SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 AND 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to ________
Commission File Number 0-16130
NORTHLAND CRANBERRIES, INC.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1583759
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or organization)
800 First Avenue South
P.O. Box 8020
Wisconsin Rapids, Wisconsin 54495-8020
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code (715) 424-4444
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes____No____
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date:
Class A Common Stock January 14, 2002 49,826,455
NORTHLAND CRANBERRIES, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements...................................... 3
Condensed Consolidated Balance Sheets..................... 3
Condensed Consolidated Statements of Operations........... 4
Condensed Consolidated Statements of Cash Flows........... 5
Condensed Consolidated Statement of Shareholders' Equity.. 6
Notes to Condensed Consolidated Financial Statements...... 7 - 20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 21 - 26
Item 3. Quantitative and Qualitative Disclosure About
Market Risk.............................................. 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 27
Item 2. Changes in Securities and Use of Proceeds................. 27 - 28
Item 3. Defaults Upon Senior Securities........................... 28
Item 6. Exhibits and Reports on Form 8-K.......................... 28 - 29
SIGNATURE................................................. 30
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
November 30, August 31,
2001 2001
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 378 $ 1,487
Accounts receivable 11,355 10,630
Current portion of note receivable and
accounts receivable - other 9,114 8,530
Inventories 23,038 24,382
Prepaid expenses and other current assets 912 879
Deferred income taxes - 32,800
Assets held for sale 5,745 5,830
--------- ---------
Total current assets 50,542 84,538
Note receivable, less current portion 22,000 23,000
Property and equipment, net 70,885 71,907
Other assets 970 970
Debt issuance costs, net 5,052 -
--------- ---------
Total assets $ 149,449 $180,415
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
Current liabilities:
Revolving line of credit facility $ 8,327 $ -
Accounts payable 8,531 6,929
Accrued liabilities 13,017 12,589
Current maturities of long-term debt 17,826 33,375
--------- ---------
Total current liabilities 47,701 52,893
Long-term debt, less current maturities 64,544 64,589
Obligations subsequently forgiven or
exchanged for common stock - 84,087
Redeemable preferred stock - Series B,
100 and 0 shares issued and outstanding,
respectively - -
--------- ---------
Total liabilities 112,245 201,569
--------- ---------
Shareholders' equity:
Convertible preferred stock - Series A,
1,668,885 and 0 shares issued and
outstanding, respectively 17 -
Common stock - Class A, $.01 par value,
49,826,455 and 4,925,555 shares issued and
outstanding, respectively 498 49
Common stock - Class B, $.01 par value,
0 and 159,051 shares issued and outstanding,
respectively - 2
Additional paid-in capital 155,302 149,129
Accumulated deficit (118,613) (170,334)
--------- ---------
Total shareholders' equity (deficiency
in assets) 37,204 (21,154)
--------- ---------
Total liabilities and shareholders' equity
(deficiency in assets) $ 149,449 $ 180,415
========= =========
See notes to condensed consolidated financial statements.
3
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
Three months ended
November 30, November 30,
2001 2000
------------ ------------
Net revenues $ 30,316 $ 41,710
Cost of sales 20,733 31,864
--------- ---------
Gross profit 9,583 9,846
Selling, general and administrative expenses 5,921 6,077
Gain on disposals of property and equipment - (410)
--------- ---------
Income from operations 3,662 4,179
Interest expense 3,090 4,685
Interest income (650) (694)
--------- ---------
Income before income taxes and extraordinary
item 1,222 188
Income taxes - -
--------- ---------
Income before extraordinary item 1,222 188
Extraordinary gain on forgiveness of
indebtedness, net of $32,800 in income
taxes 50,499 -
--------- ---------
Net income $ 51,721 $ 188
========= =========
Net income per common share:
Basic:
Income before extraordinary gain $ 0.07 $ 0.04
Extraordinary gain 2.99 -
--------- ---------
Net income $ 3.06 $ 0.04
========= =========
Diluted:
Income before extraordinary gain $ 0.04 $ 0.04
Extraordinary gain 1.66 -
--------- ---------
Net income $ 1.70 $ 0.04
========= =========
Shares used in computing net income
per common share:
Basic 16,884,777 5,084,773
Diluted 30,492,464 5,084,773
See notes to condensed consolidated financial statements.
