SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2002
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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
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NORTHLAND CRANBERRIES, INC.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1583759
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2930 Industrial Street
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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800 First Avenue South, Wisconsin Rapids, Wisconsin 54495-8020
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes____No____
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date:
Class A Common Stock April 12, 2002 91,548,580
1
NORTHLAND CRANBERRIES, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements......................................... 3
Condensed Consolidated Balance Sheets........................ 3
Condensed Consolidated Statements of Operations.............. 4
Condensed Consolidated Statements of Cash Flows.............. 5
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.................21-27
Item 3. Quantitative and Qualitative Disclosure About
Market Risk......................................... 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 29
Item 2. Changes in Securities and Use of Proceeds.................... 29
Item 4. Submissions of Matters to Vote of Security Holders...........29-30
Item 5. Other Information............................................ 30
Item 6. Exhibits and Reports on Form 8-K............................. 30
SIGNATURE.................................................... 31
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
February 28, August 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 367 $ 1,487
Accounts receivable 8,172 10,630
Current portion of note receivable and accounts receivable - other 9,422 8,530
Inventories 21,326 24,382
Prepaid expenses and other current assets 898 879
Deferred income taxes - 32,800
Assets held for sale 5,165 5,830
--------- ---------
Total current assets 45,350 84,538
Note receivable, less current portion 21,000 23,000
Property and equipment, net 68,586 71,907
Other assets 970 970
Debt issuance costs, net 4,612 -
--------- ---------
Total assets $140,518 $180,415
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
Current liabilities:
Revolving line of credit facility $ 5,361 $ -
Accounts payable 7,796 6,929
Accrued liabilities 10,747 12,589
Current maturities of long-term debt 17,767 33,375
--------- ---------
Total current liabilities 41,671 52,893
Long-term debt, less current maturities 61,456 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 103,127 201,569
--------- ---------
Shareholders' equity:
Common stock - Class A, $.01 par value, 91,548,580
and 4,925,555 shares issued and outstanding, respectively 915 49
Common stock - Class B, $.01 par value,
0 and 159,051 shares issued and outstanding, respectively - 2
Additional paid-in capital 154,902 149,129
Accumulated deficit (118,426) (170,334)
--------- ---------
Total shareholders' equity (deficiency in assets) 37,391 (21,154)
--------- ---------
Total liabilities and shareholders' equity (deficiency in assets) $ 140,518 $ 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)
For the Three Months For the Six Months
Ended February 28, Ended February 28,
2002 2001 2002 2001
--------- --------- --------- ---------
Net revenues $ 23,975 $ 29,405 $ 54,291 $ 71,115
Cost of sales 16,676 22,078 37,409 53,942
--------- --------- --------- ---------
Gross profit 7,299 7,327 16,882 17,173
Selling, general & administrative expenses (6,551) (6,638) (12,472) (12,715)
Gain on disposal of property & equipment - 2 - 412
--------- --------- --------- ---------
Income from operations 748 691 4,410 4,870
Interest expense (1,190) (4,818) (4,280) (9,503)
Interest income 629 682 1,279 1,376
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item 187 (3,445) 1,409 (3,257)
Income tax benefit - 2,092 - 2,092
--------- --------- --------- ---------
Income (loss) before extraordinary item 187 (1,353) 1,409 (1,165)
Extraordinary gain on forgiveness of
indebtedness, net of $32,800 in income taxes - - 50,499 -
--------- --------- --------- ---------
Net income (loss) $ 187 $ (1,353) $ 51,908 $ (1,165)
========= ========= ========= =========
Net income (loss) per common share:
Basic:
Income (loss) before extraordinary gain $ 0.00 $ (0.27) $ 0.04 $ (0.23)
Extraordinary gain - - 1.30 -
--------- --------- --------- ---------
Net income (loss) $ 0.00 $ (0.27) $ 1.34 $ (0.23)
========= ========= ========= =========
Diluted:
Income (loss) before extraordinary gain $ 0.00 $ (0.27) $ 0.02 $ (0.23)
Extraordinary gain - - 0.77 -
--------- --------- --------- ---------
Net income (loss) $ 0.00 $ (0.27) $ 0.79 $ (0.23)
========= ========= ========= =========
Shares used in computing net income (loss)
per common share:
Basic 60,952,355 5,084,773 38,796,832 5,084,773
Diluted 100,988,773 5,084,773 65,618,885 5,084,773
See notes to condensed consolidated financial statements.
