders at our 2001
annual meeting of shareholders). All share information in the table above has
been restated to give effect to the reverse stock split. Additionally, in
furtherance of the Restructuring, we voluntarily delisted our Class A Common
Stock from trading on The Nasdaq Stock Market and obtained quotation of our
Class A Common Stock on the Over-The-Counter Bulletin Board under a new symbol
("NRCNA") effective on the opening of trading on November 6, 2001. During fiscal
2001, we had two shareholders of record for the shares of our Class B Common
Stock. No public market existed for the shares of our Class B Common Stock
during fiscal 2001. On November 5, 2001, the record holders of the shares of
Class B Common Stock voluntarily converted their shares, pursuant to the terms
of our Articles of Incorporation, into shares of Class A Common Stock on a
one-for-one basis. As a result, as of November 30, 2001, there were no shares of
Class B Common Stock issued and outstanding.
See Item 6 for information on cash dividends paid on our common stock.
Subsequent to the dividend payment in the third quarter of fiscal 2000, we
indefinitely suspended further dividend payments on our common stock. On
November 30, 2001, the last sale price of shares of our Class A Common Stock was
$0.69 per share.
On November 6, 2001, in connection with the Restructuring, we issued
(i) 37,122,695 Class A shares, (ii) 1,668,885 Series A Preferred shares, and
(iii) 100 shares of our Series B Preferred Stock to Sun Northland. Each Series A
Preferred share will be automatically converted into 25 Class A shares (subject
to adjustment upon the happening of certain dilutive events) immediately upon
the effectiveness of an amendment to our Articles of Incorporation that has the
effect of increasing the number of authorized Class A shares to a number
sufficient to provide for the issuance of Class A shares upon conversion of all
of the Series A Preferred shares at the conversion rate then in effect. Each
issued and outstanding Series A Preferred share
-22-
is entitled to the number of votes equal to the number of Class A shares into
which such Series A Preferred share is then convertible. The conversion rate is
subject to adjustment under certain circumstances. The consideration for the
issuance of such shares consisted of $7.0 million cash and the assignment by Sun
Northland to us of Assignment, Assumption and Release Agreements with members of
our then-current bank group that gave us the right to acquire our then-existing
indebtedness contained in those agreements in exchange for a total of
approximately $38.4 million in cash and the issuance by us of approximately
$25.7 million in the form of promissory notes and 7,618,987 Class A shares to
certain bank group members who decided to continue as our lenders after the
Restructuring. We issued these shares to Sun Northland in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended. See Notes 9 and 14 of Notes to Consolidated Financial
Statements.
On November 6, 2001, in connection with the Restructuring and as
mentioned above, we issued (i) 7,618,987 Class A shares to certain bank group
members who decided to continue as our lenders after the Restructuring
(including U.S. Bank, National Association, ARK CLO 2001-1 Limited, and St.
Francis Bank, F.S.B.), and (ii) warrants to purchase an aggregate of 5,086,106
Class A shares, at an exercise price of $.01 per share, to Foothill Capital
Corporation and Ableco Finance LLC, members of our new secured lending group. In
consideration of the issuance of these Class A shares, as well as approximately
$12.4 million in cash and a promissory note in the principal amount of
approximately $25.7 million, U.S. Bank, National Association, ARK CLO 2001-1
Limited, and St. Francis Bank, F.S.B. essentially agreed to forgive
approximately $28.2 million (for financial reporting purposes) of our
then-outstanding indebtedness (or approximately $36.3 million of the aggregate
principal and interest due such banks as of the date of the Restructuring). In
consideration of the issuance of the warrants, Foothill Capital Corporation and
Ableco Finance LLC agreed to enter into a revolving credit facility with us in
the principal amount of $30 million and to provide us an additional $20 million
in financing through two separate term notes, each in the principal amount of
$10 million. The warrants are immediately exercisable. We issued these shares
and warrants in reliance on the exemption from registration contained in Section
4(2) of the Securities Act of 1933, as amended. See Notes 9 and 14 of Notes to
Consolidated Financial Statements.
The 100 shares of our Series B Preferred Stock that we sold to Sun
Northland in the Restructuring were subsequently transferred by Sun Northland
for nominal consideration to a limited liability company whose managing member
is the Company's Chief Executive Officer and whose other members are officers of
the Company.
Our Amended and Restated Credit Agreement with U.S. Bank National
Association, as Agent, and our Loan and Security Agreement with Foothill Capital
Corporation, as the Arranger and Administrative Agent, prohibit us from making
any distributions on or redemptions of our capital stock, except that under
certain circumstances, we may redeem employee-owned stock upon the employee's
termination or death.
-23-
Item 6. Selected Financial Data.
(In thousands, except per share data)
---------------------------------------------------------------------------------
Year Ended August 31
--------------- --------------- ---------------- --------------- ----------------
Statement of Operations Data:(1) 2001 2000 1999 1998 1997
- ---------------------------------------------- --------------- --------------- ---------------- --------------- ----------------
Net revenues (3) $ 125,826 $ 207,020 $ 201,285 $ 95,109 $ 40,976
Cost of sales (4) 115,496 253,397 152,481 62,475 23,171
- ---------------------------------------------- --------------- --------------- ---------------- --------------- ----------------
Gross profit (loss) 10,330 (46,377) 48,804 32,634 17,805
Costs and expenses:
Selling, general and administrative
expenses (3) (25,522) (53,654) (30,974) (21,022) (9,569)
Writedowns of long-lived assets and assets
held for sale (80,125) (6,000)
Gain (loss) on disposals of businesses and
property and equipment 2,118 2,229 (67) (11) 5
- ---------------------------------------------- --------------- --------------- ---------------- --------------- ----------------
(Loss) income from operations (93,199) (103,802) 17,763 11,601 8,241
Interest expense (18,936) (14,556) (8,565) (6,826) (4,493)
Interest income 2,730 1,387
- ---------------------------------------------- --------------- --------------- ---------------- --------------- ----------------
(Loss) income before income taxes (109,405) (116,971) 9,198 4,775 3,748
Income taxes benefit (expense) 34,892 12,000 (3,618) (1,920) (1,516)
Net (loss) income $ (74,513) $ (104,971) $ 5,580 $ 2,855 $ 2,232
- ---------------------------------------------- --------------- --------------- ---------------- --------------- ----------------
Weighted average shares 5,085 5,083 5,052 3,817 3,577
outstanding - diluted (2)
Per share data:(2)
Net income (loss) - diluted $ (14.65) $ (20.65) $ 1.10 $ 0.75 $ 0.62
Cash dividends:
Class A common $ 0.48 $ 0.64 $ 0.64 $ 0.64
Class B common $ 0.436 $ 0.582 $ 0.582 $ 0.582
- ---------------------------------------------- --------------- --------------- ---------------- --------------- ----------------
August 31
---------------------------------------------------------------------------------
Balance Sheet Data:(1) 2001 2000 1999 1998 1997
- -------------------------------------------- --------------- --------------- ---------------- --------------- ----------------
Current Assets $ 84,538 $ 85,457 $ 141,484 $ 71,298 $ 39,691
Current Liabilities 52,893 226,948 30,916 21,811 11,545
Total Assets 180,416 284,235 354,921 250,872 180,932
Long-term debt 64,589 3,927 147,797 64,276 83,131
Obligations Subsequently Forgiven or
Exchanged for Common Stock 84,087
153,870
Shareholders' equity (deficiency in assets) (21,154) 53,359 160,553 76,811
- -------------------------------------------- --------------- --------------- ---------------- --------------- ----------------
(1) See Notes 2, 3 and 4 to Notes to Consolidated Financial Statements for a discussion of
significant acquisitions and dispositions affecting the comparability of information reflected
herein. In addition, on July 1, 1998, we acquired certain net assets of Minot Food Packers, Inc. for
$35.2 million and the issuance of 34,247 Class A shares.
(2) All share and per share data have been restated to give effect to our November 5, 2001
one-for-four reverse stock split. Effective following the third quarter dividend payment in fiscal
2000, we indefinitely suspended dividend payments on our common stock.
(3) Amounts previously reported have been reclassified to conform with the new accounting standards
adopted in the fourth quarter with respect to accounting for the cost of sales incentives provided
to retailers (which we refer to as trade spending and slotting) and consumer coupons as described in
Note 1 to Notes to Consolidated Financial Statements. The costs of such items, which were previously
reported as selling, general and administrative expenses, have been reclassified and reported as
reductions in net revenues.
(4) See Note 5 to Notes to Consolidated Financial Statements for a discussion of the $17.6 million
and $57.4 million inventory lower of cost or market adjustments during the years ended August 31,
2001 and 2000, respectively.
-24-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
General
During fiscal 2001, we continued to experience substantial difficulty
generating sufficient cash flow to meet our obligations on a timely basis. We
failed to make certain scheduled monthly interest payments under our revolving
credit facility, and were not in compliance with several provisions of our
former revolving credit agreement and other long-term debt agreements as of the
end of the fiscal year. We were often delinquent on various payments to third
party trade creditors and others. The industry-wide cranberry oversupply
continued to negatively affect cranberry prices. Continued heavy price and
promotional discounting by Ocean Spray and other regional branded competitors
throughout fiscal 2001, combined with our inability to fund a meaningful
marketing campaign, resulted in lost distribution and decreased market share of
our products in various markets. We had reached the maximum in our line of
credit and were not able to obtain any additional financing. As a result of
these and other factors, we incurred a large net loss for fiscal 2001. Some of
these other factors included:
o An oversupply of cranberries resulting from three consecutive
nationwide bumper crops culminating with the 1999 harvest, followed by
what we believe was an inadequate volume regulation under the USDA
cranberry marketing order for the 2000 crop year, resulted in continued
large levels of excess cranberry inventories held by us and other
industry participants. As a result, the per barrel price for
cranberries continued to decline through the first quarter of fiscal
2001 and, while the per barrel price has subsequently increased, it has
not recovered to the extent we anticipated. As a result of these
factors, our cost to grow the fall 2001 crop and the cost of on-hand
inventories, including costs to be incurred, were in excess of market
value, and we determined that it was necessary to write down the
carrying value of our cranberry inventory by approximately $17.6
million in the fourth quarter of fiscal 2001. See "--Fiscal 2001
compared to Fiscal 2000-Cost of Sales."
o We sold our private label sauce business and a related manufacturing
facility to Clement Pappas in June 2001 in a cash transaction. Our
private label sauce business and co-packing sold from the facility
generated net revenues of approximately $7.8 million, $14.1 million and
$9.0 million in fiscal 2001, 2000 and 1999, respectively. See "--Fiscal
2001 Compared to 2000-Revenues."
o In the fourth quarter of fiscal 2001, as a result of the deterioration
in the long-term prospects for the cranberry growing and processing
industry over the summer due, in part, to the implementation of what we
believe was another inadequate volume regulation under a USDA cranberry
marketing order for the 2001 calendar year crop, continued large levels
of excess cranberry inventories held by us and other industry
participants, forecasted future cranberry market prices for the next
several years, as well as continued reductions in our anticipated
cranberry and cranberry concentrate usage requirements related to our
recent decline in revenues and market share, we decided to restructure
our operations and identify various long-lived assets to be disposed
of, and we concluded that the estimated future cash flows of our
long-lived assets were below the carrying value of such assets.
Accordingly, during the quarter, we recorded an impairment charge of
approximately $80.1 million related to writedowns to assets held for
sale, property and equipment held for use, and goodwill and other
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." See "--
Fiscal 2001 Compared to 2000--Writedown of Long-Lived Assets Held for
Sale."
Although we were successful in retaining distribution in many markets,
the lack of sufficient working capital limited our ability to promote our
products. We reached the point where we felt it was imperative to reach an
agreement with our then-current bank group and to refinance our bank debt, or
else we believed we were faced with liquidating or reorganizing the company in a
bankruptcy proceeding in which our
-25-
creditors would have likely received substantially less value than we felt they
could receive in a restructuring transaction and our shareholders would have
likely been left holding shares with no value.
On November 6, 2001, we consummated the Restructuring. Generally
speaking, in the Restructuring, Sun Northland entered into certain Assignment,
Assumption and Release Agreements with members of our then-current bank group
which gave Sun Northland, or its assignee, the right to acquire our indebtedness
held by members of our then-current bank group in exchange for a total of
approximately $38.4 million in cash, as well as our issuance of a promissory
note in the principal amount of approximately $25.7 million and 7,618,987 Class
A shares to certain bank group members which decided to continue as our lenders
after the Restructuring. Sun Northland did not provide the foregoing
consideration to our former bank group; instead, Sun Northland entered into the
Purchase Agreement with us, pursuant to which Sun Northland assigned its rights
to those Assignment, Assumption and Release Agreements to us and gave us $7.0
million in cash, in exchange for (i) 37,122,695 Class A shares, (ii) 1,668,885
Series A Preferred shares (each of which will convert automatically into 25
Class A shares upon adoption of an amendment to our articles of incorporation
increasing our authorized Class A shares, and each of which currently has 25
votes), and (iii) 100 shares of our newly created Series B Preferred Stock.
which were subsequently transferred to a limited liability company controlled by
our Chief Executive Officer. Using funding provided by our new secured lenders
and Sun Northland, we acquired a substantial portion of our outstanding
indebtedness from the members of our then-current bank group (under the terms of
the Assignment, Assumption and Release Agreements that were assigned to us by
Sun Northland) in exchange for the consideration noted above, which resulted in
the forgiveness of approximately $81.5 million (for financial reporting
purposes) of our outstanding indebtedness (or approximately $89.0 million of the
aggregate principal and interest due the then-current bank group as of the date
of the Restructuring). We also issued warrants to acquire an aggregate of
5,086,106 Class A shares to Foothill Capital Corporation and Ableco Finance LLC,
which warrants are immediately exercisable and have an exercise price of $.01
per share.
As a result of the Restructuring, Sun Northland controls approximately
94.4% of our total voting power through (i) the Class A shares and Series A
Preferred shares we issued to Sun Northland, and (ii) the additional 7,618,987
Class A shares over which Sun Northland exercises voting control pursuant to a
Stockholders' Agreement that we entered into with Sun Northland and other
shareholders in connection with the Restructuring. Assuming conversion of the
Series A Preferred shares and full vesting over time of the options to acquire
Class A shares that we issued to key employees in the Restructuring, Sun
Northland owns approximately 77.5% of our fully-diluted Class A shares.
We believe that the Restructuring will provide us with sufficient
working capital and new borrowing capacity to once again aggressively market and
support the sale of our Northland and Seneca brand juice products in fiscal
2002.
Additionally, we adopted Emerging Issues Task Force ("EITF") Issue No.
00-14, "Accounting for Certain Sales Incentives" and Issue No. 00-25,
"Accounting for Consideration from a Vendor to a Retailer in Connection with the
Purchase or Promotion of the Vendor's Products," effective in the fourth quarter
of fiscal 2001. Under these new accounting standards, the cost of sales
incentives provided to retailers (which we refer to as "trade spending and
slotting") and consumer coupons are reported as a reduction in net revenues. We
previously reported these costs as selling, general and administrative expenses.
We reclassified prior year consolidated financial statements to conform to the
new requirements, and as a result, approximately $59.2 million and $35.6 million
of amounts previously reported as selling, general and administrative expenses
during the years ended August 31, 2000 and 1999, respectively, have been
reclassified and reported as a reduction of net revenues.
With our new debt and equity capital structure following the
Restructuring, we feel we are in a position to build on the operational
improvements we put in place in fiscal 2001. Our focus for fiscal 2002 is on
improving our cash position and results of operations through a balanced
marketing approach with an emphasis on profitable growth.