4
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
Three months ended
November 30, November 30,
2001 2000
------------ ------------
Operating activities:
Net income $ 51,721 $ 188
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of property
and equipment 1,028 2,115
Amortization of intangible assets - 213
Amortization of debt issuance costs and
debt discount 156 -
Gain on disposals of property and equipment - (410)
Extraordinary gain on forgiveness of
indebtedness (50,499) -
Changes in assets and liabilities:
Receivables, prepaid expenses and other
current assets (837) 4,699
Inventories 1,344 (101)
Accounts payable and accrued liabilities 2,396 (6,633)
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Net cash provided by operating activities 5,309 71
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Investing activities:
Collections on note receivable 500 250
Property and equipment purchases (6) (183)
Proceeds from disposals of assets held for
sale and of property and equipment 79 455
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Net cash provided by investing activities 573 522
--------- ---------
Financing activities:
Net increase in borrowings under revolving
line of credit facility 8,327 -
Proceeds from issuance of long-term debt 20,000 -
Payments on long-term debt and other
obligations (1,231) (289)
Net payment to banks in settlement of
revolving credit facility (38,388) -
Payments for debt issuance costs (1,259) -
Proceeds from issuance of preferred stock 2,942 -
Proceeds from issuance of common stock 2,618 -
--------- ---------
Net cash used in financing activities (6,991) (289)
--------- ---------
Net (decrease) increase in cash and cash
equivalents (1,109) 304
Cash and cash equivalents, beginning of period 1,487 164
--------- ---------
Cash and cash equivalents, end of period $ 378 $ 468
========= =========
See notes to condensed consolidated financial
statements.
5
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED NOVEMBER 30, 2001
(DOLLARS IN THOUSANDS)
(Unaudited)
Total
Convertible Retained Shareholders'
Preferred Common Common Additional Earnings Equity
Stock - Stock - Stock - Paid-in (Accumulated (Deficiency
Series A Class A Class B Capital Deficit) in Assets)
----------- ------- ------- ---------- ------------ -------------
BALANCE, AUGUST 31,
2001 $ - $ 49 $ 2 $149,129 $(170,334) $(21,154)
Conversion of Class
B common stock to
Class A common stock
(159,051 shares) - 2 (2) - - -
Issuance of Class A
common stock for
fractional shares
due to reverse stock
split (167 shares) - - - - - -
Exchange of debt for
Class A common stock
(7,618,987 shares) - 76 - 600 - 676
Issuance of Class A
common stock
(37,122,695 shares) - 371 - 2,247 - 2,618
Issuance of warrants
to purchase 5,086,106
shares of Class A
common stock - - - 401 - 401
Issuance of convertible
preferred stock -
Series A (1,668,885
shares) 17 - - 2,925 - 2,942
Net income - - - - 51,721 51,721
----- ----- ----- -------- --------- --------
BALANCE, NOVEMBER 30,
2001 $ 17 $ 498 $ - $155,302 $(118,613) $ 37,204
===== ===== ===== ======== ========= ========
See notes to condensed consolidated financial statements.
6
NORTHLAND CRANBERRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by Northland Cranberries, Inc. (collectively with its
subsidiaries, the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect normal and recurring
adjustments, which are, in the opinion of the Company, considered necessary
to present fairly the financial position of the Company as of November 30,
2001 and August 31, 2001 and its related results of operations and cash
flows for the three months ended November 30, 2001 and 2000. As permitted
by these regulations, these condensed consolidated financial statements do
not include all information required by accounting principles generally
accepted in the United States of America to be included in an annual set of
financial statements, however, the Company believes that the disclosures
are adequate to make the information presented not misleading. The
Company's condensed consolidated balance sheet as of August 31, 2001 was
derived from the Company's latest audited consolidated financial
statements. It is suggested that the accompanying condensed consolidated
financial statements be read in conjunction with the latest audited
consolidated financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
Business Risks - Production levels of cranberries combined with on-hand
levels of inventories continue to exceed industry demand. 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.
The Company did not make its scheduled principal and interest payments on a
revolving credit facility with various banks and certain 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. Throughout fiscal 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. On
November 6, 2001, as described in Notes 2 and 7, the Company completed a
debt and equity restructuring. Management believes, 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.
Debt Issuance Costs - Costs related to obtaining a revolving credit
facility and certain term loans have been deferred and are being amortized
over the terms of the related debt
7
agreements and charged to interest expense. Accumulated amortization was
approximately $135,000 as of November 30, 2001.