4
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
For the six months ended
February 28, February 28,
2002 2001
--------- --------
Operating activities:
Net income (loss) $ 51,908 $ (1,165)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 2,046 4,745
Amortization of intangible assets - 417
Amortization of debt issuance costs and debt discount 658 -
Provision for deferred income taxes - 1,101
Gain on disposals of property and equipment - (412)
Extraordinary gain on forgiveness of indebtedness (50,499) -
Changes in assets and liabilities:
Receivables, prepaid expenses and other current assets 3,132 9,680
Inventories 3,056 722
Accounts payable and accrued liabilities 604 (14,264)
--------- ---------
Net cash provided by operating activities 10,905 824
--------- ---------
Investing activities:
Collections on note receivable 1,000 500
Property and equipment purchases (116) (238)
Proceeds from disposals of assets held for sale and of
property and equipment 1,470 459
Net decrease in other assets - 34
--------- ---------
Net cash provided by investing activities 2,354 755
--------- ---------
Financing activities:
Net increase (decrease) in borrowings under revolving line of
credit facilities 5,361 (47)
Proceeds from issuance of long-term debt 20,000 -
Payments on long-term debt and other obligations (4,268) (892)
Net payments in settlement of revolving credit facility (39,773) -
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 (14,379) (939)
--------- ---------
Net (decrease) increase in cash and cash equivalents (1,120) 640
Cash and cash equivalents, beginning of period 1,487 164
--------- ---------
Cash and cash equivalents, end of period $ 367 $ 804
========= =========
See notes to condensed consolidated financial statements.
5
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED FEBRUARY 28, 2002
(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
Conversion of convertible preferred stock -
Series A (1,668,885 shares) to Class A
common stock (41,722,125 shares) (17) 417 - (400) - -
Net income - - - - 51,908 51,908
-------- -------- -------- -------- ---------- ---------
BALANCE, FEBRUARY 28, 2002 $ - $ 915 $ - $154,902 $ (118,426) $ 37,391
======== ======== ======== ======== ========== =========
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 February 28,
2002 and August 31, 2001 and its related results of operations for the
three month and six month periods ended February 28, 2002 and 2001,
respectively, and cash flows for the six months ended February 28, 2002 and
2001, respectively. As permitted by these regulations, these condensed
consolidated financial statements do not include all information required
by accounting principles generally accepted in the United States of America
to be included in an annual set of financial statements, however, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The Company's condensed consolidated balance
sheet as of August 31, 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, and as amended
by Form 10-K/A Amendment No. 1.
Business Risks - The cranberry industry experienced three consecutive
nationwide bumper crops culminating with the 1999 harvest. This resulted in
excess cranberry inventories held by industry participants and depressed
cranberry prices. Based on United States Department of Agriculture data and
due in part to volume regulations implemented by the Department in 2000 and
2001, there has been some reduction in inventory levels and moderate
increases in cranberry prices. However, uncertainty remains as to whether a
volume regulation will be implemented in 2002 and what impact the 2002
harvest will have on cranberry inventory levels and prices. The Company
continues to operate in a marketplace that has experienced significant
levels of price discounting and selling activity as the industry reduces
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
7
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 fiscal year 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 agreements and charged to interest
expense. Accumulated amortization was approximately $575,000 as of February
28, 2002.