-26-
Fiscal 2001 Compared to Fiscal 2000
Net Revenues. Our total net revenues decreased 39.2% to $125.8 million
in fiscal 2001 from $207.0 million in fiscal 2000. The decrease resulted
primarily from (i) reduced sales of Northland and Seneca branded products, which
we believe resulted primarily from our change in promotional and pricing
strategies and reduced marketing spending; (ii) reduced co-packing revenue from
a major customer that during the first quarter of fiscal 2001 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; (iii) the
sale of our private label juice business in March 2000; and (iv) the sale of our
cranberry sauce business and a manufacturing facility in June 2001, which
reduced co-packing revenue and revenue from cranberry sauce sales. Trade
spending, slotting and consumer coupons, which is reported as a reduction of net
revenues instead of as a selling, general and administrative expense (see
"--General," above), was down 72.0% to $16.6 million in fiscal 2001 from $59.2
million in fiscal 2000.
Industry data indicated that, for the 12-week period ended September 9,
2001, our Northland brand 100% juice products achieved a 6.0% market share of
the supermarket shelf-stable cranberry beverage category on a national basis,
down from a 10.9% market share for the 12-week period ended September 10, 2000.
Market share of our Seneca brand cranberry juice product line for the same
period decreased from approximately 2.7% to approximately 0.4%, resulting in a
total combined market share of supermarket shelf-stable cranberry beverages for
our Northland and Seneca branded product lines of approximately 6.4% for the
12-week period ended September 9, 2001, down from approximately 13.6% for the
12-week period ended September 10, 2000. We anticipate our sales and market
share in the first quarter of fiscal 2002 will continue to reflect decreases
from the prior year. However, with the equity capital we received in the
Restructuring, we plan to increase advertising spending in the remaining
quarters of fiscal 2002, and we anticipate our new spending levels will help to
reverse the declining sales and market share trends for our Northland and Seneca
brands in fiscal 2002.
Cost of Sales. Our cost of sales for fiscal 2001 was $115.5 million
compared to $253.4 million in fiscal 2000, resulting in gross margins of 8.2%
and (22.4)%, respectively. The decrease in cost of sales resulted primarily from
reduced sales of Northland and Seneca branded products, the elimination of costs
associated with production of private label juice products and reduced costs for
reduced sauce and co-packing revenues. Additionally, the decrease resulted from
the change during the first quarter of fiscal 2001 in our arrangement with a
significant co-packing customer from an arrangement where we purchased
substantially all of the ingredients and sold the customer finished product to a
fee for services performed arrangement. The improved margins in fiscal 2001 were
also favorably impacted by improved manufacturing efficiencies and cost
controls.
We continue to participate in a highly competitive industry
characterized by aggressive pricing policies, changing demand patterns and
downward pressures on gross margins resulting from an excess supply of raw
cranberries and cranberry concentrate, which has resulted in prices paid to
growers which are generally less than production costs. Because our cost to grow
the fall 2001 crop and the cost of on-hand inventories, including costs to be
incurred, was in excess of market value, we wrote down the carrying value of our
cranberry inventory by approximately $17.6 million in the fourth quarter of
fiscal 2001, and by approximately $57.4 million in fiscal 2000. These charges
were also based on management's best estimates of future product sale prices and
consumer demand patterns. In fiscal 2000, we also recognized a restructuring
charge of $1.9 million related to costs associated with closing our Bridgeton,
New Jersey plant and associated employee termination related costs. Our gross
profit without taking into account the effects of these items would have been
$27.9 million and $12.9 million in fiscal 2001 and fiscal 2000, respectively,
which would have resulted in gross margins of 22.2% in fiscal 2001 and 6.2% in
fiscal 2000.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were $25.5 million, or 20.3% of net revenues, in fiscal
2001, compared to $53.7 million, or 25.9% of net revenues, in fiscal 2000. The
$28.2 million reduction in our selling, general and administrative expenses in
-27-
fiscal 2001 was primarily due to (i) a general lack of available cash to fund a
meaningful advertising campaign, which resulted in significant reductions in
advertising and other marketing and sales promotion expenses compared to fiscal
2000 (in which we incurred greater marketing and promotional expenses 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) 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 restructuring efforts; and (iv)
a reduction in personnel costs and selling commissions resulting from our
alliance with Crossmark. The decrease in our selling, general and administrative
expenses was partially offset by increases in outside professional fees incurred
in connection with developing a "turnaround" plan for our operations,
negotiating the terms of our credit facilities with our lenders, related
covenant defaults and forbearance agreements, and continuing efforts to seek
additional or alternative debt and equity financing.
We expect that selling, general and administrative expenses will
increase in fiscal 2002 primarily as a result of increased advertising as well
as fees for financial advisory services under our new management services
agreement with an affiliate of Sun Northland, partially offset by further
planned reductions in expenses related to our continuing internal restructuring
efforts.
Writedown of Long-Lived Assets and Assets Held for Sale. We
periodically evaluate the carrying value of property and equipment and
intangible assets in accordance with SFAS No. 121. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the assets' carrying values may not be recoverable. In the fourth quarter
of fiscal 2001, for the reasons discussed above under "--General," we
restructured our operations and identified certain long-lived assets to be held
for sale. We also concluded that the estimated future cash flows of our
long-lived assets were below the carrying value of such assets. Accordingly,
during the fourth quarter of fiscal 2001 and in accordance with SFAS No. 121, we
recorded an impairment charge of approximately $80.1 million related to
writedowns to assets held for sale, property and equipment held for use, and
goodwill and other intangible assets. During the year ended August 31, 2000, we
recorded an impairment writedown of $6.0 million related to a closed facility
that is held for sale (see Notes 6 and 7 of Notes to Consolidated Financial
Statements).
Gain (Loss) on Disposal of Property and Equipment. In fiscal 2001, we
recognized a $2.1 million gain associated with the sale of the net assets of our
private label sauce business and a manufacturing facility in Mountain Home,
North Carolina, as well as certain property and equipment. In fiscal 2000, we
recorded a $2.2 million gain associated with the sale of the net assets of our
private label juice business and certain property and equipment.
Interest Expense. Our interest expense was $18.9 million for fiscal
2001, compared to $14.6 million in fiscal 2000. The increase in our interest
expense was due to increased debt levels between periods and higher interest
rates during 2001 due in part to revised terms of our revolving credit facility
as a result of our defaults thereunder. The weighted average interest rate on
our borrowings for fiscal 2001 was approximately 10.6%. See "Financial
Condition" below. We expect that, as a result of significant debt forgiveness in
the Restructuring as well as the generally more favorable terms of our new
secured debt arrangements, interest expense will decline in fiscal 2002.
Interest Income. Our interest income was $2.7 million in fiscal 2001
and $1.4 million in fiscal 2000. Interest income was recognized primarily as a
result of an unsecured, subordinated promissory note we received in connection
with the sale of our private label juice business in March 2000.
Income Tax Benefit (Expense). In 2001 we recognized income tax benefits
of $34.9 million. Of this amount, $2.1 million resulted from certain refunds
received in 2001 related to farm loss carrybacks. The balance resulted from the
recognition of a tax benefit of $32.8 million for certain net operating loss
carryforwards expected to be utilized for financial reporting purposes during
the first quarter of fiscal 2002 related to forgiveness of certain indebtedness
(see Notes 9 and 14 of Notes to Consolidated Financial
-28-
Statements). In fiscal 2000, we recorded a tax benefit of $12.0 million. Future
deferred income tax benefits of approximately $38.4 million have not been
recognized at August 31, 2001 because of concerns with respect to realization of
those benefits. The "change of ownership" provisions of the Tax Reform Act of
1986 will significantly restrict the utilization of all net operating loss and
tax credit carryforwards that remain after the debt and equity restructuring.
See Note 11 of Notes to Consolidated Financial Statements.
Fiscal 2000 Compared to Fiscal 1999
Net Revenues. Our total net revenues for fiscal 2000 increased 2.8% to
$207.0 million from $201.3 million during fiscal 1999. The private label juice
business, which we sold to Cliffstar, had revenues of approximately $23.6
million and $40.3 million for the years ended August 31, 2000 and 1999,
respectively. The increased revenues for fiscal 2000 were primarily due to the
effects of a full year of sales of our Seneca branded products, which we
acquired on December 30, 1998, as well as increases over the prior year period
in our co-packing sales and sales to the foodservice channels, all offset by the
loss of revenue related to the private label juice business that we sold.
Industry data indicated that, for the 12-week period ended September
10, 2000, our Northland brand 100% juice products achieved a 10.9% market share
of the supermarket shelf-stable cranberry beverage category on a national basis,
down from a 12.8% market share for the 12-week period ended September 12, 1999.
Market share of our Seneca brand cranberry juice product line for the same
period increased from approximately 0.6% to approximately 2.7%, resulting in a
total combined market share of supermarket shelf-stable cranberry beverages for
our Northland and Seneca branded product lines of approximately 13.6% for the
12-week period ended September 10, 2000, up from approximately 13.4% for the
12-week period ended September 12, 1999.
During fiscal 2000, sales of concentrate and bulk frozen fruit
decreased primarily due to continued intense price competition resulting from
the recent industry-wide record cranberry harvests. Co-packing sales increased
in fiscal 2000 primarily as a result of increasing volume with established
customers. Trade spending, slotting and consumer coupons, which are deducted
from net revenues, increased from $35.6 million in 1999 to $59.2 million in
2000.
Cost of Sales. Our cost of sales for fiscal 2000 was $253.4 million
compared to $152.5 million in fiscal 1999, with gross margins of (22.4)% and
24.2%, respectively. The increase was primarily the result of a pre-tax lower of
cost or market inventory adjustment of $57.4 million and a $1.9 million pre-tax
restructuring charge, consisting primarily of plant closing and employee
termination related costs at our Bridgeton, New Jersey manufacturing facility.
The closing was intended to improve profitability by eliminating overcapacity
and streamlining production operations. Cost of sales without taking into
account the effects of these items would have been $194.1 million for the year
ended August 31, 2000, which would have resulted in a gross margin of 6.2%. In
addition to these charges, cost of sales increased primarily as a result of (i)
charges for inventory obsolescence as a result of the introduction of new
products including our 27% Solution; (ii) expenses associated with the operation
of marshes on which management decided, as a result of the federal marketing
order, not to grow cranberries in fiscal 2000; (iii) the inclusion of a full
year of sales of Seneca brand products; and (iv) changing product mix, including
increased lower margin co-packing sales. The decrease in our gross margin for
fiscal 2000 was primarily due to the lower of cost or market inventory
adjustment, the restructuring charge and industry pricing pressure.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were $53.7 million, or 25.9%, of net revenues for fiscal
2000, compared to $31.0 million, or 15.4% of net revenues, during the prior
fiscal year. The increase in our selling, general and administrative expenses
was attributable primarily to (i) continued aggressive promotional and marketing
strategies intended to support the development and growth of our Northland brand
100% juice products and our Seneca brand products in an increasingly competitive
marketplace; (ii) costs associated with problems encountered in the conversion
of our internal information systems; (iii) expenses associated with the process
of exploring strategic alternatives and
-29-
preparing a turnaround plan for our operations; and (iv) expenses associated
with the national introduction of our new easy grip bottle. Fiscal 2000
advertising expenses in support of our branded products totaled $14.1 million
compared to $10.6 million in fiscal 1999. In addition, in the fourth quarter of
fiscal 2000, we also took a $0.4 million restructuring charge related to
employee termination benefits in connection with the restructuring of our sales
organization as a result of our agreement with Crossmark.
Gain (Loss) on Disposals of Business and Property and Equipment. In
fiscal 2000, we recognized a $2.2 million gain associated with the sale of the
net assets of our private label juice business and certain property and
equipment.
Interest Expense. Interest expense was $14.6 million for fiscal 2000
compared to $8.6 million during fiscal 1999. The increase in our interest
expense was due to increased debt levels during most of the year, which resulted
from funding previous acquisitions and increased working capital needs, as well
as certain costs related to, and increased interest rates on, our revolving
credit facility following renegotiation of the terms of the facility in the
third quarter. We also utilized our revolving credit facility to fund increased
levels of inventory, accounts receivable and operating losses, as well as
seasonal operating activities.
Interest Income. In fiscal 2000, we recognized $1.4 million in interest
income associated with a $28 million unsecured, subordinated promissory note we
received in connection with the sale of our private label juice business.
Income Tax Benefit (Expense). Due to our net loss, we realized a $12
million income tax benefit in fiscal 2000. We also provided for a valuation
allowance of $30.8 million for deferred income tax assets, as it was more likely
that not that such assets would not be realized. In fiscal 1999, we recorded
income tax expense of $3.6 million.
Financial Condition
Fiscal 2001. In fiscal 2001 (prior to the Restructuring), net cash
provided by operating activities was $4.7 million, compared to net cash used in
operating activities in fiscal 2000 of $30.9. The $74.5 million net loss for
2001 included non-cash charges of (i) $80.1 million for writedowns of long-lived
assets; (ii) $17.6 million of inventory lower of cost or market adjustments; and
(iii) $9.7 million in depreciation and amortization. Receivables, prepaid
expenses and other current assets decreased $10.3 million from August 31, 2000
as a result of declining revenue levels, which provided us additional cash to
pay down accounts payable and accrued liabilities. Inventory decreased $5.6
million, net of the $17.6 million non-cash lower of cost or market adjustment,
due primarily to reduced raw materials and finished goods inventories caused by
fewer distribution centers and improved inventory management. Working capital
increased $173.1 million to $31.6 million at August 31, 2001 from a deficiency
of $(141.5) million at August 31, 2000. This improvement was due primarily to
the classification at fiscal year end of amounts outstanding under our debt
arrangements as long-term in accordance with our new financing arrangements
secured on November 6, 2001 and certain obligations which were subsequently
forgiven or exchanged for common stock. In addition, we recognized a $32.8
million current deferred income tax asset that is expected to be realized during
the first quarter of fiscal 2002. Our current ratio exclusive of the current
deferred income tax asset increased to 1.0 to 1.0 at August 31, 2001 from 0.4 to
1.0 at August 31, 2000.
At August 31, 2000 and throughout fiscal year 2001, we were in default
under our loan agreements, had no borrowing capacity under our revolving credit
facility, operated under forbearance agreements with our major secured lenders
and generally experienced an extremely difficult cash flow situation.
Additionally, we are currently in default under the terms of our grower
contracts (see Note 13 of notes to Consolidated Financial Statements). In
September 2000, we were unable to make certain payments due to the growers under
the terms of the contracts and we notified the growers of our intention to defer
payments required under the contracts for the 2000 calendar year crop. The
contracted growers did, however, harvest and deliver their 2000 and 2001
calendar year crops to us and we made all the rescheduled payments
-30-
required by the contracts through August 31, 2001. We are in process of pursuing
amended payment terms under the contracts and are seeking waivers from the
growers.
Net cash provided by investing activities was $14.8 million in fiscal
2001 compared to $4.0 million in fiscal 2000. Collections on the note receivable
from Cliffstar were $1.8 million in fiscal 2001 versus $0.3 million in fiscal
2000. Property and equipment purchases decreased from $5.4 million in fiscal
2000 to $0.4 million in fiscal 2001. Proceeds from disposals of businesses,
property and equipment and assets held for sale was $13.4 million in fiscal 2001
compared to $8.7 million in fiscal 2000, and consisted primarily of the sale of
the private label sauce business and Mountain Home, North Carolina manufacturing
facility in fiscal 2001, and the sale of our private label juice business in
fiscal 2000.