Net Income Per Common Share - Net income per common share is calculated in
accordance with Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings Per Share." Basic net income per common share is computed by
dividing net income by the weighted average number of common shares
outstanding. Diluted net income per common share is computed by dividing
net income by the weighted average number of common shares outstanding
increased by the number of dilutive potential common shares based on the
treasury stock method. Previously reported share and per share information
has been restated to give effect to a reverse stock split described in Note
8.
The weighted average shares outstanding used in calculating net income per
common share for the three months ended November 30, 2001 and 2000
consisted of the following:
November 30, November 30,
2001 2000
Basic:
Shares outstanding at beginning of
period 5,084,606 5,084,606
Issuance of fractional shares due to
reverse stock split 167 167
Issuance of new shares 11,800,004 -
Total
---------- ----------
16,884,777 5,084,773
Effect of dilution:
Convertible preferred stock 11,003,637 -
Warrants 1,335,266 -
Options 1,268,784 -
---------- ----------
Diluted 30,492,464 5,084,773
========== ==========
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, among 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 condensed consolidated financial statements have been
reclassified to conform to the new requirements, and as a result,
approximately $3,052,000 of amounts previously reported as selling, general
and administrative expenses during the three months ended November 30,
2000, have been reclassified and reported as a reduction of net revenues.
8
In August 2001, the Financial Accounting Standards Board ("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,
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
does not believe the adoption of SFAS No. 143 will have a material impact,
if any, 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 Transaction".
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 does not believe the
adoption of SFAS No. 144 will have a material impact, if any, on its
consolidated financial statements.
Reclassifications - Certain amounts previously reported have been
reclassified to conform to the current presentation.
2. DEBT AND EQUITY RESTRUCTURING
On November 6, 2001, the Company completed a debt and equity restructuring.
The debt restructuring (see Note 7) was accomplished through the exchange
by the participants of the Company's then current bank group of
approximately $153,754,000 of total outstanding revolving credit agreement
indebtedness for an aggregate cash payment of $38,388,000, as well as by
the Company's issuance of revised debt obligations with an aggregate stated
principal amount of $25,714,000 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
9
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 approximately $7,000,000 of
equity capital into the Company together with the assignment of Sun
Northland's rights to the Company's bank debt (of which approximately
$81,219,000 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 (see Note 8) 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 8), 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 $20,680,000 in outstanding borrowings under two term
loans with an insurance company (see Note 7).
The Company paid an affiliate of Sun Northland a fee of $700,000 as
consideration for certain services performed in connection with structuring
and negotiating the restructuring transaction. Additionally, 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 to be 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 $1,000,000 per 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 7). 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 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 of $0.01 per share. The warrants expire on November 6,
2011. The Company also issued non-interest bearing fee notes to Foothill
and Ableco in the aggregate amount of $5,000,000,
10
which are payable in full on November 6, 2006. The fee notes have been
discounted for financial reporting purposes and interest expense is
recognized over the terms of the related debt.
3. 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 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.
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.
On July 7, 2000, Cliffstar filed suit against the Company in the United
States District Court, Western District of New York, alleging, among other
things, that the Company breached certain representations and warranties in
the Asset Purchase Agreement. That lawsuit was subsequently dismissed, and
on July 31, 2000, the Company filed a lawsuit against Cliffstar in the
Northern District of Illinois, which was later amended on October 10, 2000
and January 16, 2001. The lawsuit arises out of the sale of the net assets
of the Company's private label juice business to Cliffstar in the
transaction that closed on March 8, 2000. The Company claims that (1)
Cliffstar breached the Asset Purchase Agreement by failing to make required
payments under the Asset Purchase Agreement and by failing to negotiate in
good faith concerning a cranberry sauce purchase agreement between the
parties; (2) Cliffstar breached an interim cranberry sauce purchase
agreement between the two companies by failing to adequately perform and to
pay the Company the required amounts due under it; (3) Cliffstar breached
its fiduciary duty to the Company based on the same (or similar) conduct;
(4) Cliffstar breached the promissory note issued by it in the transaction
by
11
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.
As of November 30, 2001, the note receivable from Cliffstar had an
outstanding balance of $25,500,000, 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
12
note and accounts receivable due from Cliffstar as of November 30, 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 has received all scheduled principal payments, together with
accrued interest at 10%. The Company has recognized interest income on the
note receivable at a rate of 10% for financial reporting purposes, pending
the resolution of this matter.
Although the note is in default, the Company has classified the balance
outstanding in the accompanying condensed consolidated balance sheets in
accordance with the scheduled payment dates provided for in the note, as
this is how the Company anticipates payments will be received, unless the
court rules otherwise.