Net Income(Loss) 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 (loss) per common
share and diluted net (loss) per common share are computed by dividing net
income (loss) 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
(loss) per common share for the three months and six month periods ended
February 28, 2002 and 2001 consisted of the following:
Three Months Ended Six Months Ended
February 28, February 28,
2002 2001 2002 2001
---- ---- ---- ----
Basic:
Shares outstanding at
beginning of period 49,826,455 5,084,773 5,084,606 5,084,606
Issuance of fractional shares
due to reverse stock split - - 167 167
Issuance of new shares 11,125,900 - 33,712,059 -
---------- ------------ ---------- -----------
Total 60,952,355 5,084,773 38,796,832 5,084,773
Effect of dilution:
Convertible preferred stock 30,596,225 - 20,799,931 -
Warrants 5,018,430 - 3,176,848 -
Options 4,421,763 - 2,845,274 -
---------- ------------ ---------- -----------
Diluted 100,988,773 5,084,773 65,618,885 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
8
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 $3,042,000 and $6,094,000 of
amounts previously reported as selling, general and administrative expenses
during the three and six month periods ended February 28, 2001,
respectively, have been reclassified and reported as a reduction of net
revenues.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which addresses the financial accounting for and the reporting of the
impairment of long-lived assets and long-lived assets to be disposed of
among other items. 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 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 (during the first quarter of fiscal 2002), 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 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 Inc., 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
9
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.
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, 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
10
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 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
11
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 February 28, 2002, the note receivable from Cliffstar had an
outstanding balance of $25,000,000 and the Company had other outstanding
accounts receivable due from Cliffstar aggregating approximately
$5,411,000. The action is in the final stages of discovery. On March 15,
2002, the Company filed a motion for summary judgment with the court
seeking dismissal of Cliffstar's fraud claim. A decision on the motion is
anticipated in early June, 2002. 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 February 28, 2002 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.
12
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
$2,160,000 and $7,003,000 during the three and six month periods ended
February 28, 2001, 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 does not segregate such items by type of product.
5. INVENTORIES
Inventories as of February 28, 2002 and August 31, 2001 consisted of the
following (in thousands):
February 28, 2002 August 31, 2001
Raw materials $15,675 $18,677
Finished goods 3,689 3,281
Deferred crop costs 1,962 2,424
------- -------
Total inventories $21,326 $24,382
======= =======
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 $49,000 was paid
during the six months ended February 28, 2002.
13
7. REVOLVING LINE OF CREDIT FACILITY, LONG-TERM DEBT AND OBLIGATIONS
SUBSEQUENTLY FORGIVEN OR EXCHANGED FOR COMMON STOCK
Long-term debt as of February 28, 2002 and long-term debt and obligations
subsequently forgiven or exchanged for common stock as of August 31, 2001
consisted of the following (in thousands):
February 28, August 31,
2002 2001
Term loans payable $17,488 $ -
Fee notes payable 3,610 -
Restructured bank notes 32,873 -
Restructured insurance company note 20,341 -
Revolving credit facility with banks - 139,305
Term loans payable to insurance company - 19,096
Other obligations 4,911 9,469
Accrued interest on restructured obligations - 14,181
------- --------
Total 79,223 182,051
Less obligations subsequently forgiven or
exchanged for common stock - 84,087
------- --------
Amounts to be paid 79,223 97,964
Less current maturities of long-term debt 17,767 33,375
------- --------
Long-term debt $61,456 $ 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.
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.
Prior to the Restructuring, 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
14
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 six months ended February 28, 2002.
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 six months
ended February 28, 2002. 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 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% (5.75% as of February 28, 2002),
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
15
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%.
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 six months ended February 28, 2002.
The extraordinary gain on the forgiveness of indebtedness recognized during
the six months ended February 28, 2002, 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
========
16
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 February 28, 2002). As of
February 28, 2002, there was approximately $5,361,000 of outstanding
borrowings under this facility. Approximately $6,400,000 of additional
borrowings were available to the Company under the facility as of February
28, 2002.
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 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-
17
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.
An amendment to the Company's Articles of Incorporation increasing the
authorized Class A Common Stock from 60,000,000 shares to 150,000,000
shares was approved by the shareholders of the Company at the 2002 Annual
Meeting of Shareholders and became effective on February 4, 2002.
Immediately upon the effectiveness of this amendment, each of the then
outstanding Series A Preferred shares was automatically converted into 25
shares of Class A Common Stock. As a result of the amendment, 1,668,885
Series A Preferred shares were converted into 41,722,125 Class A Common
Stock of the Company on February 4, 2002. There are currently no Series A
Preferred Stock of the Company outstanding.