Our net cash used in financing activities was $18.2 million in fiscal
2001 compared to net cash provided by financing activities of $26.3 million in
fiscal 2000. We repaid $15.7 million of principal on our revolving credit
facility in 2001, primarily from proceeds from disposals of the private label
sauce business and related property and equipment. In fiscal 2000, we borrowed
an additional $31.0 million on this bank revolving credit facility which brought
us up to the maximum available credit limit. In fiscal 2000 we paid dividends on
our common stock of $2.4 million; however, we suspended dividend payments on our
common stock indefinitely following the third quarter dividend payment in fiscal
2000.
Subsequent to the Restructuring. As part of the Restructuring, we
entered into an Amended and Restated Credit Agreement with certain members of
our former bank group which evidences, among other things, our obligation to
repay the revised term loan of approximately $25.7 million that we issued to
those creditors in the Restructuring. Payments on the revised term loan are due
monthly based on the prime interest rate, as defined, plus 1% (6% as of November
6, 2001) applied against the outstanding stated principal balance, with an
additional $1.7 million payable on November 6, 2002 and additional monthly
payments of approximately $133,000 due commencing on December 1, 2003 and
continuing to through October 1, 2006, with a final payment of approximately
$19.3 million due on November 1, 2006. The revised term loan is collateralized
by specific assets, and we are required to make certain mandatory prepayments to
the extent of any net proceeds received from the sale of such assets or to the
extent that a note received in connection with the sale of such assets, or
assets previously sold, is collected. The future cash payments required under
the Restructured Bank Note are to be applied against the adjusted carrying value
of the Restructured Note, with generally no interest expense recognized for
financial reporting purposes, in accordance with SFAS No. 15, as long as we make
the scheduled payments in accordance with the Restructured Bank Note and there
are no changes to the interest rate.
Additionally, we entered into a Loan and Security Agreement on November
6, 2001 with Foothill Capital Corporation and Ableco Finance LLC. Under this
loan agreement, Foothill and Ableco provided us with two term loans, each in the
principal amount of $10 million, and a new $30 million revolving credit
facility. The term loans and the credit facility mature and/or expire on
November 6, 2006, and interest accrues on the outstanding principal balance
thereunder at the greater of 7.0% or the prime rate, as defined, plus 1%.
Quarterly principal payments of $625,000, plus additional principal payments
equal to (i) the quarterly principal payments received on Cliffstar's promissory
note in excess of $625,000 and (ii) all earnout payments received under the
asset purchase agreement between us and Cliffstar, are due on the first term
loan. Monthly principal payments of $166,667 are due on the second term loan.
The debt is collateralized by specific assets.
In addition to the Restructuring, we also restructured and modified the
terms of approximately $20.7 million in outstanding borrowings under two term
loans with an insurance company, consolidating those two term loans into one new
note with a stated principal amount of approximately $19.1 and a stated interest
rate of 5% for the first two years of the note, increasing by 1% annually
thereafter, with a maximum interest rate of 9% in the sixth and final year. The
note is payable in monthly installments of approximately $186,000 commencing
December 1, 2001, adjusted periodically as the stated interest rate increases,
with a final payment
-31-
of approximately $11.6 million due November 1, 2007. The effective interest rate
to be recognized for financial reporting purposes will approximate 4.5%. The
note is collateralized by specific assets.
We also renegotiated the terms of our unsecured debt arrangements with
certain of our larger unsecured creditors, resulting in the cancellation of
approximately $3.5 million of additional indebtedness previously owing to those
creditors that will be recognized as an extraordinary gain, net of legal fees,
other direct costs and income taxes, in the first quarter of fiscal 2002.
We also issued fee notes to Foothill and Ableco in the aggregate
principal amount of $5 million, which are payable in full on November 6, 2006.
The fee notes will be discounted for financial reporting purposes and charged to
operations as additional interest expense over the terms of the related debt.
As also required by the Purchase Agreement, we entered into a
Management Services Agreement with Sun Capital Partners Management, LLC, an
affiliate of Sun Northland, pursuant to which Sun Capital Partners Management,
LLC will provide various financial and management consulting services to us in
exchange for an annual fee (which is paid in quarterly installments) equal to
the greater of $400,000 or 6% of our EBITDA (as defined therein), provided that
the fee may not exceed $1 million a year unless approved by a majority of our
directors who are not affiliates of Sun Capital Partners Management, LLC. This
agreement terminates on the earlier of November 6, 2008 or the date on which Sun
Northland and its affiliates no longer own at least 50% of our voting power.
We anticipate that we will recognize an extraordinary gain on the
forgiveness of indebtedness of approximately $83.5 million during the first
quarter of fiscal 2002, net of our best estimate of the amount of legal fees and
other direct costs incurred and the estimated fair value of the Class A shares
issued to the banks in the Restructuring. For financial reporting purposes, the
$83.5 million anticipated gain on the forgiveness of indebtedness will be
reported net of income taxes, which are estimated to approximate $32.8 million,
resulting in a net extraordinary gain of approximately $50.7 million. Such
estimated amounts are expected to be known and finalized by the date we report
our consolidated operating results for the first quarter of fiscal 2002.
The extraordinary gain, combined with the additional equity contributed
by Sun Capital, the common stock issued to the participating banks and the
warrants issued to Foothill and Abelco is estimated to provide us with
approximately $57.4 million of additional stockholders' equity which was
received during the first quarter of our fiscal 2002.
As of November 30, 2001, we had outstanding borrowings of $9.9 million
under our $30 million revolving credit facility with Foothill and Ableco. We
believe that we will be able to fund our ongoing operational needs for the
remainder of fiscal 2002, and the foreseeable future through (i) cash generated
from operations; (ii) financing available under our revolving credit facility
with Foothill and Ableco; (iii) intended actions to reduce our near-term working
capital requirements; and (iv) additional measures to reduce costs and improve
cash flow from operations.
As of November 30, 2001, we were in compliance with all of our new debt
arrangements.
Pro-Forma Financial Position. We have set forth below an unaudited,
pro-forma condensed consolidated balance sheet which reflects our pro-forma
financial position on August 31, 2001 as if the Restructuring occurred on that
date. The information in the table does not represent historical data and is not
presented in conformity with accounting principles generally accepted in the
United States of America. Rather, it is intended solely to provide a brief
summary of what our financial position would have been on August 31, 2001 had
the Restructuring occurred on that date. You should not rely on this information
as indicative of what our actual financial position will be at any future date.
-32-
Pro-Forma Condensed Consolidated Balance Sheet
(unaudited)
Assets: August 31, 2001
Current Assets $ 51,300
Long-Term Assets 101,100
--------------
Total Assets $ 152,400
==============
Liabilities and Shareholders' Equity:
Current Liabilities $ 52,930
Long-Term Debt 65,570
--------------
Total Liabilities 118,500
Shareholders' Equity 33,900
--------------
Total Liabilities and Shareholders' Equity $ 152,400
==============
After giving effect to the Restructuring, our pro-forma condensed
consolidated balance sheet as of August 31, 2001 reflects total debt (including
the current portion) of $97.1 million for a total debt to equity ratio on a
pro-forma basis of 2.9 to 1.0 compared to total debt of $181.0 million and debt
to equity ratio of 3.4 to 1.0 at August 31, 2000. Our current ratio on a
pro-forma basis decreased to 1.0 to 1.0 from 1.6 to 1.0 at August 31, 2001 based
on our actual financial position.
We arrived at the information reflected in the pro-forma condensed
consolidated balance sheet presented above by reflecting various adjustments
resulting from the Restructuring as if the Restructuring had occurred on August
31, 2001. These adjustments included (i) our new financing with Foothill and
Ableco; (ii) the restructuring of our former bank debt; (iii) the equity
investment by Sun Northland; (iv) the restructuring of our debt with an
insurance company; and (v) settlements of various other vendor obligations. In
addition, we reflected all transaction costs incurred in the Restructuring and
the tax impacts of the Restructuring. Finally, we revised the current and
long-term portion of debt to the amounts that would have existed had the
Restructuring occurred on August 31, 2001.
Depending upon our future sales levels and relative sales mix of
products during fiscal 2002, we expect our working capital requirements to
fluctuate periodically during fiscal 2002.
Quarterly Results
Our quarterly results in fiscal 2001 varied significantly from
comparative quarters in the prior fiscal year and from quarter to quarter during
fiscal 2001:
o Net revenues declined in each of the first three quarters, with an
increase in the fourth quarter. This trend was directly related to our actions
to refocus our trade promotional strategies to emphasize profitability, as
opposed to generating revenue growth, and our lack of media advertising due to
our cash position.
o Our significant losses before income taxes in the fourth quarter of
fiscal 2001 resulted from a $17.6 million lower of cost or market inventory
adjustment and an $80.1 million charge for impairment of long-lived assets and
assets held for sale. The second quarter of fiscal 2000 included a $27.0 million
lower of cost or market inventory adjustment, and the fourth quarter of fiscal
2000 included a $30.4 million lower of cost or market inventory adjustment and
additional charges, including an $8.3 million charge associated with certain
internal restructuring efforts, which included an impairment charge of $6.0
million.
-33-
Our quarterly results will likely continue to fluctuate in fiscal 2002
and will likely cause comparisons with prior quarters to be unmeaningful,
largely because (i) while we anticipate significant increases in marketing and
trade promotional spending during future quarterly periods, such spending may
vary based on then current market and competitive conditions and other factors;
(ii) we anticipate revenues to increase even as we focus our promotional
strategies on returning to profitable operations; and (iii) we expect to
continue to realize cost savings from our internal restructuring efforts.
The following table contains unaudited selected historical quarterly
information, which includes adjustments, consisting only of normal recurring
adjustments (except for (i) during the quarter ended August 31, 2001, we
recorded an inventory lower of cost or market adjustment of $17.6 million to
cost of sales and an $80.1 million charge for impairment of long-lived assets
and assets held for sale; (ii) during the quarter ended February 29, 2000, we
recorded an inventory lower of cost or market adjustment of $27.0 million to
cost of sales; (iii) during the quarter ended August 31, 2000, we recorded a
lower of cost or market inventory adjustment of $30.4 million, a $6.0 million
charge for impairment of long-lived assets and assets held for sale, and a
restructuring charge of $1.9 million to cost of sales and $0.4 million to
selling, general and administrative expenses; (iv) during the quarters ended
August 31, 2001 and May 31, 2000, we recognized gains on the disposals of
certain private label businesses and related property and equipment of $1.7
million and $2.1 million, respectively; and (v) during the quarter ended August
31, 2001, we recorded an income tax benefit of $32.8 million related to certain
net operating loss carryforwards which will be utilized to offset debt
forgiveness income as a result of the Restructuring), that we considered
necessary for a fair presentation:
Fiscal Quarters Ended
(In thousands, except per share data)
Fiscal 2001 Fiscal 2000
------------------------------------------------- ---------------------------------------------------
Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 29, Nov. 30,
2001 2001 2001 2000 2000 2000 2000 1999
----------- ----------- ------------ ------------ ------------- ------------ ------------ -----------
Net revenues (1) $31,359 $26,602 $27,856 $40,009 $33,997 $52,675 $58,703 $61,645
Gross profit (loss) (1) (9,360) 5,767 5,778 8,145 (55,482) 13,353 (14,338) 10,090
Writedowns of long-lived
assets and assets held
for sale (1) (80,125) (6,000)
(Loss) income before taxes (103,742) (2,406) (3,445) 188 (78,602) (4,410) (34,512) 553
Net (loss) income $(70,942) $(2,406) $(1,353) $188 $(79,846) $(4,410) $(21,036) $321
Net income per
share-diluted: (2)
Weighted average shares
outstanding 5,085 5,085 5,085 5,085 5,085 5,085 5,085 5,076
Net (loss) income per
share $(13.95) $(0.47) $(0.27) $0.04 $(15.70) $(0.87) $(4.14) $0.06
Cash dividends
per share: (2)
Per Class A share 0.160 0.160 0.160
Per Class B share 0.145 0.145 0.145
(1) Amounts previously reported have been reclassified to conform with the new accounting standards
adopted in the fourth quarter with respect to accounting for the cost of sales incentives provided
to retailers (which we refer to as trade spending and slotting) and consumer coupons as described in
Note 1 to Notes to Consolidated Financial Statements. The costs of such items, which were previously
reported as selling, general and administrative expenses, have been reclassified and reported as
reductions in net revenues. Certain other amounts previously reported have been reclassified to
conform to the current presentation.
(2) All share and per share data has been restated to give effect to our November 5, 2001
one-for-four reverse stock split. Effective following the third quarter dividend payment in fiscal
2000, we indefinitely suspended dividend payments on our common stock.
Certain amounts previously reported have been reclassified as discussed
in footnote (1) to the table above. The following table sets forth a
reconciliation of such previously reported amounts.
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Fiscal Quarters Ended
(In thousands)
Fiscal 2001 Fiscal 2000
------------------------------------------------- ---------------------------------------------------
Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 29, Nov. 30,
2001 2001 2001 2000 2000 2000 2000 1999
------------------------------------------------- ---------------------------------------------------
Net revenues as previously
reported $31,359 $30,281 $32,477 $44,762 $61,206 $61,417 $68,621 $74,967
Reclassification
adjustments (3,679) (4,591) (4,753) (27,209) (8,742) (9,918) (13,322)
Net revenues as reported $31,359 $26,602 $27,856 $40,009 $33,997 $52,675 $58,703 $61,645
Gross profit (loss) as
previously reported $(9,360) $10,599 $11,960 $14,603 $(34,273) $22,095 $(4,420) $23,412
Reclassification
adjustments (4,832) (6,182) (6,458) (21,209) (8,742) (9,918) (13,322)
Gross profit (loss) as
reported $(9,360) $5,767 $5,778 $8,145 $(55,482) $13,353 $(14,338) $10,090
Item 7A. Quantitative and Qualitative Disclosures 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 are
affected by changes in short-term interest rates under our revolving credit
agreement, pursuant to which our borrowings bear interest at a variable rate.
Based upon the debt outstanding under our former revolving credit agreement and
bank term note as of August 31, 2001, an increase of 1.0% in market interest
rates would have increased interest expense and decreased earnings before income
taxes by approximately $1.4 million. As a result of the Restructuring, we
currently have significantly less debt outstanding than we did at August 31,
2001, and as a result we would be less impacted by an increase in market
interest rates. This analysis does not take into account any actions we might
take in an effort to mitigate our exposure in the event interest rates were to
change materially. See Note 9 of Notes to Consolidated Financial Statements. As
of August 31, 2001, we were experiencing financial difficultites and did not
make our scheduled payments on certain debt obligations that were subsequently
restructured and/or forgiven. Accordingly, we have determined that it is not
practicable to estimate the fair value of our debt obligations as of August 31,
2001.
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Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board
of Directors of Northland Cranberries, Inc.:
We have audited the accompanying consolidated balance sheets of
Northland Cranberries, Inc. and subsidiaries as of August 31, 2001 and 2000, and
the related consolidated statements of operations, shareholders' equity
(deficiency in assets) and cash flows for each of the three years in the period
ended August 31, 2001. Our audits also included the consolidated financial
statement schedule listed at Item 14(a)(2). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Northland Cranberries, Inc.
and subsidiaries as of August 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 2001, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Notes 9 and 14 to the consolidated financial
statements, on November 6, 2001, the Company completed a debt and equity
restructuring.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
November 30, 2001
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NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2001 AND 2000
- ---------------------------------------------------------------------------------------------------
ASSETS 2001 2000
CURRENT ASSETS:
Cash and cash equivalents $ 1,487,002 $ 164,211
Accounts receivable 10,629,588 20,650,152
Current portion of note receivable and accounts receivable - other 8,530,238 7,787,365
Inventories 24,381,940 48,200,907
Prepaid expenses and other current assets 878,983 2,009,489
Deferred income taxes 32,800,000
Assets held for sale 5,830,000 6,644,859
------------ ------------
Total current assets 84,537,751 85,456,983
NOTE RECEIVABLE, Less current portion 23,000,000 26,000,000
PROPERTY AND EQUIPMENT - Net 71,907,266 153,119,069
OTHER ASSETS 970,509 1,930,607
INTANGIBLE ASSETS - Net 17,728,274
------------ ------------
TOTAL ASSETS $180,415,526 $284,234,933
============ ============
See notes to consolidated financial statements.