4. 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 and a related manufacturing facility in Mountain
Home, North Carolina. The Company had net revenues of approximately
$4,843,000 during the three months ended November 30, 2000, 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 does not segregate such items by type of product.
5. INVENTORIES
Inventories as of November 30, 2001 and August 31, 2001 consisted of the
following (in thousands):
November 30, August 31,
2001 2001
------------ ----------
Raw materials $ 19,986 $ 18,677
Finished goods 3,052 3,281
Deferred crop costs - 2,424
-------- --------
Total inventories $ 23,038 $ 24,382
======== ========
13
6. RESTRUCTURING CHARGES
During 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.
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, of which approximately $37,000 was paid
during the three months ended November 30, 2001.
7. REVOLVING LINE OF CREDIT FACILITY, 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 November 30, 2001 and August 31, 2001 consisted of the
following (in thousands):
November 30, August 31,
2001 2001
------------ ----------
Term loans payable $ 19,208 $ -
Fee notes payable 3,547 -
Restructured bank notes 33,300 -
Restructured insurance company note 20,675 -
Revolving credit facility with banks - 139,305
Term loans payable to insurance
company - 19,096
Other obligations 5,640 9,469
Accrued interest on restructured
obligations - 14,181
-------- --------
Total 82,370 182,051
Less obligations subsequently forgiven
or exchanged for common stock - 84,087
-------- --------
Amounts to be paid 82,370 97,964
Less current maturities of long-term debt 17,826 33,375
-------- --------
Long-term debt $ 64,544 $ 64,589
======== ========
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
described below, these obligations were subsequently restructured on
November 6, 2001 (see Note 2). Accordingly, the Company classified its
long-term debt as of August 31, 2001, based on the terms of the subsequent
restructuring.
14
Under the terms of the amended revolving credit facility, interest was
accrued and recorded at the banks' domestic rate (which approximated prime,
as defined), plus 3.25%, while the loan was in default. The outstanding
accrued interest due the banks aggregated approximately $12,891,000 as of
August 31, 2001 and approximately $14,450,000 as of the November 6, 2001
restructuring date.
The Company had 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 had 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 August 31, 2001. The insurance company term loans
provided 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,
continued 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 and approximately $1,584,000 as of the November 6, 2001 restructuring
date.
Certain banks participating in the revolving credit facility agreed to
accept aggregate cash payments of approximately $25,959,000 on November 6,
2001, as the final settlement for approximately $79,291,000 of outstanding
principal and interest due them as of such date. The difference
(approximately $53,332,000), net of legal fees, other direct costs and
income taxes, was recognized in accordance with SFAS No. 15, "Accounting
for Debtors and Creditors for Troubled Debt Restructurings," as an
extraordinary gain during the three months ended November 30, 2001.
Certain other banks participating in the revolving credit facility agreed
to accept an aggregate cash payment of approximately $12,429,000, 7,618,987
shares of the Company's newly issued Class A Common Stock and new notes
(the "Restructured Bank Notes") with a stated principal balance aggregating
approximately $25,714,000, as the final settlement for approximately
$74,463,000 of outstanding aggregate principal and interest due them as of
the restructuring date. The total scheduled aggregate cash payments
(principal and interest) required under the terms of the Restructured Bank
Notes 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 Notes and the approximately $74,463,000 of outstanding
principal and interest owed such banks as of the restructuring date of
approximately $27,887,000 was recognized as an extraordinary gain, net of
legal fees, other direct costs and income taxes, during the three months
ended November 30, 2001. The future cash payments required under the
Restructured Bank Notes are to be applied against the Company's adjusted
carrying value of the Restructured Bank Notes, with
15
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 Notes and there are no
changes to the interest rate.
Payments are due monthly under the Restructured Bank Notes based on the
prime interest rate, as defined, plus 1% (6% as of November 30, 2001),
applied against the outstanding stated principal balance of the
Restructured Bank Notes, 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 through October 1, 2006, with
a final payment of approximately $19,345,000 due on November 1, 2006. In
addition, the Company is required to pay the agent bank an annual agency
fee of 0.25% of the outstanding stated principal balance due on such notes
as of the date of the restructuring and on each anniversary date thereof
during the term of the notes. The Restructured Bank Notes are
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 Notes, commencing with the November 1, 2006 scheduled
payment.