Stock Options - On November 6, 2001, the Company adopted the 2001 Stock
Option Plan (the "2001 Plan"), which provided 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
18
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 any
outstanding 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 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 or six month
periods ended February 28, 2002 due to the utilization of certain net
operating loss carryforwards for which no benefit had been previously
provided. A tax benefit of approximately $2,100,000 was recognized in the
19
three months ended February 28, 2001 for certain refunds related to farm
loss carry backs which were received in that period.
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 six month period ended
February 28, 2002. 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 fiscal 2001 and 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, Inc., 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 Common 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 Common shares, (ii) 1,668,885 Series A Preferred shares (each
of which converted into 25 Class A Common shares, or a total of 41,722,125 Class
A Common shares, on February 4, 2002), 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
21
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 $81.2 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 Common 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 Common shares, including the
Series A Preferred shares subsequently converted into Class A Common shares,
issued to Sun Northland, and (ii) the additional 7,618,987 Class A Common 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 full vesting over time of the
options to acquire Class A Common shares that we issued to key employees in the
Restructuring, Sun Northland owns approximately 77.5% of our fully-diluted Class
A Common shares.
See Notes 2 and 7 of Notes to Condensed Financial Statements for a further
discussion of the Restructuring.
In December 2001, we entered into an agreement terminating our lease of two
cranberry marshes in Nantucket, Massachusetts. Under the terms of the agreement,
we transferred certain equipment used in the operation of the marshes to the
lessor in exchange for the early termination of the lease (the original term of
which continued through December, 2003) and a full release of all of our past
and future obligations under the lease.
The cranberry industry experienced three consecutive nationwide bumper crops
culminating with the 1999 harvest. This was followed by what we believe were
inadequate volume regulations under United States Department of Agriculture
cranberry marketing orders for the 2000 and 2001 crop years, resulting in large
levels of excess cranberry inventories held by industry participants and
depressed cranberry prices. To date in fiscal 2002, we have observed moderately
increasing prices. In February 2002, the Cranberry Marketing Committee met to
consider whether to implement a marketing order for the 2002 crop year. No
consensus was reached and, to date, the Committee has not recommended that the
United States Department of Agriculture adopt a volume regulation. It is
22
unknown at this time whether a volume regulation will be adopted for the 2002
crop year and what impact any or no regulation will have on our results of
operations or financial condition.
We prepare our financial statements in accordance with generally accepted
accounting principles which, through the application of certain critical
accounting policies, require management to make judgments, estimates and
assumptions regarding matters which are inherently uncertain. We have stated our
inventory carrying value at the lower of cost (using the first-in, first-out
costing method) or estimated market values, based upon management's best
estimates of future product selling 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 it takes to sell the inventory. Such factors are all
subject to significant fluctuations. We also use 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 net revenues and expenses during the reporting period.
On an ongoing basis management reviews these 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 or the use of different
assumptions may result in revised estimates and actual results could differ from
those estimates.
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.
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 the condensed
consolidated statements of operations for the three month and six month periods
ended February 28, 2001 to conform to the new requirements, and as a result,
approximately $3.0 million and $6.1 million, respectively, of amounts previously
reported as selling, general and administrative expenses have been reclassified
and reported as a reduction of net revenues.
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.
23
RESULTS OF OPERATIONS
Total net revenues for the three months ended February 28, 2002 were $24.0
million, a decrease of 18.4% from net revenues of $29.4 in the prior year's
second quarter. Net revenues for the six months ended February 28, 2002 were
$54.3 million, a decrease of 23.6% from net revenues of $71.1 million in the
prior year's second 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 $2.2 million and $7.0 million of net revenues,
respectively, for the three month and six month periods ended February 28, 2001.
These net revenue decreases were offset by (i) increased sales of cranberry
concentrate; and (ii) reduced trade spending and consumer coupons (which are
reported as a reduction of gross revenues). Trade industry data for the 12-week
period ended February 24, 2002 showed that our Northland brand 100% juice
products achieved a 5.1% market share of the supermarket shelf-stable cranberry
beverage category on a national basis, down from a 7.9% market share for the
12-week period ended February 25, 2001. The total combined market share of
supermarket shelf-stable cranberry beverages for our Northland and Seneca
branded product lines was 5.2% for the 12-week period ended February 24, 2002
compared to a 9.0% market share for the 12-week period ended February 25, 2001.