-37-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2001 AND 2000
- -------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY IN ASSETS) 2001 2000
CURRENT LIABILITIES:
Accounts payable $ 6,928,762 $ 31,357,380
Accrued liabilities 12,589,434 18,489,027
Current maturities of long-term debt 33,374,495 177,101,992
------------- -------------
Total current liabilities 52,892,691 226,948,399
LONG-TERM DEBT, Less current maturities 64,589,196 3,927,069
OBLIGATIONS SUBSEQUENTLY FORGIVEN OR
EXCHANGED FOR COMMON STOCK 84,087,222
------------- -------------
Total liabilities 201,569,109 230,875,468
------------- -------------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 9, 10, 13 and 14)
SHAREHOLDERS' EQUITY (DEFICIENCY IN ASSETS):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued
Common stock:
Class A, $.01 par value, 4,925,555
shares issued and outstanding 49,256 49,256
Class B, $.01 par value, 159,051
shares issued and outstanding 1,591 1,591
Additional paid-in capital 149,129,317 149,129,317
Accumulated deficit (170,333,747) (95,820,699)
------------- -------------
Total shareholders' equity (deficiency in assets) (21,153,583) 53,359,465
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY IN ASSETS) $ 180,415,526 $ 284,234,933
============= =============
-38-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
- -----------------------------------------------------------------------------------------
2001 2000 1999
NET REVENUES $ 125,825,641 $ 207,020,280 $ 201,285,006
COST OF SALES 115,495,961 253,396,905 152,481,190
------------- ------------- -------------
GROSS PROFIT (LOSS) 10,329,680 (46,376,625) 48,803,816
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (25,522,336) (53,654,139) (30,973,918)
WRITEDOWNS OF LONG-LIVED ASSETS AND
ASSETS HELD FOR SALE (80,125,000) (6,000,000)
GAIN (LOSS) ON DISPOSALS OF BUSINESSES
AND PROPERTY AND EQUIPMENT 2,118,257 2,228,691 (67,061)
------------- ------------- -------------
(LOSS) INCOME FROM OPERATIONS (93,199,399) (103,802,073) 17,762,837
INTEREST EXPENSE (18,936,343) (14,556,330) (8,564,480)
INTEREST INCOME 2,730,694 1,387,827
------------- ------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES (109,405,048) (116,970,576) 9,198,357
INCOME TAX BENEFIT (EXPENSE) 34,892,000 12,000,000 (3,618,000)
------------- ------------- -------------
NET (LOSS) INCOME $ (74,513,048) $(104,970,576) $ 5,580,357
============= ============= =============
NET (LOSS) INCOME PER SHARE:
Basic $ (14.65) $ (20.65) $ 1.12
Diluted (14.65) (20.65) 1.10
SHARES USED IN COMPUTING NET (LOSS)
INCOME PER SHARE:
Basic 5,084,606 5,082,510 5,001,379
Diluted 5,084,606 5,082,510 5,051,628
See notes to consolidated financial statements.
-39-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
- -------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
OPERATING ACTIVITIES:
Net (loss) income $ (74,513,048) $(104,970,576) $ 5,580,357
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment 8,962,236 8,157,849 8,010,453
Amortization of tradenames, trademarks and goodwill 774,275 794,916 842,944
Provision for deferred income taxes (32,800,000) (11,323,000) 2,473,000
Provision for inventory lower of cost or market adjustments 17,603,000 57,400,000
Provision for writedown of assets held for sale 14,980,000 6,000,000
Provision for writedown of property and equipment 50,484,000
Provision for writedown of intangible assets 14,661,000
(Gain) loss on disposals of businesses and property and equipment (2,118,257) (2,228,691) 67,061
Changes in assets and liabilities (net of effects
of business acquisitions and dispositions):
Receivables, prepaid expenses and other current assets 10,331,194 5,019,396 (14,807,868)
Inventories 5,569,367 (15,176,886) (30,680,548)
Accounts payable and accrued liabilities (9,245,139) 25,390,681 (4,521,337)
------------- ------------- -------------
Net cash provided by (used in) operating activities 4,688,628 (30,936,311) (33,035,938)
------------- ------------- -------------
INVESTING ACTIVITIES:
Acquisitions of businesses (31,700,438)
Proceeds from disposals of businesses,
property and equipment and
assets held for sale 13,435,019 8,676,478 40,778
Property and equipment purchases (406,412) (5,397,401) (8,333,350)
Collections on note receivable 1,750,000 250,000
Net decrease (increase) in other assets 33,802 497,721 (658,510)
------------- ------------- -------------
Net cash provided by (used in) investing activities 14,812,409 4,026,798 (40,651,520)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net (decrease) increase in borrowings
under revolving credit facilities (15,695,300) 30,950,000 90,950,000
Payments on long-term debt (2,482,946) (2,388,289) (14,122,493)
Dividends paid (2,431,863) (3,194,024)
Exercise of stock options 174,750 475,911
Other (286,236)
------------- ------------- -------------
Net cash (used in) provided by financing activities (18,178,246) 26,304,598 73,823,158
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,322,791 (604,915) 135,700
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 164,211 769,126 633,426
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,487,002 $ 164,211 $ 769,126
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid during the year for:
Interest (net of amounts capitalized) $ 4,937,583 $ 13,672,749 $ 8,458,891
Income taxes (refunded) - net (3,193,197) 698,736 669,700
SUPPLEMENTAL NON-CASH INVESTING AND
FINANCING ACTIVITIES (Notes 2 and 9)
See notes to consolidated financial statements.
-40-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
- -----------------------------------------------------------------------------------------------------------------------
Total
Common Stock Retained Shareholders'
-------------------- Additional Earnings Equity
Paid-in (Accumulated (Deficiency
Class A Class B Capital Deficit) in Assets)
BALANCE, AUGUST 31, 1998 $ 47,683 $ 1,591 $ 144,625,044 $ 9,195,407 $ 153,869,725
Common stock issued for acquistions of
businesses (114,322 shares) 1,143 3,470,287 3,471,430
Common stock issued for compensation
(1,000 shares) 10 58,054 58,064
Stock options exercised (30,338 shares) 303 475,608 475,911
Tax benefit from exercise of stock
options 291,919 291,919
Cash dividends paid:
Class A ($0.64 per share) (3,101,495) (3,101,495)
Class B ($0.58176 per share) (92,529) (92,529)
Net income 5,580,357 5,580,357
--------- ------- ------------- ------------ ------------
BALANCE, AUGUST 31, 1999 49,139 1,591 148,920,912 11,581,740 160,553,382
Stock options exercised (11,650
shares) 117 174,633 174,750
Tax benefit from exercise of stock
options 33,772 33,772
Cash dividends paid:
Class A ($0.48 per share) (2,362,466) (2,362,466)
Class B ($0.43632 per share) (69,397) (69,397)
Net loss (104,970,576) (104,970,576)
--------- ------- ------------- ------------ ------------
BALANCE, AUGUST 31, 2000 49,256 1,591 149,129,317 (95,820,699) 53,359,465
Net loss (74,513,048) (74,513,048)
--------- ------- ------------- ------------ ------------
BALANCE, AUGUST 31, 2001 $ 49,256 $ 1,591 $ 149,129,317 $ (170,333,747) $ (21,153,583)
========= ======= ============= ============ ============
See notes to consolidated financial statements.
-41-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The business of Northland Cranberries, Inc. (the
"Company") consists principally of growing and selling cranberries and
cranberry products. The Company's vertical integration business
strategy includes marketing and selling its Northland, Seneca,
TreeSweet and Awake brand cranberry and other fruit juice products,
fresh, frozen, and dried cranberries, and cranberry concentrate
domestically through retail supermarkets and through other distribution
channels, both domestically and internationally. In addition, the
Company produces and packages juice beverages for other companies on a
contract-manufacturing basis.
Business Risks - Production levels of cranberries combined with on-hand
levels of inventories continue to exceed industry demand. Prices paid
to growers for raw cranberries are currently below production costs for
many growers. 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 July 2000, the United States Department of
Agriculture ("USDA") adopted a volume regulation under a federal
marketing order which was designed to reduce the industry-wide
cranberry crop for the 2000 calendar year crop from levels of that of
the previous three years. In June of 2001, the USDA adopted a volume
regulation under a federal marketing order for the 2001 calendar year
crop which is intended to further reduce the industry-wide cranberry
crop. In addition, Federal legislation signed on October 27, 2000
provided 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. The Company received approximately $1,190,000 in direct
payments from the CCC during the year ended August 31, 2001, which was
recorded as net revenues in the consolidated statement of operations
for the year then ended. In addition, the Company was awarded contracts
and provided concentrate to other contract awardees which generated net
revenues of approximately $4,677,000 during the year ended August 31,
2001 related to sales under the USDA cranberry product purchase
programs.
As described in Note 9, the Company did not make its scheduled
principal and interest payments on a revolving credit facility with
various banks and the term loans payable to an insurance company during
the year ended August 31, 2001, and the Company was not in compliance
with several provisions of such debt agreements as of and for the years
ended August 31, 2001 and 2000. Under the terms of the Company's debt
agreements, the lenders had the ability to call all outstanding
principal and interest thereunder immediately due and payable. During
the year ended August 31, 2001, management explored various
alternatives with respect to obtaining additional equity and debt
financing, and continued efforts to restructure and/or refinance its
debt facilities, reduce costs and to explore various strategic
alternatives related to the sale of all or a portion of the Company's
assets or common stock and on November 6, 2001, as described in Notes 9
and 14, completed a debt and equity restructuring. Management of the
Company believes, that as a result of the restructuring, the Company's
debt facilities and expected cash flows from operations, will be
sufficient to support the Company's liquidity requirements for the
remainder of the year ending August 31, 2002 and for the foreseeable
future.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
-42-
Cash and Cash Equivalents - Cash and cash equivalents consist primarily
of amounts on deposit at various banks.
Concentration of Credit Risk and Significant Customer - The Company
manufactures and sells to wholesale food processors, distributors and
retailers throughout the United States. The Company performs certain
credit evaluation procedures and does not require collateral. Accounts
receivable are stated net of allowances for doubtful accounts of
approximately $300,000 and $250,000 as of August 31, 2001 and 2000,
respectively. During the years ended August 31, 2001 and 2000, the
Company had revenues from a customer, for which the Company produces
and packages juice beverages, of approximately $12,862,000 and
$45,888,000, respectively, or 10.2% and 22.2%, respectively, of net
revenues. The reduction in net revenues resulted primarily from a
change during the first quarter of the year ended August 31, 2001 from
an arrangement where the Company purchased substantially all of the
ingredients and sold the customer finished product to a fee for
services performed arrangement. Accounts receivable as of August 31,
2001 and 2000 included approximately $968,000 and $6,563,000,
respectively, due from this customer. During the year ended August 31,
1999, the Company did not have net revenues from any customer that
exceeded 10% of net revenues.
Inventories - Inventories, which primarily consist of cranberries,
cranberry and other concentrates, juice, packaging supplies and
deferred crop costs, are stated at the lower of cost or market.
Inventory market writedowns are provided when the estimated sales value
of such inventories, less estimated completion and disposition costs,
exceeds the cost or carrying value of the inventories. The market
estimates are based on management's best estimates of future selling
prices and 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 which it takes to sell the inventory. Such factors
are all subject to significant fluctuations. Cranberries and cranberry
content of inventories are accounted for using the specific
identification costing method, which approximates the first-in,
first-out ("FIFO") costing method. All other inventory items are
accounted for using the FIFO costing method. Deferred crop costs
consist of those costs related to the growing of the crop which will be
harvested in the following fiscal year.
Assets Held for Sale - Assets held for sale are carried at estimated
fair value, less costs of disposal, which is less than the original
carrying value of the assets.
Property and Equipment - Property and equipment are stated at cost,
less depreciation and amortization using the straight-line method over
the estimated useful lives. The costs related to the development of new
productive cranberry beds are capitalized during the development period
until commercial production is achieved (generally the fifth growing
season after planting). Amounts included in construction in progress
include construction costs of beds, dikes and ditches, irrigation
systems, and costs associated with vine clippings planted. In addition,
during the development period, certain direct costs are capitalized in
construction in progress. The Company depreciates buildings, land
improvements, cranberry vines, bulkheads and irrigation equipment over
30 to 40 years and other depreciable assets over 3 to 10 years.
Intangible Assets - Tradenames, trademarks and goodwill (excess of
purchase price over fair value of net assets acquired) were amortized
using the straight-line method, principally over a period of 40 years
(see Note 7).
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 values may not be recoverable. If the sum of the expected
-43-
future undiscounted cash flows is less than the carrying value of the
assets, a loss is recognized for the difference between the fair value
and carrying value of the assets. In the fourth quarter of the year
ended August 31, 2001, as a result of the deterioration in the
long-term prospects for the cranberry growing and processing industry
over the summer due, in part, to the implementation of a USDA cranberry
marketing order for the 2001 calendar year crop, continued large levels
of excess cranberry inventories held by the Company and other industry
participants, forecasted future cranberry market prices for the next
several years, as well as continued reductions in the Company's
anticipated cranberry and cranberry concentrate usage requirements
related to the Company's recent decline in revenues and market share,
the Company decided to restructure its operations and sell various
long-lived assets, and concluded that the estimated future cash flows
of its long-lived assets were below the carrying value of such assets.
Accordingly, during the quarter, the Company recorded an impairment
charge of $80,125,000 related to writedowns to assets held for sale,
property and equipment held for use, and goodwill and other intangible
assets in accordance with SFAS No. 121. The estimated fair value was
based on anticipated future cash flows, discounted at a rate
commensurate with the risk involved. During the year ended August 31,
2000, the Company recorded an impairment writedown of $6,000,000
related to a closed facility that is held for sale (see Notes 6 and 7).
Income Taxes - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes" which requires an asset and
liability approach to financial accounting and reporting for income
taxes.
Net Revenues - The Company recognizes revenue when product is shipped
and title passes to the customer. Revenue is recognized as the net
amount to be received after deducting estimated amounts for coupons,
discounts, trade allowances and product returns. See New Accounting
Standards described elsewhere in Note 1 for reclassifications of
previously reported net revenues.
Advertising - Advertising costs incurred to produce media for
advertising for major new campaigns are expensed in the period in which
the advertising first takes place. Other advertising costs are expensed
when incurred. Advertising expenses of approximately $2,946,000,
$14,127,000 and $10,583,000 during the years ended August 31, 2001,
2000 and 1999, respectively, are included in selling, general and
administrative expenses.
Net Income (Loss) Per Share - Net income (loss) per share is calculated
in accordance with SFAS No. 128, "Earnings Per Share." Basic net income
(loss) per share and diluted (loss) per share are computed by dividing
net income (loss) by the weighted average number of common shares
outstanding. Diluted net income per 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. Previously reported share and per share
information has been restated to give effect to a reverse stock split
described in Note 10.
Segment Information - The Company operates principally in a single
consumer foods line of business, encompassing the growing and selling
of cranberries and cranberry products.