On November 6, 2001, the Company and the insurance company holding the two
term 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 $20,680,000 as
of the restructuring date) under 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 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
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
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, no
gain was 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) recognized as interest expense over the term of
the Restructured Insurance Company Note, using the interest method. The
effective interest rate recognized for financial reporting purposes
approximates 4.5%.
16
In addition, in connection with the restructuring, the Company restructured
certain obligations owed to other creditors that resulted in approximately
$3,465,000 of forgiveness of indebtedness that was recognized as an
extraordinary gain, net of legal fees, other direct costs and income taxes,
during the three months ended November 30, 2001.
The extraordinary gain on the forgiveness of indebtedness recognized during
the three months ended November 30, 2001, is summarized as follows (in
thousands):
Forgiveness of indebtedness:
Revolving credit facility with banks $ 81,219
Other obligations 3,465
--------
Total 84,684
Less legal fees and other direct costs 1,385
--------
Extraordinary gain 83,299
Less income taxes 32,800
--------
Net extraordinary gain $ 50,499
========
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. 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 and Ableco 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% (7% as of November 30, 2001). As of
November 30, 2001, there was approximately $8,327,000 of outstanding
borrowings under this facility. Approximately $6,000,000 of additional
borrowings were available to the Company under the facility as of November
30, 2001.
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.
As part of the consideration to Foothill and Ableco to provide the new
credit facilities to the Company, the Company issued non-interest bearing
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
17
notes have been discounted for financial reporting purposes and interest
expense is recognized over the terms of the related debt.
The revolving credit facility, the term loans and the fee notes are
collateralized by substantially all the Company's assets that are not
otherwise collateralized, as defined in the Agreement.
The debt agreements contain various covenants which include prohibitions on
dividends and other distributions to shareholders, as well as repurchases
of stock. Further, property and equipment expenditures are restricted and
the Company is required to maintain and meet certain operating performance
levels, as defined.
For financial reporting purposes, the outstanding accrued interest on the
restructured obligations of approximately $14,181,000 as of August 31, 2001
was included with long-term debt. 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, was classified as a noncurrent liability for
financial reporting purposes, as such amounts were not to be paid as part
of the restructuring.
8. SHAREHOLDERS' EQUITY (DEFICIENCY IN ASSETS) AND REDEEMABLE PREFERRED STOCK
The authorized common stock of the Company as of August 31, 2001 consisted
of 60,000,000 shares of Class A Common Stock and 4,000,000 shares of Class
B Common Stock. 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. The shares of Class A Common Stock are entitled to one
vote per share and the shares of Class B Common Stock were entitled to
three votes per share.
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 previously reported share and per share information included in
the condensed 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.
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
18
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 shareholders'
meeting. 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.
Stock Options - 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 2. 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
a subsequent change in control.
Warrants to Purchase Common Stock - As part of the consideration to
Foothill and Ableco to provide 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 of $.01 per share. The warrants expire
on November 6, 2011 (see Note 2).
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, 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
19
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 debt and equity 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.
9. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which generally requires the recognition of deferred income tax assets and
liabilities based on the expected future income tax consequences of events
that have previously been recognized in the Company's financial statements
or tax returns. In addition, a valuation allowance is recognized if it is
more likely than not that some or all of the deferred income tax assets
will not be realized.
There was no income tax expense recognized for financial reporting purposes
on income before extraordinary gain for either the three months ended
November 30, 2001 or 2000 due to the utilization of certain net operating
loss carryforwards for which no benefit had been previously provided.
As described in Notes 2 and 7, the Company completed a debt and equity
restructuring on November 6, 2001. This restructuring resulted in a gain on
the forgiveness of indebtedness of differing amounts for financial and
income tax reporting purposes that will reduce the available net operating
loss carryforwards. The estimated income tax effect of this gain resulted
in the recognition of an income tax benefit of $32,800,000 for financial
reporting purposes as of August 31, 2001 and a charge to the extraordinary
gain for income taxes of a like amount for the three month period ended
November 30, 2001. The "change of ownership" provisions of the Tax Reform
Act of 1986 significantly restrict the utilization for income tax reporting
purposes of all net operating losses and tax credit carryforwards remaining
after the debt and equity restructuring.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
GENERAL
In the first two months of the first quarter of fiscal 2002, 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 through November 5, 2001. 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, 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 on
our then existing line of credit.
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 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 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, pursuant to which Sun
Northland assigned its rights to the 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
21
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 $81.2 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.