On January 25, 2002, we were notified by Nestle USA ("Nestle"), a customer for
whom we produce and package juice beverages, of its intention to transfer
production and packing of bottled beverages to our principal competitor, Ocean
Spray Cranberries, Inc., over the next six to nine months. Nestle has notified
us that it does not intend to transfer production of canned juice beverages, so
we anticipate that we will continue to produce and package canned juice
beverages for Nestle. We had net revenues from production and packing of bottled
beverages for Nestle of approximately $1.5 million and $3.1 million in the three
and six month periods ended February 28, 2002, respectively. We are currently
considering various alternatives with respect to the utilization of our
manufacturing facilities and replacing the Nestle business.
In fiscal year 2001, due to our general lack of available cash, we were unable
to fund a meaningful advertising campaign. In fiscal year 2002, following our
Restructuring, we were able to once again resume media advertising of our
Northland brand 100% juice cranberry blends. We believe the resumption of media
advertising, combined with our trade promotion spending, will provide a more
balanced marketing approach which we expect will result in net revenues in the
second half of fiscal year 2002 exceeding net revenues during the first half of
fiscal year 2002.
Cost of sales for the three months ended February 28, 2002 was $16.7 million
compared to $22.1 million for the second quarter of fiscal 2001, resulting in
gross margins of 30.4% and 24.8% in each respective period. Cost of sales for
the six months ended February 28, 2002 was $37.4 million compared to $53.9
million for the second quarter of fiscal 2001, resulting in gross margins of
31.1% and 24.2% in each respective period. The increase in gross margins in the
second quarter and the first six months 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.
24
Selling, general and administrative expenses were $6.6 million, or 27.5% of net
revenues, for the three months ended February 28, 2002, compared to $6.6
million, or 22.4% of net revenues, in the prior year's second fiscal quarter.
During the three months ended February 28, 2002, we increased media advertising
expense significantly while decreasing wages, consulting, legal and depreciation
expenses, which resulted in similar levels of selling, general and
administrative expenses compared to the second quarter of 2001. For the six
months ended February 28, 2002, selling, general and administrative expenses
were $12.5 million compared to $12.7 million in fiscal 2001. 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 $11.2 million, or 20.6% of net revenues. The reduction in expense
(after the restructuring charges) between fiscal years resulted primarily from
reduced wages, consulting expenses, legal expenses and depreciation, offset by
increased media advertising. During the three months ended February 28, 2002, we
sold an office facility in Wisconsin Rapids for its carrying value. The gain on
disposal of property and equipment in the six-month period ending February 28,
2001 of $0.4 million resulted primarily from the sale of certain other real
estate and other assets.
Interest expense was $1.2 million and $4.3 million for the three and six-month
periods ended February 28, 2002, compared to $4.8 million and $9.5 million
during the same periods 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.
Interest income of $0.6 million and $1.3 million for the three and six month
periods ended February 28, 2002 and $0.7 million and $1.4 million in the
comparable periods of fiscal 2001 is associated with an unsecured, subordinated
promissory note receivable from Cliffstar Corporation.
In the three and six month periods ended February 28, 2002 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. The income tax
benefit recognized in the second quarter of fiscal 2001 related to a refund from
a farm loss carry back received in that period.
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 $10.9 million in the first six
months of fiscal 2002 compared to $0.8 million in the same period of fiscal
2001. Income before extraordinary item plus depreciation and amortization was
$4.1 million in the first six months of fiscal 2002 compared to $4.0 million in
the comparable period of fiscal 2001. Decrease in receivables, prepaid expenses
and other current assets provided $3.1 million of cash in the first six months
of fiscal 2002 compared to $9.7 million in the first six months of fiscal 2001.
Accounts payable and accrued liabilities provided
25
cash of $0.6 million in the first six months of fiscal 2002 compared to a use of
cash of $14.3 million in the first six months of fiscal 2001. The decrease in
payables and accrued liabilities in the first six months of fiscal 2002
primarily resulted from a reduction in operating costs. Inventories decreased
$3.1 million in the first six months of fiscal 2002 compared to $0.7 million in
the first six months of fiscal 2001. This year's decrease resulted from lower
growing and harvesting costs, as well as continued improvement in our management
of raw material inventory levels.