Comprehensive Income (Loss) - There is no difference between
comprehensive income (loss) and net income (loss) for each of the three
years in the period ended August 31, 2001.
Fair Value of Financial Instruments - The Company is required to
disclose the estimated fair value of certain financial instruments in
accordance with SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments". Considerable judgment is required to interpret
market data to develop estimates of fair value. As of August 31, 2001,
the Company, as previously described in Note 1, was experiencing
financial difficulties and had not made its scheduled payments on
certain accounts payable and long-term debt obligations that were
subsequently restructured and/or forgiven, and on November 6, 2001, as
described in Note 14, announced the completion of a debt and equity
-44-
restructuring in which certain creditors agreed to forgive and
restructure the amounts owed to them by the Company. Accordingly,
management has determined that it is not practicable to estimate the
fair value of the Company's long-term debt obligations. The Company
believes the carrying amount of its other financial instruments (cash
and cash equivalents, accounts receivable, notes receivable, accounts
payable and accrued liabilities) is a reasonable estimate of the fair
value of such instruments due to the short-term nature of such
instruments and the market interest rates applicable to similar
instruments. However, as described in Note 2, there are certain
uncertainties with respect to a note and related accounts receivable
due from the buyer of a private label juice business sold on March 8,
2000. The ultimate resolution of this matter could significantly affect
any estimates of the fair value of the note and related accounts
receivable.
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. On an ongoing basis, management reviews
its estimates, including those related to allowances for doubtful
accounts, product returns, and trade discounts and incentives,
valuation of inventories, future cash flows associated with assets held
for sale and long-lived assets, useful lives for depreciation and
amortization, valuation allowances for deferred income tax assets,
litigation, environmental liabilities and contracts based on currently
available information. Changes in facts and circumstances may result in
revised estimates and actual results could differ from those estimates.
New Accounting Standards - Effective in the fourth quarter of the year
ended August 31, 2001, the Company adopted Emerging Issues Task Force
("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and
Issue No. 00-25, "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's
Products." EITF Issue No. 00-14 provides guidance on the financial
reporting of the cost of consumer coupons, amongst other items, in the
consolidated statements of operations. EITF Issue No. 00-25 provides
guidance on the financial reporting of the costs associated with sales
incentives provided to customers in the consolidated statements of
operations. Under the new accounting standards, the cost of consumer
coupons and sales incentives provided to retailers are reported as a
reduction in net revenues. The Company previously reported the cost of
consumer coupons and sales incentives provided to retailers as selling,
general and administrative expenses. Prior year consolidated financial
statements have been reclassified to conform to the new requirements,
and as a result, approximately $59,191,000 and $35,556,000 of amounts
previously reported as selling, general and administrative expenses
during the years ended August 31, 2000 and 1999, respectively, have
been reclassified and reported as a reduction of net revenues.
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 No. 133 and SFAS No. 138 established accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The
Company adopted SFAS No. 133 and SFAS No. 138, effective September 1,
2000. The adoption of SFAS No. 133 and SFAS No. 138 did not have an
impact on the Company's consolidated financial statements as the
Company has not used derivative financial instruments and has not been
involved in hedging activities.
In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition,
-45-
construction, development and (or) the normal operation of a long-lived
asset, except for certain obligations of lessees. SFAS No. 143 requires
entities to record the fair value of a liability for an asset
retirement obligation in the period the asset was acquired. When the
liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the estimated useful life of
the related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The Company is required to adopt SFAS No. 143,
effective September 1, 2002. The Company has not determined the impact,
if any, the adoption of SFAS No. 143 will have on its consolidated
financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". SFAS No. 144 also amends Accounting Research Bulletin
No. 51, "Consolidated Financial Statements", to eliminate the exception
to consolidation for a subsidiary for which control is likely to be
temporary. SFAS No. 144 requires that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired. SFAS No. 144 also broadens the presentation
of discontinued operations to include more disposal transactions. The
Company is required to adopt SFAS No. 144, effective September 1, 2002.
The Company has not determined the impact, if any, the adoption of SFAS
No. 144 will have on its consolidated financial statements.
Reclassifications - Certain amounts previously reported have been
reclassified to conform to the current presentation.
2. DISPOSITION OF PRIVATE LABEL JUICE 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 $28,000,000 (non-cash
investing activity) which is to be collected over six years and which
bears interest at a rate of 10% per annum, as well as approximately
$6,800,000 in cash (subject to potential post-closing adjustments)
related to inventory transferred to Cliffstar on the closing date. The
Company recognized a pre-tax gain of approximately $2,100,000 in
connection with the sale of the net assets.
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. To date, Cliffstar has not provided
the Company with earn-out calculations in accordance with the Asset
Purchase Agreement and the Company has not recognized any income under
the earn-out requirements. 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.
-46-
The private label juice business had revenues of approximately
$23,600,000 and $40,300,000 for the years ended August 31, 2000 and
1999, respectively. The Company recognized gross profit of
approximately $3,700,000 and $12,400,000 on such revenues during the
years ended August 31, 2000 and 1999, 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 did 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 sub-
sequently 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 is currently in arbitration. The Company seeks compensatory
damages in an amount in excess of $5,000,000, plus punitive damages for
Cliffstar's breaches of its fiduciary duties and attorneys' fees.
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.
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As of August 31, 2001, the note receivable from Cliffstar had an
outstanding balance of $26,000,000, and the Company had other
outstanding accounts receivable due from Cliffstar aggregating
approximately $5,411,000. The action remains in the discovery stages.
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 accounts receivable
due from Cliffstar as of August 31, 2001 are 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 and to pursue any claims the Company may have against
Cliffstar, including any actions to collect the amounts outstanding.
Cliffstar made the required $250,000 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 Company received Cliffstar's scheduled August 31, 2000
principal payment of $250,000 together with approximately $700,000 of
accrued interest at 10% on September 8, 2000. The Company received
Cliffstar's scheduled November 30, 2000 principal payment of $250,000
together with approximately $686,000 of accrued interest at 10% on
December 22, 2000. The Company received Cliffstar's scheduled February
28, 2001 principal payment of $250,000 together with approximately
$679,000 of accrued interest at 10% on March 2, 2001. The Company
received Cliffstar's scheduled May 31, 2001 and August 31, 2001
principal payments aggregating $1,000,000 together with approximately
$1,348,000 of accrued interest at 10% on the scheduled due dates. In
addition, the Company received Cliffstar's scheduled November 30, 2001
principal payment of $500,000, together with approximately $648,000
accrued interest at 10% on the scheduled due date. The Company has
recognized interest income on the note receivable at a rate of 10% in
the 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 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. Aggregate annual scheduled principal
payments required under the terms of the Cliffstar note agreement as of
August 31, 2001, consisted of the following:
Years Ending Principal
August 31, Payments
2002 $ 3,000,000
2003 4,500,000
2004 6,000,000
2005 8,000,000
2006 4,500,000
--------------
Total $ 26,000,000
==============
3. DISPOSITION OF PRIVATE LABEL CRANBERRY SAUCE BUSINESS AND RELATED
MANUFACTURING FACILITY
On June 8, 2001, the Company sold the net assets of its private label
cranberry sauce business to Clement Pappas and Company, Inc. ("Clement
Pappas"), and a related manufacturing facility in Mountain Home, North
Carolina to Clement Pappas NC, Inc., for aggregate cash proceeds of
approximately $12,475,000. The proceeds of the sale were utilized
primarily to reduce the
-48-
Company's bank debt. The Company recognized a pre-tax gain of
approximately $1,707,000 in connection with the sale of the net assets.
Additionally, Clement Pappas is contractually obligated to make certain
payments to the Company for a period of up to five years from the
closing date based on total case sales of cranberry sauce, as defined,
subject to an aggregate minimum payment of $1,000,000 and an aggregate
maximum payment of $2,500,000. The present value of the future
aggregate minimum payments has been recorded as an asset in the
accompanying August 31, 2001 consolidated balance sheet. The Company
also entered into certain related agreements with Clement Pappas NC,
Inc., including among them, a co-packing agreement pursuant to which
the Company contracted for specified quantities of juice products to be
packed by Clement Pappas NC, Inc. with an initial term of one year
following the closing date.
The Company had net revenues of approximately $7,859,000, $14,143,000,
and $8,958,000 during the years ended August 31, 2001, 2000 and 1999,
respectively, related to the private label sauce business and the
activities related to producing and packing juice beverages for other
customers at the Mountain Home facility. Other information with respect
to gross profit and selling, general and administrative expenses is not
available, as the Company's accounting system did not segregate such
items by type of product.
4. ACQUISITIONS
On December 30, 1998, the Company acquired the juice division of Seneca
Foods Corporation ("Seneca") for approximately $28.7 million in cash,
and assumed certain liabilities in connection with the acquisition. The
assets acquired included an exclusive license to market and sell all
Seneca brand fruit beverages, bottling and packaging facilities located
in New York, North Carolina and Wisconsin, a distribution center in
Michigan, and a receiving station in New York.
On March 1, 1999, the Company acquired certain assets of Clermont, Inc.
("Clermont") for $2.6 million in cash, issuance of a $4.4 million note
payable and 91,822 shares of Class A Common Stock. The assets acquired
included cranberries, cranberry and other fruit concentrates, a
concentrating facility in Oregon, and other equipment.
On April 21, 1999, the Company acquired the common stock of Potomac
Foods of Virginia, Inc. ("Potomac") for $0.4 million in cash, $0.4
million of assumed debt and 22,500 shares of Class A Common Stock. The
assets of Potomac primarily consisted of certain customer
relationships.
The acquisitions were recorded using the purchase method of accounting
and, accordingly, the results of operations of the acquired businesses
are included in the consolidated statements of operations from the
dates of acquisition. The purchase price of the acquisitions has been
allocated to the assets acquired and liabilities assumed based upon
fair values.
The unaudited pro forma net income and net income per share
information, assuming the Seneca acquisition had been consummated as of
September 1, 1998, are as follows for year ended August 31, 1999:
Net income $ 5,087,357
Net income per share
Basic $ 1.02
Diluted 1.01
Information with respect to pro forma net revenues for the year ended
August 31, 1999 is not readily available and is impracticable to obtain
as a result of the Company reclassifying the consolidated
-49-
financial statements for the year ended August 31, 1999 to conform with
the new reporting requirements required under the EITF Issues, as
described in Note 1. The unaudited revenues reported by Seneca during
the period from September 1, 1998 through the December 30, 1998
acquisition date, which were determined using a different basis of
accounting, were approximately $35,719,000. The unaudited pro forma
results are not necessarily indicative of the actual results of
operations that would have occurred had the Seneca acquisition actually
been made at the beginning of the year. The pro forma effects of the
Clermont and Potomac acquisitions were not significant.
5. INVENTORIES
Inventories as of August 31, 2001 and 2000 consisted of the following:
2001 2000
Raw materials $17,788,874 $30,528,712
Finished goods 4,169,378 7,951,357
Deferred crop costs 2,423,688 9,720,838
----------- -----------
Total inventories $24,381,940 $48,200,907
=========== ===========
During the years ended August 31, 2001 and 2000, the Company recorded
approximately $17,603,000 (fourth quarter) and $57,400,000 ($27,000,000
in the second quarter and $30,400,000 in the fourth quarter),
respectively, of pre-tax, lower of cost or market charges to cost of
sales which reduced the carrying value of its inventory to its
estimated market value. The Company continues to participate in a
highly competitive industry characterized by aggressive pricing
practices, changing demand patterns on the part of customers and
downward pressures on gross margins resulting from an excess supply of
raw cranberries and cranberry concentrate, that have resulted in
depressed prices to growers which are generally less than production
costs, as described in Note 1. The Company's lower of cost or market
charges were based upon management's best estimates of future product
sale prices and consumer demand patterns.
6. RESTRUCTURING CHARGES AND ASSETS HELD FOR SALE
During the fourth quarter of the year ended August 31, 2000, the
Company recorded an $8,250,000 pre-tax restructuring charge consisting
primarily of a $6,000,000 impairment writedown of a manufacturing
facility in Bridgeton, New Jersey that discontinued production and
closed on November 22, 2000 and $2,250,000 of plant closing costs and
employee termination benefits (of which $1,900,000 of was charged to
cost of sales and $350,000 of employee termination benefits were
charged to selling, general and administrative expenses). Approximately
130 employees received notification of their termination during the
year ended August 31, 2000 as a result of the restructuring plan,
primarily at the closed manufacturing facility and in the Company's
sales department. All of the plant closing costs and employee
termination benefits provided for at the time of the restructuring were
paid during the year ended August 31, 2001, with the exception of
approximately $456,000 of estimated obligations under a defined benefit
pension plan which covered certain former Bridgeton employees.
Assets held for sale as of August 31, 2000 consisted of the land,
building and equipment related to the manufacturing facility in
Bridgeton, New Jersey. The soil and water on the property is
contaminated as the result of a leaking underground storage tank, for
which the Company received an environmental indemnification agreement
from the previous owner of the facility, at the time of the Company's
purchase of the facility. During the fourth quarter of the year ended
August 31, 2001, management of the Company concluded after further
analysis of the market alternatives for the facility, to sell
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substantially all of the equipment at the facility for approximately
$435,000 and transfer and return to use other equipment, with a fair
value of approximately of $301,000, to other Company facilities. The
remaining carrying value of the facility was further written down
during the fourth quarter of the year ended August 31, 2001, by
approximately $4,398,000 to $1,500,000, its current estimated fair
value, less costs of disposal. Company management expects the
remediation efforts to be completed over the next fiscal year. The
Company anticipates difficulties selling the facility while the
remediation is in process.
Assets held for sale as of August 31, 2001 consisted of the remaining
land and building in Bridgeton, New Jersey, the land and building
related to a closed storage/distribution facility in Eau Claire,
Michigan, a cranberry marsh in Hanson, Massachusetts, which management
has determined is no longer economically feasible to operate, and after
harvesting the 2001 calendar year crop, was taken out of production and
certain equipment at two leased cranberry marshes in Nantucket,
Massachusetts which are expected by management of the Company to be
sold to the lessor of the facility. During the fourth quarter of the
year ended August 31, 2001, the Company recorded aggregate impairment
write-downs for these assets of $14,980,000, which included
approximately $4,398,000 related to the Bridgeton, New Jersey facility.
The estimation process involved in determining if assets have been
impaired and in the determination of fair value is inherently uncertain
since it requires estimates of current, as well as future market
conditions and events. In determining fair value, the Company
considered, among other things, property appraisals and the range of
preliminary purchase prices being discussed with potential buyers.
7. LONG-LIVED ASSETS
Property and equipment as of August 31, 2001 and 2000 consisted of the
following:
2001 2000
Land $ 5,559,741 $ 9,420,420
Land improvements 7,696,210 19,268,931
Cranberry vines, bulkheads
and irrigation equipment 32,758,540 84,477,947
Buildings and improvements 19,192,225 28,821,225
Equipment and vehicles 15,525,822 53,611,760
Construction in progress 1,387,682
--------------- ---------------
Property and equipment - at cost 80,732,538 196,987,965
Less accumulated depreciation
and amortization 8,825,272 43,868,896
--------------- ---------------
Property and equipment - net $ 71,907,266 $ 153,119,069
=============== ===============
During the fourth quarter of the year ended August 31, 2001, the
Company recorded an impairment writedown of $50,484,000 related to
property and equipment. The cost and accumulated depreciation and
amortization of the respective assets were restated to reflect the new
carrying values as a result of the writedown. The Company capitalized
approximately $87,000 and $326,000 of interest during the years ended
August 31, 2000 and 1999, respectively.