See Notes 2 and 7 of Notes to Condensed Financial Statements for a further
discussion of the Restructuring.
We believe that as a result of the Restructuring, we have sufficient working
capital and borrowing capacity to once again aggressively market and support the
sale of our Northland and Seneca brand juice products in fiscal 2002.
With our new debt and equity capital structure following the Restructuring, we
believe 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 operations
and reducing debt through a balanced marketing approach with an emphasis on
profitable growth.
RESULTS OF OPERATIONS
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
22
reduction in net revenues. We previously reported these costs as selling,
general and administrative expenses. We reclassified the condensed consolidated
statement of operations for the first quarter of fiscal 2001 to conform to the
new requirements, and as a result, approximately $3.1 million of amounts
previously reported as selling, general and administrative expenses have been
reclassified and reported as a reduction of net revenues.
Total net revenues for the three months ended November 30, 2001 were $30.3
million, a decrease of 27.3% from net revenues of $41.7 million in the prior
year's first quarter. The decrease resulted primarily from (i) reduced sales of
Northland and Seneca branded products; and (ii) 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 and which accounted for
approximately $4.8 million of net revenues for the first quarter of fiscal 2001.
These revenue decreases were offset by (i) increased sales of cranberry
concentrate; and (ii) reduced trade spending, slotting and consumer coupons
(which is reported as a reduction of gross revenues). Trade industry data for
the 12-week period ended November 4, 2001 showed that our Northland brand 100%
juice products achieved a 5.7% market share of the supermarket shelf-stable
cranberry beverage category on a national basis, down from a 10.6% market share
for the 12-week period ended November 5, 2000. The total combined market share
of supermarket shelf-stable cranberry beverages for our Northland and Seneca
branded product lines was 5.9% for the 12-week period ended November 4, 2001
compared to a 12.5% market share for the 12-week period ended November 5, 2000.
We anticipate that our total net revenues in fiscal 2002 will be relatively
comparable with total net revenues in fiscal 2001. We anticipate a more balanced
marketing approach in fiscal year 2002, including a planned resumption of media
advertising.
Cost of sales for the first quarter of fiscal 2002 was $20.7 million compared to
$31.9 million for the first quarter of fiscal 2001, resulting in gross margins
of 31.7% and 23.5% in each respective period. The increase in gross margins in
the first quarter of fiscal 2002 was primarily the result of reduced
manufacturing costs which were impacted by improved cost controls, improved
utilization of manufacturing capacity and lower cranberry costs.
Selling, general and administrative expenses were $5.9 million, or 19.5% of net
revenues, for the first quarter of fiscal 2002 compared to $6.1 million, or
14.6% of net revenues, in the prior year's first fiscal quarter. Included in the
fiscal 2002 amount were approximately $1.3 million of charges relating to the
Restructuring. After these restructuring charges, the recurring expenses were
approximately $4.6 million, or 15.2% of net revenues. The reduction between
quarters resulted primarily from reduced wages, consulting expenses and
depreciation.
The gain on disposals of property and equipment in the first quarter of fiscal
2001 of $0.4 million resulted primarily from the sale of certain real estate and
other assets.
Interest expense was $3.1 million in the first quarter of fiscal 2002 compared
to $4.7 million during the same period of fiscal 2001. The decrease resulted
primarily from reduced debt levels following our Restructuring. Interest expense
in the remaining quarters of fiscal 2002 will be lower than comparable quarters
in the prior year because of these reduced debt levels. See "Financial
Condition" below.
23
Interest income of $0.7 million in the first quarter of fiscal 2002 and $0.7
million in the comparable period of fiscal 2001 is associated with an unsecured,
subordinated promissory note receivable from Cliffstar Corporation.
In the first quarter of fiscal 2002 and the comparable quarter of fiscal 2001,
there were no income taxes on operating income due to the utilization of certain
net operating loss carryforwards for which no benefit had been previously
provided.
In the first quarter of fiscal 2002, we realized an extraordinary gain on
forgiveness of indebtedness in connection with the Restructuring of
approximately $83.3 million, net 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. The extraordinary gain was further reduced by $32.8 million
of income taxes resulting in a net extraordinary gain of $50.5 million.