Working capital was $3.7 million at February 28, 2002 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. The current ratio exclusive of the current deferred
income tax asset was 1.1 to 1.0 at February 28, 2002, compared to 1.0 to 1.0 at
August 31, 2001.
Net cash provided by investing activities was $2.4 million in the first six
months of fiscal 2002 compared to $0.8 million in the similar period of fiscal
2001. Collections on the note receivable from Cliffstar Corporation contributed
toward the positive cash flow in both fiscal periods. Proceeds from the disposal
of assets in the first six months of fiscal 2002 were primarily the result of
the sale of an office facility in Wisconsin Rapids for $1.3 million. Other
proceeds from disposals of property and equipment provided $0.2 million, offset
by property and equipment purchases of $0.1 million. In fiscal 2001, proceeds
from disposals of property and equipment provided $0.5 million, offset by
property and equipment purchases of $0.2 million.
Net cash used in financing activities was $14.4 million in the first six months
of fiscal 2002 compared to $0.9 million in the same period 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 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,
payments were made on long-term debt and other obligations of $4.3 million in
the first six months of fiscal 2002 and $0.9 million in the same period of
fiscal 2001.
The following schedule sets forth our contractual long-term debt obligations as
of February 28, 2002 (in thousands):
Payments Due by Period
----------------------
---------------------------------------------------------------------------
Total Less than 2-3 years 4-5 years After 5 years
1 year
---------------------------------------------------------------------------
Long-Term Debt $79,223 $17,767 $12,981 $13,686 $34,780
======= ------- ------- ------- -------
---------------------------------------------------------------------------
We have multiple-year crop purchase contracts with 45 independent cranberry
growers pursuant to which the Company has contracted to purchase all of the
cranberries harvested from up to 1,948 contracted acres owned by these growers,
subject to federal marketing order limitations. These
26
contracts last for five years, starting with the 1999 calendar year crop, and
automatically renew after every harvest, unless cancelled, 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.
As of February 28, 2002, we had outstanding borrowings of $5.4 million under our
$30.0 million revolving credit facility with Foothill and Ableco. As of February
28, 2002, we had approximately $6.4 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 February 28, 2002, we were in compliance with all of our 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 level of cranberry inventory
held by industry participants; (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 a marketing order or lack of a marketing order of the United
States Department of Agriculture relative to the 2002 crop year, as well as any
potential 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 Form
10-Q based on future events or circumstances. Please
27
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 February 28, 2002, an increase of 1.0% in market
interest rates would increase annual interest expense by approximately $0.3
million.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
There was no material change in our litigation with Cliffstar during the second
quarter of fiscal 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ---------------------------------------------------
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 Common
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 was
automatically convertible into 25 Class A Common shares (subject to adjustment
upon the happening of certain dilutive events) immediately upon the
effectiveness of an amendment to our Articles of Incorporation having the effect
of increasing the number of authorized Class A Common shares to a number
sufficient to provide for the issuance of Class A Common shares upon conversion
of all of the Series A Preferred shares at the conversion rate then in effect.