-51-
Intangible assets as of August 31, 2000 consisted of the following:
Tradenames and trademarks $ 11,873,666
Goodwill 7,936,801
----------------
Intangible assets - at cost 19,810,467
Less accumulated amortization 2,082,193
----------------
Intangible assets - net $ 17,728,274
================
During the fourth quarter of the year ended August 31, 2001, the
Company recorded an impairment writedown of $14,661,000 for the
remaining unamortized cost of the intangible assets.
8. ACCRUED LIABILITIES
Accrued liabilities as of August 31, 2001 and 2000 consisted of the
following:
2001 2000
Interest $ 85,661 $ 1,304,423
Trade and consumer promotions 4,051,098 11,205,184
Compensation and other employee benefits 1,648,665 2,208,529
Property taxes 829,213 555,533
Income taxes 120,465 168,070
Commissions 439,020 117,559
Legal and professional fees 3,097,453 1,351,161
Other 2,438,454 1,578,568
--------------- ---------------
Total accrued liabilities $ 12,589,434 $ 18,489,027
=============== ===============
Approximately $14,181,000 of outstanding accrued interest as of August
31, 2001 on certain restructured obligations has been classified as
long-term debt and obligations subsequently forgiven or exchanged for
common stock as of August 31, 2001 (see Note 9).
9. LONG-TERM DEBT AND OBLIGATIONS SUBSEQUENTLY FORGIVEN OR EXCHANGED FOR
COMMON STOCK
Long-term debt and obligations subsequently forgiven or exchanged for
common stock as of August 31, 2001 and 2000 consisted of the following:
2001 2000
Revolving credit facility with various banks $139,304,700 $155,000,000
Term loans payable to insurance company 19,095,673 19,095,673
Other obligations
9,469,673 6,933,388
Accrued interest on restructured obligations 14,180,867
------------ ------------
Total 182,050,913 181,029,061
Less obligations subsequently forgiven or
exchanged for common stock 84,087,222
------------ -------------
Amounts to be paid 97,963,691 181,029,061
Less current maturities of long-term debt 33,374,495 177,101,992
------------ -------------
Long-term debt $ 64,589,196 $ 3,927,069
============ ============
As of August 31, 2001, the Company was not in compliance with various
financial covenants contained in the agreements covering the revolving
credit facility and the term loans payable to an insurance company and,
accordingly, the borrowings thereunder were due on demand. However, as
-52-
described below, these obligations were subsequently restructured (see
Note 14). Accordingly, the Company has classified its long-term debt as
of August 31, 2001, based on the terms of the subsequent restructuring.
Under the revolving credit facility, as amended, the Company through
July 17, 2000, could borrow at the bank's domestic rate (which
approximates prime, as defined) or the London Interbank Offered Rate
("LIBOR"), plus 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% and the borrowing option under LIBOR was
eliminated. Under the terms of the amended revolving credit facility,
interest accrues and has been recorded at the bank's domestic rate,
plus 3.25%, while the loan is in default. Amounts outstanding under the
agreement bear interest at a rate of 9.75% and 10.09% as of August 31,
2001 and 2000, respectively. The outstanding accrued interest due the
banks aggregated approximately $12,891,000 as of August 31, 2001. The
Company did not make its scheduled interest payments to the banks
during the year ended August 31, 2001.
The Company has a term loan with an insurance company payable in
semi-annual installments, including interest at 8.08%, through July 1,
2004. In addition, the Company has a term loan with the same insurance
company payable in semi-annual installments, including interest at
7.86%, through August 1, 2008. The outstanding principal balances on
the 8.08% term loan and the 7.86% term loan were $11,376,865 and
$7,718,808, respectively as of both August 31, 2001 and 2000. The
insurance company term loans provide for an additional 5% default
interest to be paid on any unpaid scheduled principal and interest
payments, which aggregated approximately $2,234,000 as of August 31,
2001. Interest on the remaining principal balances, which aggregated
approximately $17,679,000 as of August 31, 2001, continues to accrue at
the contracted rates. The outstanding accrued interest, including the
additional default interest due, on the insurance company term loans
aggregated approximately $1,279,000 as of August 31, 2001.
On November 6, 2001, as described herein and elsewhere at Note 14, the
Company restructured its obligations under a revolving credit facility
with certain banks and two term loans payable to an insurance company.
Certain banks participating in the revolving credit facility agreed to
accept an aggregate cash payment of approximately $25,959,000 on
November 6, 2001, as the final settlement for approximately $79,293,000
of outstanding principal and interest due them as of such date. The
difference (approximately $53,334,000), net of legal fees, other direct
costs and income taxes, will be recognized in accordance with SFAS No.
15, "Accounting for Debtors and Creditors for Troubled Debt
Restructurings," as an extraordinary gain in the Company's consolidated
financial statements during the first quarter of the year ending August
31, 2002.
Certain other banks participating in the revolving credit facility
agreed to accept a cash payment of approximately $12,429,000, 7,618,987
shares of the Company's newly issued Class A Common Stock and a new
note (the "Restructured Bank Note") with a stated principal balance of
approximately $25,714,000, as the final settlement for approximately
$74,461,000 of outstanding principal and interest due them as of the
restructuring date. The total scheduled cash payments (principal and
interest) required under the terms of the Restructured Bank Note will
be less than the aggregate amounts owed such participating banks under
the former note, after deducting the cash payment made as of the date
of the restructuring and the estimated fair value of the shares of
common stock issued. The difference between the sum of the cash paid,
the estimated fair value of the common stock issued and the scheduled
estimated maximum future payments (principal and interest) required
under the Restructured Bank Note and the approximately $74,461,000 of
outstanding principal and interest owed such banks as of the
restructuring date of approximately $28,182,000 will be recognized as
an extraordinary gain, net of legal fees, other direct costs and income
taxes, in the Company's consolidated financial statements during the
first quarter of the year ending August 31, 2002. The
-53-
future cash payments required under the Restructured Bank Note are to
be applied against the Company's adjusted carrying value of the
Restructured Bank Note, with generally no interest expense recognized
for financial reporting purposes, in accordance with SFAS No. 15, as
long as the Company makes the scheduled payments in accordance with the
Restructured Bank Note and there are no changes to the interest rate.
Payments are due monthly under the Restructured Bank Note based on the
prime interest rate, as defined, plus 1% (6% as of November 6, 2001)
applied against the outstanding stated principal balance of the
Restructured Bank Note, with an additional $1,700,000 payable on
November 6, 2002 and additional monthly payments of approximately
$133,000 due commencing on December 1, 2003 and continuing to through
October 1, 2006, with a final payment of approximately $19,344,000 due
on November 1, 2006. The Restructured Bank Note is collateralized by
specific assets of the Company and the Company is required to make
certain mandatory prepayments to the extent of any net proceeds
received from the sale of such collateralized assets or to the extent
that a note received in connection with the sale of such assets, or
assets previously sold, is collected. The applicable prepayments are to
be applied in inverse order against the stated additional payments due
under the Restructured Bank Note, commencing with the November 1, 2006
scheduled payment.
On November 6, 2001, the Company and the insurance company holding the
two terms loans entered into a new loan agreement which restructured
and modified the terms of the two original loan agreements (with an
aggregate outstanding principal and interest balance of approximately
$20,657,000 as of the restructuring date) in which the Company issued a
new note to the insurance company (the "Restructured Insurance Company
Note") with a stated principal amount of approximately $19,096,000 with
a stated interest rate of 5% for the first two years of the note,
increasing by 1% annually thereafter, with a maximum interest rate of
9% in the sixth and final year of the Restructured Insurance Company
Note. The Restructured Insurance Company Note is payable in monthly
installments of approximately $186,000 commencing December 1, 2001,
adjusted periodically as the stated interest rate increases, with a
final payment of approximately $11,650,000 due November 1, 2007. The
Restructured Insurance Company Note may require an acceleration of
principal payments of approximately $17,000 per month, should the
Company's required per barrel price paid to contract growers (see Note
13) exceed $32 per barrel, as defined, and continue for the remaining
term of the Restructured Insurance Company Note, as long as the price
equals or exceeds $32 per barrel. The Restructured Insurance Company
Note is collateralized by specific assets of the Company. Under SFAS
No. 15, there is no gain to be recognized on the restructuring and
modification of the term loans as the total scheduled principal and
interest payments due under the Restructured Insurance Company Note are
in excess of the amounts owed the insurance company as of the date of
the restructuring, with the excess (approximately $4,406,000) to be
recognized as interest expense over the term of the Restructured
Insurance Company Note, using the interest method. The effective
interest rate to be recognized for financial reporting purposes will
approximate 4.5%.
In addition, in connection with the restructuring, the Company
restructured certain obligations owed to other creditors that resulted
in approximately $3,465,000 of debt forgiveness that will be recognized
as an extraordinary gain, net of legal fees, other direct costs and
income taxes, in the Company's consolidated financial statements during
the first quarter of the year ending August 31, 2002.
The Company anticipates that it will recognize an extraordinary gain on
the forgiveness of indebtedness of approximately $83,500,000 during the
first quarter of the year ending August 31, 2002, net of management's
best estimate of the amount of legal fees and other direct costs
incurred and the estimated fair value of the shares of Class A Common
Stock issued to the participating banks. For financial reporting
purposes the $83,500,000 anticipated gain on the forgiveness of
indebtedness will be reported net of income taxes which are estimated
to approximate $32,800,000, resulting in a net extraordinary gain of
approximately $50,700,000. Such estimated amounts are expected to be
-54-
known and finalized by the date the Company reports its consolidated
operating results for the first quarter of the year ending August 31,
2002. The estimated net extraordinary gain on the forgiveness of
indebtedness anticipated to be recognized in the Company's consolidated
financial statements during the first quarter of the year ending August
31, 2002, is summarized as follows:
Estimated forgiveness of indebtedness:
Revolving credit facility with banks $81,516,000
Other obligations 3,465,000
-------------
Total 84,891,000
Less estimated legal fees and other direct costs 1,481,000
-------------
Estimated extraordinary gain 83,500,000
Less estimated income taxes 32,800,000
-------------
Estimated net extraordinary gain $50,700,000
=============
The other obligations consist of various term loans and vendor
obligations, which as of August 31, 2001, included approximately
$3,465,000 of restructured obligations subsequently forgiven. In
addition, there was approximately $11,000 of accrued interest
outstanding as of August 31, 2001 on an obligation that was
subsequently restructured. Principal and interest on the obligations
remaining after the restructuring are due in various amounts through
November 2005, with interest ranging from 0% to 12%. The obligations
are generally collateralized by specific assets of the Company.
On November 6, 2001, the Company entered into a Loan and Security
Agreement (the "Agreement") with Foothill Capital Corporation and
Ableco Finance LLC that provides for a revolving credit facility and
two term loans. The Company has the ability to borrow, subject to
certain terms and conditions, up to $30,000,000 in accordance with a
revolving credit facility, which expires on November 6, 2006. Interest
on the revolving credit facility is payable monthly at the greater of
prime, as defined, plus 1%, or 7%.
The Agreement provides for two term loans in the amount of $10,000,000
each, Term Loans A and B. Interest on the term loans is payable monthly
at the greater of prime, as defined, plus 1%, or 7%. Principal payments
of approximately $167,000 per month are required under Term Loan A
commencing December 1, 2001 and continuing through November 1, 2006.
Minimum principal payments of $625,000 per quarter are required under
Term Loan B, commencing November 30, 2001 and continuing through August
31, 2005. Accelerated principal payments may be required based on
collection of related collateral.
The revolving credit facility and the term loans are collateralized by
substantially all the Company's assets that are not otherwise
collateralized, as defined in the Agreement.
The restructured debt agreements and other debt obligations contain
various covenants which include restrictions on dividends and other
distributions to shareholders, repurchases of stock and property and
equipment expenditures, and require the Company to maintain and meet
certain operating performance levels, as defined.
During the years ended August 31, 2001 and 2000, the Company issued
certain notes to vendors and finance companies in the amount of
$1,860,000 and $2,410,000, respectively, to finance certain accounts
payable and equipment purchases (non-cash financing and investing
activities).
For purposes of classifying the Company's consolidated balance sheet as
of August 31, 2001, the outstanding accrued interest on the
restructured obligations of approximately $14,181,000 has been included
with long-term debt (non cash financing activities). The obligations
subsequently forgiven and the portion of the revolving credit facility
with various banks that was exchanged for common stock, aggregating
approximately $83,411,000 and $676,000, respectfully, have been
classified as
-55-
a noncurrent liability for financial reporting purposes, as such
amounts will not be paid (non-cash financing activities).
Aggregate annual principal payments required under terms of the debt
agreements as of August 31, 2001, after giving effect to the subsequent
debt and equity restructuring and the various obligations that were
forgiven, consisted of the following:
Years Ending Principal
August 31, Payments
2002 $ 33,374,495
2003 12,787,214
2004 10,243,718
2005 7,062,853
2006 1,824,703
Thereafter 32,670,708
------------
Total $ 97,963,691
============
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 August 31, 2001, the grower/officer was in
default with certain terms and conditions contained in the related debt
agreements. The Company has provided for its estimated loss under the
guarantee.
10. SHAREHOLDERS' EQUITY (DEFICIENCY IN ASSETS) AND REDEEMABLE PREFERRED
STOCK
The authorized common stock of the Company consists of 60,000,000
shares of Class A Common Stock and 4,000,000 shares of Class B Common
Stock. Outstanding Class B shares are convertible into Class A shares
on a one-for-one basis at any time. The shares of Class A Common Stock
are entitled to one vote per share and the shares of Class B Common
Stock are entitled to three votes per share. Holders of Class A Common
Stock are entitled to receive cash dividends equal to at least 110% of
any cash dividends paid on the shares of Class B Common Stock. However,
cash dividends may be paid on Class A Common Stock without a concurrent
cash dividend being paid on the Class B Common Stock. If at any time
the outstanding shares of Class B Common Stock fall below 2% of the
outstanding shares of Class A Common Stock, they will be automatically
converted into Class A Common Stock.
Effective November 5, 2001, the Company's Articles of Incorporation
were amended (i) effecting a one-for-four reverse stock split of the
Class A Common Stock and Class B Common Stock (with fractional shares
resulting from such reverse stock split being rounded up to the next
whole share); (ii) creating and authorizing the issuance of up to
2,000,000 shares of preferred stock, $.01 par value per share,
designated as Series A Preferred Stock; and (iii) creating and
authorizing the issuance of 100 shares of preferred stock, $.01 par
value per share, designated as Series B Preferred Stock. All share and
per share information included in the consolidated financial statements
has been restated to give effect to the reverse stock split. The
Company was previously authorized to issue 5,000,000 shares of
preferred stock with a par value of $.01, and no such shares were
issued.
On November 5, 2001, the Class B Common Stock shareholders voluntarily
converted their shares, pursuant to the terms of the Company's Articles
of Incorporation, into shares of Class A Common Stock on a one-for-one
basis.
-56-
Convertible Preferred Stock - Each share of the Series A Preferred
Stock will be automatically converted into 25 shares (subject to
adjustment upon the happening of certain dilutive events) of Class A
Common Stock immediately upon the effectiveness of a proposed amendment
to the Company's Articles of Incorporation, which will increase the
number of authorized shares of Class A Common Stock from 60,000,000
shares to 150,000,000 shares and is expected to be approved by the
Company's shareholders at the Company's 2002 annual meeting (See Note
14). Each issued and outstanding share of Series A Preferred Stock is
entitled to the number of votes equal to the number of shares of Class
A Common Stock into which such share of Series A Preferred Stock is
then convertible. The conversion rate is subject to adjustment under
certain circumstances. If and when the Board of Directors declares a
cash dividend on the shares of Class A Common Stock, then the
shareholders of Series A Preferred Stock are entitled to receive a cash
dividend per share equal to the amount such shareholders would have
received had such shareholders converted their Series A Preferred Stock
into Class A Common Stock immediately prior to such distribution. The
Series A Preferred Stock has a preference in liquidation, prior to the
Series B Preferred Stock, up to an amount equal to the amount such
shareholder would have received had such shareholder converted its
Series A Preferred Stock into Class A Common Stock immediately prior to
such distribution.