FINANCIAL CONDITION
Net cash provided by operating activities was $5.3 million in the first quarter
of fiscal 2002 compared to net cash provided of $0.1 million in the same period
of fiscal 2001. Income before extraordinary item plus depreciation and
amortization was $2.4 million in the first quarter of fiscal 2002 compared to
$2.5 million in the comparable period of fiscal 2001. Increases in receivables,
prepaid expenses and other current assets accounted for a $0.8 million use of
cash in the first quarter of fiscal 2002 compared to decreases in such items
providing cash of $4.7 million in the first quarter of fiscal 2001. Increases in
accounts payable and accrued liabilities provided cash of $2.4 million in the
first quarter of fiscal 2002 compared to a use of cash of $6.6 million in the
first quarter of fiscal 2001. The increased payables and accrued liabilities in
the fiscal 2002 first quarter primarily resulted from Restructuring expenses
incurred in November 2001. Inventories decreased $1.3 million in the first
quarter of fiscal 2002 compared to an increase of $0.1 million in the first
quarter of fiscal 2001. While we would normally expect a seasonal increase in
inventories at the end of the first quarter, this year's decrease resulted from
lower growing and harvesting costs, as well as continued improvement in our
management of raw materials and finished goods inventory levels.
Working capital was $2.8 million at November 30, 2001 compared to $31.6 million
at August 31, 2001. However, at August 31, 2001, working capital included a
$32.8 million deferred income tax asset which was realized during the first
quarter of fiscal 2002. Our current ratio exclusive of the current deferred
income tax asset was 1.0 to 1.0 at August 31, 2001, compared to 1.1 to 1.0 at
November 30, 2001.
Net cash provided by investing activities was $0.6 million in the first quarter
of fiscal 2002 compared to $0.5 million in the similar quarter of fiscal 2001.
Collections on our note receivable from Cliffstar Corporation contributed toward
the positive cash flow in both quarters. In fiscal 2001, proceeds from disposals
of property and equipment provided $0.5 million, offset by property and
equipment purchases of $0.2 million.
Our net cash used in financing activities was $7.0 million in the first quarter
of fiscal 2002 compared to $0.3 million in the first quarter of the prior year.
To accomplish the Restructuring, we obtained proceeds from our new revolving
credit facility and two term loans, along with proceeds, net of legal
24
and other costs, from the issuance of Class A Common Stock and Class A Preferred
Stock. These proceeds were used to pay various banks in settlement of our
previous revolving credit facility (see "General" and Notes 2 and 7 of Notes to
Condensed Consolidated Financial Statements) and to pay various debt issuance
costs. Also, we made payments on long-term debt and other obligations of $1.2
million in the first quarter of fiscal 2002 and $0.3 million in the first
quarter of fiscal 2001. In both quarters monthly principal payments were made on
other obligations, and in the first quarter of fiscal 2002 additional payments
were made as required on our restructured debt agreements.
As of November 30, 2001, we had outstanding borrowings of $8.3 million under our
$30.0 million revolving credit facility with Foothill and Ableco. As of November
30, 2001, we had approximately $6.0 million of unused borrowing availability
under the facility. We believe that we will be able to fund our ongoing
operational needs for the remainder of fiscal 2002 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make certain "forward-looking statements" in this Form 10-Q, such as
statements about our future plans, goals and other events which have not yet
occurred. We intend that these statements will qualify for the safe harbors from
liability provided by the Private Securities Litigation Reform Act of 1995. You
can generally identify these forward-looking statements because we use words
such as we "believe," "anticipate," "expect" or similar words when we make them.
Forward-looking statements include, among others, statements about actions by
our competitors, sufficiency of our working capital, potential operational
improvements and our efforts to return to profitability, sales and marketing
strategies, expected levels of trade and marketing spending, anticipated market
share of our branded products, expected levels of interest expense and net
revenues, 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 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-Q. We disclaim any duty to update these statements or other information in
this
25
Form 10-Q based on future events or circumstances. Please read this entire Form
10-Q to better understand our business and the risks associated with our
operations. Specifically, please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of our current
financial condition and recent debt and equity restructuring.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------
We do not enter into any material futures, forwards, swaps, options or other
derivative financial instruments for trading or other purposes. Our primary
exposure to market risk is related to changes in interest rates and the effects
those changes may have on our earnings as a result of our long-term financing
arrangements. We manage our exposure to this market risk by monitoring interest
rates and possible alternative means of financing. Our earnings may be affected
by changes in short-term interest rates under our revolving line of credit
facility and certain term loans, pursuant to which our borrowings bear interest
at a variable rate, subject to minimum interest rates payable on certain loans.