An amendment to the Company's Articles of Incorporation increasing the
authorized Class A Common from 60,000,000 shares to 150,000,000 shares was
approved by the shareholders of the Company at the 2002 Annual Meeting of
Shareholders and became effective on February 4, 2002. Immediately upon the
effectiveness of this amendment, each of the then outstanding Series A Preferred
shares was automatically converted into 25 shares of Class A Common Stock. As a
result of the amendment, 1,668,885 Series A Preferred shares were converted into
41,722,125 Class A Common shares of the Company on February 4, 2002. There are
currently no Series A Preferred shares of the Company outstanding.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- --------------------------------------------------------------
The following matters were submitted to a vote of our shareholders at the Annual
Meeting of Shareholders held on January 30, 2002:
A. Election of Directors
---------------------
The following six individuals were elected by the shareholders to serve as
directors of the Company to hold office until the next annual meeting of our
shareholders and until their successors are duly qualified and elected:
By Class A Common Stock:
Total Votes
Votes Withholding
Voted "For" Authority
----------- ---------
John Swendrowski 41,549,613 264,851
Marc J. Leder 41,566,279 248,185
Rodger R. Krouse 41,567,528 246,936
David Kreilein 41,566,872 247,592
Clarence E. Terry 41,567,193 247,271
Kevin J. Calhoun 41,567,302 247,162
By Series A Preferred Stock (1,668,885 shares, each with 25 votes):
Total Votes
Votes Withholding
Voted "For" Authority
----------- ----------
John Swendrowski 41,722,125 0
Marc J. Leder 41,722,125 0
Rodger R. Krouse 41,722,125 0
David Kreilein 41,722,125 0
Clarence E. Terry 41,722,125 0
Kevin J. Calhoun 41,722,125 0
29
B. Amendment to Increase Authorized Shares
---------------------------------------
A proposal to approve an amendment to our Articles of Incorporation to increase
the number of authorized shares of Class A Common Stock, $.01 par value, from
60,000,000 to 150,000,000.
By Class A Common Stock:
Votes Votes Votes Broker
----- ----- ----- ------
For Against Abstaining Non-Votes
--- ------- ---------- ---------
39,211,579 299,449 33,857 2,269,579
By Series A Preferred Stock (1,668,885 shares, each with 25 votes):
Votes Votes Votes Broker
----- ----- ----- ------
For Against Abstaining Non-Votes
--- ------- ---------- ---------
41,722,125 0 0 N/A
C. Consent Amendment
-----------------
A proposal to approve an amendment to our Articles of Incorporation which would,
generally speaking, allow for certain actions to be taken by written consent of
less than all of our shareholders.
By Class A Common Stock:
Votes Votes Votes Broker
----- ----- ----- ------
For Against Abstaining Non-Votes
--- ------- ---------- ---------
39,164,801 330,581 49,503 2,269,579
By Series A Preferred Stock (1,668,885 shares, each with 25 votes):
Votes Votes Votes Broker
----- ----- ----- ------
For Against Abstaining Non-Votes
--- ------- ---------- ---------
41,722,125 0 0 N/A
ITEM 5. OTHER INFORMATION.
- -------------------------
At the regular meeting of the Board of Directors of the Company held on January
30, 2002, the Board unanimously voted to create standing Audit and Compensation
Committees. Kevin J. Calhoun and David L. Kreilein were appointed to serve as
members of the Audit Committee, with Mr. Kreilein serving as Chairman of the
Committee. Rodger R. Krouse, Clarence E. Terry and David L. Kreilein were
appointed to serve as members of the Compensation Committee, with Mr. Krouse
serving as Chairman of the Committee.
At the regular meeting of the Board of Directors of the Company held on January
30, 2002, the Board also unanimously voted to increase the size of the Board of
Directors from six to eight members. Pursuant to a Unanimous Consent Action of
the Board of Directors effective February 20, 2002, Patrick J. Sullivan and
George R. Rae were appointed to serve as members of the Board until the next
annual meeting of the shareholders of the Company and the election and
qualification of their successors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------------------------------------------
A. Exhibits
Exhibits filed with this Form 10-Q report are incorporated herein by
reference to the Exhibit Index accompanying this report.
B. Form 8-K
No Current Reports on Form 8-K were filed during the second quarter of
fiscal 2002.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHLAND CRANBERRIES, INC.
DATE: April 12, 2002 By:/s/ Richard P. Teske
-------------------------------------
Richard P. Teske
Vice President and Chief Financial Officer
31
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amendments to the Company's Articles of Incorporation.
3.2 Articles of Incorporation, as amended, effective February 4,
2002.
3.3 Amendments to the By-Laws of the Company, effective January 30,
2002.
3.4 By-Laws of the Company, as amended, effective January 30, 2002.
10.1 Stock Option Agreement dated as of November 6, 2001 by and
between the Company and John Swendrowksi.
10.2 Form of Stock Option Agreement dated as of November 6, 2001 by
and between the Company and certain executive officers.
32