Redeemable Preferred Stock - The Series B Preferred Stock has no voting
rights and no dividend preference. In the event of liquidation, the
shares of Series B Preferred Stock have a preference in liquidation
after the shares of Series A Preferred Stock equal to the par value of
each share of 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, which
subsequent to year-end, acquired a controlling interest in the Company
(see Note 14), 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 the Company's capital stock upon
the sale of substantially all the Company's 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.
Generally, the redemption price in such circumstances is zero if Sun
Northland, LLC's internal rate of return is less than or equal to 40%,
and increases as Sun Northland, LLC's internal rate of return
increases. The 100 shares of Series B Preferred Stock that the Company
sold to Sun Northland, LLC in the Restructuring were subsequently
transferred by Sun Northland, LLC for nominal consideration to a
limited liability company whose managing member is the Company's Chief
Executive Officer and whose other members are officers of the Company.
Stock Options - In 1987, the Company adopted the 1987 Stock Option Plan
(the "1987 Plan"), which provides for the issuance of options to
purchase up to 68,750 shares of Class A Common Stock to certain
executive officers and key employees. Stock options granted under the
1987 Plan are exercisable at a price equal to market value on the date
of grant for a period determined by the Board of Directors, not to
exceed 10 years and vest over a period of 1 to 5 years.
In fiscal 1990, the Company adopted the 1989 Stock Option Plan (the
"1989 Plan"), which provides for the issuance of options to purchase up
to 150,000 shares of Class A Common Stock to key employees and
non-employee directors of the Company. Stock options granted under the
1989 Plan are exercisable at a price established by the Board of
Directors which shall not be less than 85% of the market value on the
date of grant for a period determined by the Board of Directors, not to
exceed 10 years and vest over a period of 3 to 5 years.
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"), which provides for the issuance of options to purchase up to
200,000 shares of Class A Common Stock to key employees and
non-employee directors of the Company. Stock options granted under the
1995 Plan are exercisable at a price established by the Compensation
and Stock Option Committee, which shall not be less than 100% of the
fair market value on the date of grant for a period determined by the
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Compensation and Stock Option Committee, not to exceed 10 years and
vest over a period of 1 to 5 years.
On November 6, 2001, the Company adopted the 2001 Stock Option Plan
(the "2001 Plan"), which provides for the issuance of options to
purchase up to 5,014,081 shares of Class A Common Stock to certain
officers, key employees and consultants in connection with the debt and
equity restructuring described in Note 14. Stock options granted under
the 2001 Plan are exercisable at a price of $.08878 per share, which is
equivalent to the per share price paid by Sun Northland, LLC for the
Company's shares of Class A Common Stock. The options generally vest
one-fourth annually beginning on November 6, 2002 and expire on
November 6, 2011. The 2001 Plan has a change in control clause, which
provides that all options under the 2001 Plan which have been granted
which are not exercisable as of the effective date of the change in
control will automatically accelerate and become exercisable upon the
effective date of the change in control.
The status of the stock option plans existing as of August 31, 2001 was
as follows:
Number Weighted Average
Price Range of Shares Exercise Price
Outstanding as of August 31, 1998 $ 10.50-79.00 270,914 $ 38.28
Granted 26.75-44.50 26,125 39.32
Exercised 10.50-29.00 (30,337) 15.68
Cancelled 29.00-79.00 (14,824) 58.60
----------------- ------------- ---------------------
10.50-79.00 251,878 39.88
Outstanding as of August 31, 1999
Granted 6.25-22.00 25,125 19.76
Exercised 15.00 (11,650) 15.00
Cancelled 20.25-79.00 (22,706) 40.56
----------------- ------------- ---------------------
6.25-79.00 242,647 38.96
Outstanding as of August 31, 2000
Granted 3.12- 5.20 38,000 3.16
Cancelled 3.12-79.00 (85,122) 32.81
----------------- ------------- ---------------------
Outstanding as of August 31, 2001 $ 3.12-79.00 195,525 $ 34.68
================= ============= =====================
Exercisable as of August 31, 2001 $ 6.25-79.00 141,517 $ 41.08
Exercisable as of August 31, 2000 10.50-79.00 203,772 38.88
Exercisable as of August 31, 1999 10.50-79.00 215,113 37.08
Available for grant after August 31, 2001,
excluding options available under the 2001 Plan 63,625
The following table summarizes information about stock options
outstanding as of August 31, 2001:
Options Exercisable
-------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life-Years Price Exercisable Price
$ 3.12 - 22.00 78,700 5.5 $ 12.80 35,917 $ 19.24
26.75 - 40.00 28,575 3.5 32.32 28,200 32.52
40.50 - 79.00 88,250 5.4 54.68 77,400 54.32
------------------- --------------- --------------- ------------- -------------- -------------
$ 3.12 - 79.00 195,525 5.2 $ 34.68 141,517 $ 41.08
=================== =============== =============== ============= ============== =============
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The Company has adopted the disclosure - only requirements of SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected
to continue to follow the provisions of Accounting Principles Board No.
25, "Accounting for Stock Issued to Employees" and its related
interpretations; accordingly, no compensation cost has been reflected
in the consolidated financial statements for its stock option plans.
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS No. 123, the Company's
net (loss) income and net (loss) income per share for the years ended
August 31, 2001, 2000 and 1999 would have been reduced to the pro forma
amounts indicated below:
2001 2000 1999
Net (loss) income:
As reported $(74,513,048) $(104,970,576) $ 5,580,357
Pro forma (74,609,000) (105,280,000) 5,376,000
Net (loss) income per share - diluted:
As reported $ (14.65) $ (20.65) $ 1.12
Pro forma (14.67) (20.71) 1.06
The weighted-average fair value per share of stock options granted
during the years ended August 31, 2001, 2000 and 1999 was $2.52,
$12.32, and $12.88, respectively. For purposes of pro forma disclosure,
the estimated fair value of the stock options is amortized to expense
over the vesting period of the stock options.
For the purpose of these disclosures, the fair value of each stock
option granted was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for the years ended August 31, 2001, 2000 and 1999:
2001 2000 1999
Expected volatility 75% 67% 26.8%
Risk-free interest rate 5.5% 5.9% 5.5%
Dividend rate during the expected term 0% 0% 1.6410%
Expected life in years 9 9 9
11. 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.
Income tax benefit (expense) for the years ended August 31, 2001, 2000
and 1999 was as follows:
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Current benefit (expense):
Federal $ 2,092,000 $ 677,000 $ (1,145,000)
State
----------- ------------- ------------
Total current benefit (expense) 2,092,000 677,000 (1,145,000)
----------- ------------- ------------
Deferred benefit (expense):
Federal 26,205,000 10,484,000 (1,978,000)
State 6,595,000 839,000 (495,000)
----------- ------------- ------------
Total deferred benefit (expense) 32,800,000 11,323,000 (2,473,000)
----------- ------------- ------------
Total benefit (expense) for income taxes $34,892,000 $ 12,000,000 (3,618,000)
=========== ============= ============
A tax benefit of approximately $2,092,000 was recognized during the
year ended August 31, 2001 for certain refunds related to farm loss
carrybacks which were received during the year.
A reconciliation of the Federal statutory income tax rate to the
effective income tax rate for the years ending August 31, 2001, 2000
and 1999 was as follows:
2001 2000 1999
Federal income tax rate 34.0% 34.0% (34.0)%
Losses for which no benefit was provided (8.0) (24.2)
State income taxes, net of Federal tax benefit 4.0 0.5 (5.2)
Other 1.9 (0.1)
------------ ------------ ------------
Effective income tax rate -benefit (expense) 31.9% 10.3% (39.3)%
============ ============ ============
Temporary differences that give rise to deferred income tax assets and
liabilities as of August 31, 2001 and 2000 consisted of the following:
2001 2000
Deferred income tax assets:
Accounts receivable allowances $ 406,000 $ 98,000
Inventories 20,187,000 27,132,000
Intangible assets 3,972,000
Accrued liabilities 2,714,000 4,356,000
Federal net operating loss carryforwards 37,440,000 16,856,000
State net operating loss carryforwards 5,737,000 2,744,000
Federal alternative minimum tax credit carryforwards 2,276,000 3,739,000
Federal investment tax credit carryforwards 37,000 37,000
---------------- ---------------
Total deferred income tax assets 72,769,000 54,962,000
---------------- ---------------
Deferred income tax liabilities:
Property and equipment (1,549,000) (24,189,000)
Prepaid expenses (13,000) (13,000)
---------------- ---------------
Total deferred income tax liabilities (1,562,000) (24,202,000)
---------------- ---------------
Deferred income tax assets - net 71,207,000 30,760,000
Valuation allowance (38,407,000) (30,760,000)
---------------- ---------------
Net deferred income tax assets recognized in the
consolidated balance sheets $ 32,800,000 $ 0
================ ===============
As of August 31, 2001, the Company had, for federal income tax
purposes, net operating loss carryforwards of approximately
$110,116,000, which expire in 2020 and 2021, available to offset future
federal taxable income. As of August 31, 2001, the
-60-
Company also had approximately $101,629,000 of state net operating loss
carryforwards available to offset future taxable income for state
income tax purposes, which expire in 2020 and 2021. In addition, as of
August 31, 2001, the Company had approximately $2,276,000 of federal
alternative minimum tax credit carryforwards and approximately $37,000
of investment tax credit carryforwards available to offset future
federal income taxes. The alternative minimum tax credit carryforwards
have no expiration date and the investment tax credit carryforwards
expire in 2004.
As described in Notes 9 and 14, the Company completed a debt and equity
restructuring on November 6, 2001. This restructuring resulted in debt
forgiveness income of differing amounts for financial and income tax
reporting purposes that will reduce the available net operating loss
carryforwards. The estimated tax effect of this income results in the
recognition of a tax benefit of approximately $32,800,000 for financial
reporting purposes as of August 31, 2001. The "change of ownership"
provisions of the Tax Reform Act of 1986 will significantly restrict
the utilization for income tax reporting purposes of all net operating
losses and tax credit carryforwards that remain after the debt and
equity restructuring.
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan that covers substantially all
full-time employees. The Company contributes amounts based on employee
contributions under this plan. The Company contributed approximately
$419,000, $561,000 and $572,000 to the plan during the years ended
August 31, 2001, 2000 and 1999, respectively.
On April 14, 2000, the Board of Directors of the Company approved a
Severance and Stay Bonus Plan (the "Plan") that provided for
discretionary bonuses to be paid to certain employees if they continued
to be employed by the Company until there was a change in control, as
defined in the agreement. The Plan also provided for specified payments
to certain employees, if they were terminated as a result of a change
in control or during a period of time subsequent to the change in
control, as defined in the agreement. Bonuses aggregating approximately
$720,000 were expensed as of November 6, 2001, the date of the change
in control as described in Note 14, and subsequently paid to certain
employees. The Plan was terminated in its entirety after such payments
were made and no additional payments are required under the Plan.
13. COMMITMENTS
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 cranberries harvested
from up to 1,960 contracted acres owned by these growers, subject to
federal marketing order limitations. 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 in certain circumstances) and certain incentives
for premium cranberries. In September 2000, the Company was unable to
make certain payments 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 under the contract for the
2000 calendar year crop. The contracted growers did, however, harvest
and deliver their 2000 and 2001 calendar year crops to the Company and
the Company made the rescheduled 2000 calendar year crop payments in
full to the growers during the year ended August 31, 2001. The Company
is, however, in default under the terms of the grower contracts. The
Company intends to seek the necessary waivers from the growers for the
default. The ultimate resolution of this matter is currently
undeterminable.
Leasing Activities - 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. Rent expense for the years ended August
31, 2001,
-61-
2000 and 1999 was approximately $250,000, $225,000 and $368,000,
respectively. In 2000, the Company determined that it was no longer
economically feasible to operate these marshes and is currently in
negotiations with the lessor to terminate the lease on or about
December 31, 2001. Accordingly, the remaining unamortized cost of the
leasehold interests of approximately $581,000 was expensed as cost of
sales during the year ended August 31, 2000.
On September 5, 1991, the Company entered into a net lease, which was
amended in July 1993, with Equitable Life Assurance Society of the
United States ("Equitable") for the Cranberry Hills cranberry marsh,
which Equitable purchased on May 3, 1991 from Cranberry Hills
Partnership ("Cranberry Hills"), a partnership controlled by the
Company's CEO and two former directors. The lease, which expired
December 31, 2000, provided for rent payments to Equitable of $400,000
and $371,000 during the years ended August 31, 2000 and 1999
respectively. There were no payments required during the year ended
August 31, 2001. Management fees paid to Cranberry Hills during the
year ended August 31, 1999 aggregated approximately $95,000. There were
no management fees required to be paid during the years ended August
31, 2001 or 2000, and there are no future payments required. On January
26, 2001, the Company entered into a management agreement with
Equitable for the management of the cranberry marsh. The agreement,
which expires on December 31, 2001, requires the Company to manage,
operate and harvest the marsh. The agreement requires the Company to
purchase the harvest from Equitable at a price equivalent to what the
Company will pay the independent growers as described in the Supply
Contracts above, with revenues and expenses to be shared, as defined in
the agreement.
14. SUBSEQUENT EVENTS
On November 6, 2001, the Company completed a debt and equity
restructuring, in which the debt restructuring (see Note 9) was
accomplished though the exchange by the participants of the Company's
then current bank group of approximately $153.8 million of total
outstanding revolving credit agreement indebtedness for a total of
approximately $38.4 million in cash, as well as by the Company's
issuance of revised debt obligations with an aggregate stated principal
amount of approximately $25.7 million and 7,618,987 shares of
newly-issued Class A Common Stock representing approximately 7.5% of
the Company's fully-diluted common shares to certain bank group members
which decided to continue as lenders to the Company. The debt
restructuring occurred pursuant to an agreement for the assignment and
assumption by Sun Northland, LLC ("Sun Northland"), an affiliate of Sun
Capital Partners, of the Company's bank group indebtedness. Sun
Northland then invested $7 million of equity capital into the Company
together with the assignment of Sun Northland's rights to the Company's
bank debt of which approximately $81.5 million was forgiven for
financial reporting purposes, in exchange for 37,122,695 shares of
newly-issued Class A Common Stock, 1,668,885 shares of newly-created,
convertible Series A Preferred Stock and 100 shares of newly created
Series B Preferred Stock, which together represent approximately 77.5%
of the Company's fully-diluted common shares. The 100 shares of Series
B Preferred Stock were subsequently transferred by Sun Northland, LLC
for nominal consideration to a limited liability company whose managing
member is the Company's Chief Executive Officer and whose other members
are officers of the Company. After giving effect to the debt and equity
restructuring transactions, as well as the anticipated future issuances
of common stock options to certain executive officers and key employees
of the Company (see Note 10), the Company's existing shareholders'
ownership percentage is expected to constitute approximately 5% of the
Company's fully-diluted common shares.
In addition, on November 6, 2001, the Company restructured and modified
the terms of approximately $20.7 million in outstanding borrowings
under two term loans with an insurance company (see Note 9).