Based upon the debt outstanding under our revolving line of credit facility and
certain term loans as of November 30, 2001, an increase of 1.0% in market
interest rates would increase annual interest expense by approximately $0.4
million.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
There was no material change in our litigation with Cliffstar during the first
quarter of fiscal 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ---------------------------------------------------
On November 5, 2001, in contemplation of completing the Restructuring, we
amended our Articles of Incorporation to effect 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). In the reverse stock
split, each issued and outstanding share of our capital stock was converted into
one-fourth of a share, and fractional shares resulting from the reverse stock
split were rounded up to the next whole share. We further amended our Articles
of Incorporation on November 5, 2001 to create a series of preferred stock
called Series A Preferred Stock, shares of which were issued to Sun Northland in
the Restructuring.
On November 6, 2001, in connection with the Restructuring and pursuant to the
terms of a Stock Purchase Agreement, 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 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.
As additional consideration and as required by the Stock Purchase Agreement
referenced above, we paid Sun Northland a fee of $700,000 in consideration of
certain services Sun Northland rendered to us in connection with the
Restructuring. We also entered into a Management Services Agreement, dated as of
November 6, 2001, with Sun Capital Partners Management, LLC ("SCPM"), an
affiliate of Sun Northland. Pursuant to that agreement, SCPM 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 SCPM. 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.
On November 6, 2001, in connection with the Restructuring and as mentioned
above, we issued 7,618,987 Class A shares to certain bank group members who
decided to continue as our lenders
27
after the Restructuring (including U.S. Bank, National Association, ARK CLO
2001-1 Limited, and St. Francis Bank, F.S.B.). 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), and also agreed to enter into an Amended and Restated Credit
Agreement with us which evidences, among other things, our obligation to repay
the revised $25.7 million term loan mentioned above. Payments on the revised
term loan are due monthly based on the prime interest rate, as defined, plus 1%
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. We issued these shares in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act of 1933, as
amended.
In the Restructuring we also issued warrants to purchase an aggregate of
5,086,106 Class A shares, at an exercise price of $.01 per share, to Foothill
and Ableco, members of our new secured lending group. 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. In consideration of the issuance of
the warrants and the fee notes, Foothill and Ableco entered into a loan
agreement with us pursuant to which they 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 warrants we issued to Foothill and Ableco are immediately exercisable. We
issued these warrants in reliance on the exemption from registration contained
in Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- -----------------------------------------
In response to this Item, the information set forth in Notes 1, 2 and 7 of Notes
to Condensed Consolidated Financial Statements contained in Part I of this
Quarterly Report on Form 10-Q is hereby incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------------------------------------------
A. Exhibits
Exhibits filed with this Form 10-Q report are incorporated herein by
reference to the Exhibit Index accompanying this report.
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B. Form 8-K
We filed the following Current Reports on Form 8-K during the first quarter
of fiscal 2002:
Date Filed Date of Report Item
---------- -------------- ----
November 6, 2001 November 6, 2001 Item 5 - Regulation FD
Disclosure - Press Release
Announcing Reverse Stock
Split, Voluntary NASDAQ
Delisting and Commencement
of Over-the-Counter Bulletin
Board Trading of Registrant's
Class A Common Stock
November 7, 2001 November 6, 2001 Item 5 - Regulation FD
Disclosure - Press Release
Announcing Change in Control
of Registrant
November 21, 2001 November 6, 2001 Item 1 - Change in Control
of Registrant
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHLAND CRANBERRIES, INC.
DATE: January 14, 2002 By: /s/ Richard P. Teske
------------------------------------
Richard P. Teske
Vice President and Chief Financial Officer
30
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 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.]
2.2 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.]
2.3 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.]
2.4 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.]
2.5 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.]
4.1 Modification Agreement, dated as of November 6, 2001,
between the Company and Equitable Life Assurance Society of
the United States. [Incorporated by reference to Exhibit 4.6
to the Company's Annual Report on Form 10-K for the year
ended August 31, 2001.]
4.2 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.]
31
4.3 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.]
4.4 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.]
4.5 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.]
10.1 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.]
10.2 Amendment, dated September 7, 2001, to Lease, dated March
31, 1994 between Nantucket Conservation Foundation, Inc. and
the Company. [Incorporated by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year ended
August 31, 2001.]
10.3 Severance and Noncompetition Agreement, dated as of November
6, 2001, by and between the Company and John Swendrowski.
[Incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the year ended August 31,
2001.]
10.4 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.]
10.5 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.]
10.6 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.]
32