-62-
The Company paid an affiliate of Sun Northland a fee of $700,000 as
consideration of certain services performed in connection with
structuring and negotiating the restructuring. As part of the
restructuring, the Company entered into a management services agreement
with Sun Capital Partners Management, LLC, an affiliate of Sun Capital
Partners, Inc., pursuant to which Sun Capital Partners Management, LLC
will provide various financial and management consulting services to
the Company in exchange for an annual fee (which is paid in quarterly
installments) equal to the greater of $400,000 or 6% of EBITDA (as
defined therein), provided that the fee may not exceed $1 million a
year unless approved by a majority of the Company's directors who are
not affiliates of Sun Capital Partners Management, LLC. This agreement
terminates on the earlier of November 6, 2008 or the date on which Sun
Northland and its affiliates no longer own at least 50% of the
Company's voting power.
Financing for the debt restructuring, and for additional working
capital, was provided by Foothill Capital Corporation ("Foothill") and
Ableco Finance LLC ("Ableco"). Foothill and Ableco provided the Company
with $20 million in term loan financing and a new $30 million revolving
credit facility (see Note 9). As part of the consideration to Foothill
and Ableco to provide the new credit facilities to the Company,
Foothill and Ableco received warrants to purchase up to a total of
5,086,106 shares of Class A Common Stock, or approximately 5% of the
Company's fully-diluted common shares at an exercise price equal to
$0.01 per share. The warrants expire on November 6, 2011. The Company
also issued fee notes to Foothill and Ableco in the aggregate amount of
$5,000,000, which are payable in full on November 6, 2006. The fee
notes will be discounted for financial reporting purposes and charged
to operations as additional interest expense over the terms of the
related debt.
In connection with the "change in control," the Company entered into a
severance and noncompetition agreement with the Company's Chief
Executive Officer, that provides for certain benefits under certain
circumstances, as defined in the agreement in the event employment is
terminated prior to November 6, 2002.
* * * * * *
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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PART III
Item 10. Directors and Executive Officers of the Company.
Pursuant to Instruction G, we have incorporated the information
required by this Item with respect to directors by reference to the information
set forth under the caption "Proposal One: Election of Directors" in our
definitive proxy statement for our 2002 annual meeting of shareholders to be
filed with the Commission pursuant to Regulation 14A within 120 days of the end
of our fiscal year. The information required by Item 405 of Regulation S-K is
also incorporated by reference to the information set forth under the caption
"Other Matters--Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement. The required information with respect to executive officers
appears at the end of Part I of this Form 10-K.
Item 11. Executive Compensation.
Pursuant to Instruction G, we have incorporated the information
required by this Item by reference to the information set forth under the
caption "Executive Compensation" in the Proxy Statement; provided, however, that
the subsections titled "Executive Compensation - General" and "Executive
Compensation - Fiscal 2001 Compensation Generally" shall not be deemed to be
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Pursuant to Instruction G, we have incorporated the information
required by this Item by reference to the information set forth under the
caption "Stock Ownership of Management and Others" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Pursuant to Instruction G, we have incorporated the information
required by this Item by reference to the information set forth under the
caption "Certain Transactions" in the Proxy Statement.
-64-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) The financial statements of Northland Cranberries, Inc.,
consisting of our consolidated balance sheets as of August 31, 2001 and 2000,
consolidated statements of operations, cash flows and shareholders' equity for
the fiscal years ended August 31, 2001, 2000 and 1999, notes to consolidated
financial statements and independent auditors' report, are filed herewith.
(a)(2) Schedule II, Valuation and Qualifying Accounts, is filed
herewith. We have omitted other schedules because they are not required or not
applicable, or the information required to be shown is included in our financial
statements and related notes.
(a)(3) The exhibits we have filed herewith or incorporated by reference
herein are set forth on the attached Exhibit Index.*
(b) We filed the following Current Reports on Form 8-K during the
fourth quarter of fiscal 2001 and in the first quarter of fiscal 2002 to the
date of this Form 10-K:
Date Filed Date of Report Item
June 11, 2001 June 8, 2001 Item 5 - Second Amendment to Forbearance
Agreement and Limited Waiver, Third
Amendment to Forbearance Agreement and
sale of Mountain Home, North Carolina
plant and private label sauce business.
November 6, 2001 November 6, 2001 Item 5 - One-for-four reverse stock
split, voluntary delisting of the Class
A Common Stock from The Nasdaq Stock
Market and quotation on the Over-The-
Counter Bulletin Board.
November 7, 2001 November 6, 2001 Item 5 - Change of control transaction
with Sun Northland, LLC.
November 21, 2001 November 6, 2001 Item 2 - Change of control transaction
with Sun Northland, LLC.
* We will furnish to shareholders the Exhibits to this Form 10-K,
including long-term debt instruments disclosed in Exhibit 4.5, on
request and advance payment of a fee of $0.20 per page, plus mailing
expenses. Requests for copies should be addressed to Kenneth A.
Iwinski, Vice President-Legal and Secretary, Northland Cranberries,
Inc., 800 First Avenue South, P.O. Box 8020, Wisconsin Rapids,
Wisconsin 54495-8020.
-65-
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CRANBERRIES, INC.
Date: December 13, 2001 By: /s/ John Swendrowski
-------------------------------
John Swendrowski
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed on December 13, 2001 below by the following
persons on behalf of the Company and in the capacities indicated.
By: /s/ John Swendrowski By: /s/ Richard P. Teske
----------------------------------- ---------------------------------
John Swendrowski Richard P. Teske
Chairman of the Board, Chief Financial Officer
Chief Executive Officer and Director
By: /s/ Marc J. Leder By: /s/ David L. Kreilein
--------------------------------- --------------------------------
Marc J. Leder David L. Kreilein
Director Director
By: /s/ Clarence E. Terry By: /s/ Kevin J. Calhoun
----------------------------------- ---------------------------------
Clarence E. Terry Kevin J. Calhoun
Director Director
By: /s/ Rodger R. Krouse
-----------------------------------
Rodger R. Krouse
Director
-66-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Year ended August 31,
2001 2000 1999
Valuation accounts deducted in the consolidated
balance sheets from assets to
which they apply:
Accounts receivable - allowance for doubtful accounts:
Balances at beginning of year $ (250,000) $ (600,000) $ -
Additions - charged to expense (955,000) (645,000) (600,000)
Deductions - amounts written off, net of recoveries 905,000 995,000 -
----------------------------------------------------
Balances at end of year $ (300,000) $ (250,000) $ (600,000)
====================================================
Deferred income taxes - valuation allowance:
Balances at beginning of year $ (30,760,000) $ - $ -
Additions - allowance established (7,647,000) (30,760,000) -
----------------------------------------------------
Balances at end of year $ (38,407,000) $ (30,760,000) $ -
====================================================
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Asset Purchase Agreement, dated as of January 5, 2000, by and between
the Company and Cliffstar Corporation. [Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated March 23,
2000.]
2.2 First Amendment to Asset Purchase Agreement, dated as of March 8, 2000,
by and between the Company and Cliffstar Corporation. [Incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form 8-K
dated March 23, 2000.]
2.3 Asset Purchase Agreement, dated as of December 2, 1998, by and between
the Company and Seneca Foods Corporation. [Incorporated by reference to
Exhibit 2.0 to the Company's Current Report on Form 8-K dated December
30, 1998.]
2.4 Stock Purchase Agreement, dated as of November 6, 2001, by and between
the Company and Sun Northland, LLC. [Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated November
21, 2001.]
2.5 Assignment, Assumption and Release Agreement, dated as of November 6,
2001, by and among Sun Northland, LLC, LaSalle Bank National
Association, St. Francis Bank, F.S.B., ARK CLO 2000-1 Limited and U.S.
Bank National Association. [Incorporated by reference to Exhibit 2.2 to
the Company's Current Report on Form 8-K dated November 21, 2001.]
2.6 Assignment Agreement, dated as of November 6, 2001, by and between the
Company and Sun Northland, LLC. [Incorporated by reference to Exhibit
2.3 to the Company's Current Report on Form 8-K dated November 21,
2001.]
2.7 Assignment, Assumption and Release Agreement, dated as of November 6,
2001, by and among Sun Northland, LLC, Wells Fargo Bank Minnesota,
National Association, Endeavor, L.L.C., Bank One Wisconsin and M&I
Marshall & Ilsley Bank. [Incorporated by reference to Exhibit 2.4 to
the Company's Current Report on Form 8-K dated November 21, 2001.]
2.8 Assignment Agreement, dated as of November 6, 2001, by and between the
Company and Sun Northland, LLC. [Incorporated by reference to Exhibit
2.5 to the Company's Current Report on Form 8-K dated November 21,
2001.]
3.1 Articles of Amendment to the Company's Articles of Incorporation
effecting the one-for-four reverse stock split, effective November 5,
2001. [Incorporated by reference to Exhibit 4.7 to the Company's
Current Report on Form 8-K dated November 21, 2001.]
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EXHIBIT NO. DESCRIPTION
3.2 Articles of Amendment to the Company's Articles of Incorporation
creating the Series A Preferred Stock, effective November 5, 2001.
[Incorporated by reference to Exhibit 4.8 to the Company's Current
Report on Form 8-K dated November 21, 2001.]
3.3 Articles of Amendment to the Company's Articles of Incorporation
creating the Series B Preferred Stock, effective November 5, 2001.
[Incorporated by reference to Exhibit 4.9 to the Company's Current
Report on Form 8-K dated November 21, 2001.]
3.4 Articles of Incorporation, as amended, dated November 5, 2001.
3.5 Amendments to By-Laws of the Company, effective November 6, 2001.
3.6 By-Laws of the Company, as amended, effective November 6, 2001.
4.1 Secured Promissory Note, dated as of June 14, 1989, issued by the
Company to The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K
dated July 7, 1989.]
4.2 Mortgage and Security Agreement, dated as of June 14, 1989, from the
Company to The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K
dated July 7, 1989.]
4.3 Mortgage and Security Agreement dated July 9, 1993, between the Company
and The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 4.8 to the Company's Form 10-Q
dated November 12, 1993.]
4.4 Modification Agreement, dated as of July 9, 1993, between the Company
and The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 4.9 to the Company's Form 10-Q
dated November 12, 1993.]
4.5 Modification Agreement, dated as of November 6, 2001, between the
Company and Equitable Life Assurance Society of the United States.
4.6 Secured Promissory Note, dated July 9, 1993, between the Company and
The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 4.23 to the Company's Form 10-K
for the fiscal year ended March 31, 1995.]
4.7 Stock Pledge, dated July 9, 1993, between the Company and The Equitable
Life Assurance Society of the United States. [Incorporated by reference
to Exhibit 4.24 to the Company's Form 10-K for the fiscal year ended
March 31, 1995.]
4.8 Loan and Security Agreement, dated as of November 6, 2001, by and among
the Company, Foothill Capital Corporation and Ableco Finance LLC, as
lenders, and Foothill Capital Corporation, as arranger and
administrative agent. [Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated November 21, 2001.]
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4.9 Amended and Restated Credit Agreement, dated as of November 6, 2001, by
and among the Company, St. Francis Bank, F.S.B., ARK CLO 2000-1 Limited
and U.S. Bank National Association, as lenders, and U.S. Bank National
Association, as agent. [Incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated November 21, 2001.]
4.10 Common Stock Purchase Warrant, dated as of November 6, 2001, issued to
Foothill Capital Corporation. [Incorporated by reference to Exhibit 4.5
to the Company's Current Report on Form 8-K dated November 21, 2001.]
4.11 Common Stock Purchase Warrant, dated as of November 6, 2001, issued to
Ableco Finance LLC. [Incorporated by reference to Exhibit 4.6 to the
Company's Current Report on Form 8-K dated November 21, 2001.]
Other than as set forth in Exhibits 4.1 through 4.9, the Company has
numerous instruments which define the rights of holders of long-term
debt. These instruments, primarily security agreements, collateral
pledges and mortgages, including amendments and restatements of
previously executed security agreements, collateral pledges and
mortgages, were entered into in connection with (i) debt financing
provided by U.S. Bank National Association, and are disclosed in the
Amended and Restated Credit Agreement filed as Exhibit 4.9 to this Form
10-K; (ii) and financing provided by Foothill Capital Corporation and
Ableco Finance LLC, and are disclosed in the Loan and Security
Agreement filed as Exhibit 4.8 to this Form 10-K. The Company will
furnish a copy of any of such instruments to the Commission upon
request.
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*10.1 1987 Stock Option Plan, dated June 2, 1987, as amended. [Incorporated
by reference to Exhibit 10.5 to the Company's Form 10-K for the fiscal
year ended December 31, 1987.]
*10.2 Forms of Stock Option Agreement, as amended, under 1987 Stock Option
Plan. [Incorporated by reference to Exhibit 10.6 to the Company's Form
10-K for the fiscal year ended December 31, 1987.]
*10.3 Form of Modification Agreement, dated as of April 16, 1996, between the
Company and each of John B. Stauner, John Swendrowski and William J.
Haddow, modifying Stock Option Agreements previously entered into
between the parties. [Incorporated by reference to Exhibit 10.3 to the
Company's Form 10- K for the fiscal year ended August 31, 1996.]
*10.4 1989 Stock Option Plan, as amended. [Incorporated by reference to
Exhibit 4.4 to the Company's Form S-8 Registration Statement (Reg. No.
33-32525).]
*10.5 Forms of Stock Option Agreements under the 1989 Stock Option Plan, as
amended. [Incorporated by reference to Exhibits 4.5-4.8 to the
Company's Form S-8 Registration Statement (Reg. No. 33-32525).]
*10.6 1995 Stock Option Plan, as amended. [Incorporated by reference to
Exhibit 10.6 to the Company's Form 10-K for the fiscal year ended
August 31, 1997.]
*10.7 Form of Stock Option Agreements under the 1995 Stock Option Plan, as
amended. [Incorporated by reference to Exhibit 10.7 to the Company's
Form 10-K for the fiscal year ended August 31, 1996.]
*10.8 Northland Cranberries, Inc. 2001 Stock Option Plan. [Incorporated by
reference to Exhibit 99.2 to the Company's Current Report on Form 8-K
dated November 21, 2001.]
10.9 Lease, dated March 31, 1994 between Nantucket Conservation Foundation,
Inc. and the Company. [Incorporated by reference to Exhibit 10.11 to
the Company's Form 10-K for the fiscal year ended March 31, 1994.]
10.10 Amendment, dated September 7, 2001, to Lease, dated March 31, 1994
between Nantucket Conservation Foundation, Inc. and the Company.
*10.11 Severance and Noncompetition Agreement, dated as of November 6, 2001,
by and between the Company and John Swendrowski.
10.12 Stockholders' Agreement, dated as of November 6, 2001, by and among Sun
Northland, LLC, the minority shareholders listed therein and the
Company. [Incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K dated November 21, 2001.]
10.13 Registration Agreement, dated as of November 6, 2001, by and among the
Company, Sun Northland, LLC and the other investors signatory thereto.
[Incorporated by reference to Exhibit 4.4 to the Company's Current
Report on Form 8-K dated November 21, 2001.]
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*10.14 Management Services Agreement, dated as of November 6, 2001, by and
between Northland Cranberries, Inc. and Sun Capital Partners
Management, LLC. [Incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K dated November 21, 2001.]
21 Subsidiaries of the Company. [Incorporated by reference to Exhibit 21
to the Company's Form 10-K for the fiscal year ended August 31, 1999.]
23 Consent of Deloitte & Touche LLP.
99 Definitive Proxy Statement for the Company's 2002 annual meeting of
shareholders (which will be filed with the Commission under Regulation
14A within 120 days after the end of the Company's fiscal year and
which is incorporated by reference herein to extent indicated in this
Form 10-K).
* This exhibit is a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of
Form 10-K.
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