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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 May 31, 2002
------------------------------------
[ ] OR TRANSITION REPORT PURSUANT TO SECTION 13 AND 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16130
NORTHLAND CRANBERRIES, INC.
- --------------------------------------------------------------------------------
(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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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 July 15, 2002 91,548,580
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 - 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 20 - 26
Item 3. Quantitative and Qualitative Disclosure About
Market Risk...................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 28
Item 2. Changes in Securities and Use of Proceeds................. 28
Item 5. Other Information........................................ 28
Item 6. Exhibits and Reports on Form 8-K.......................... 28
SIGNATURE................................................. 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
May 31, August 31,
2002 2001
--------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 238 $ 1,487
Accounts receivable 6,795 10,630
Current portion of note receivable and
accounts receivable - other 9,644 8,530
Inventories 20,402 24,382
Prepaid expenses and other current assets 1,063 879
Deferred income taxes - 32,800
Assets held for sale 6,529 5,830
--------- ---------
Total current assets 44,671 84,538
Note receivable, less current portion 19,750 23,000
Property and equipment, net 65,852 71,907
Other assets 970 970
Debt issuance costs, net 4,190 -
--------- ---------
Total assets $ 135,433 $ 180,415
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
Current liabilities:
Revolving line of credit facility $ 2,889 $ -
Accounts payable 7,920 6,929
Accrued liabilities 8,740 12,589
Current maturities of long-term debt 18,657 33,375
--------- ---------
Total current liabilities 38,206 52,893
Long-term debt, less current maturities 57,892 64,589
Obligations subsequently forgiven or
exchanged for common stock - 84,087
--------- ---------
Total liabilities 96,098 201,569
--------- ---------
Redeemable preferred stock - Series B,
100 and 0 shares issued and outstanding,
respectively - -
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 (116,482) (170,334)
--------- ---------
Total shareholders' equity (deficiency
in assets) 39,335 (21,154)
--------- ---------
Total liabilities and shareholders'
equity (deficiency in assets) $ 135,433 $ 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 Nine Months
Ended May 31, Ended May 31,
2002 2001 2002 2001
------------ ---------- ----------- ----------
Net revenues $ 24,231 $ 27,333 $ 78,522 $ 98,448
Cost of sales 16,094 20,835 53,503 74,777
----------- --------- ---------- ---------
Gross profit 8,137 6,498 25,019 23,671
Selling, general &
administrative expenses (6,043) (5,178) (18,515) (17,893)
Gain on disposals of
property & equipment - - - 412
----------- --------- ---------- ---------
Income from operations 2,094 1,320 6,504 6,190
Interest expense (1,119) (4,410) (5,399) (13,913)
Interest income 630 684 1,909 2,060
----------- --------- ---------- ---------
Income (loss) before
income taxes and
extraordinary item 1,605 (2,406) 3,014 (5,663)
Income tax benefit 339 - 339 2,092
----------- --------- ---------- ---------
Income (loss) before
extraordinary item 1,944 (2,406) 3,353 (3,571)
Extraordinary gain on
forgiveness of
indebtedness, net of
$32,800 in income taxes - - 50,499 -
----------- --------- ---------- ---------
Net income (loss) $ 1,944 $ (2,406) $ 53,852 $ (3,571)
=========== ========= ========== =========
Net income (loss) per
common share:
Basic:
Income (loss) before
extraordinary gain $ 0.02 $ (0.47) $ 0.06 $ (0.70)
Extraordinary gain - - 0.89 -
----------- --------- ---------- ---------
Net income (loss) $ 0.02 $ (0.47) $ 0.95 $ (0.70)
=========== ========= ========== =========
Diluted:
Income (loss) before
extraordinary gain $ 0.02 $ (0.47) $ 0.04 $ (0.70)
Extraordinary gain - - 0.65 -
----------- --------- ---------- ---------
Net income (loss) $ 0.02 $ (0.47) $ 0.69 $ (0.70)
=========== ========= ========== =========
Shares used in computing
net income (loss) per
common share:
Basic 91,548,580 5,084,773 56,573,978 5,084,773
Diluted 101,132,502 5,084,773 77,649,987 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 Nine Months Ended
May 31, May 31,
2002 2001
---------- ---------
Operating activities:
Net income (loss) $ 53,852 $ (3,571)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization of property
and equipment 2,941 6,898
Amortization of intangible assets - 634
Amortization of debt issuance costs and
debt discount 1,143 -
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 4,373 11,209
Inventories 3,980 4,374
Accounts payable and accrued liabilities (1,341) (16,701)
--------- --------
Net cash provided by operating activities 14,449 2,431
--------- --------
Investing activities:
Collections on note receivable 2,000 1,250
Property and equipment purchases (286) (377)
Proceeds from disposals of assets held for sale
and of property and equipment 2,115 511
Net decrease in other assets - 35
--------- --------
Net cash provided by investing activities 3,829 1,419
--------- --------
Financing activities:
Net increase (decrease) in borrowings under
revolving line of credit facilities 2,889 (54)
Proceeds from issuance of long-term debt 20,000 -
Payments on long-term debt and other obligations (6,944) (1,539)
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 (19,527) (1,593)
--------- --------
Net (decrease) increase in cash and cash
equivalents (1,249) 2,257
Cash and cash equivalents, beginning of period 1,487 164
--------- --------
Cash and cash equivalents, end of period $ 238 $ 2,421
========= ========
See notes to condensed consolidated financial statements.
5
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED MAY 31, 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 - - - - 53,852 53,852
----- ----- ----- --------- ---------- ---------
BALANCE, MAY 31, 2002 $ - $ 915 $ - $ 154,902 $ (116,482) $ 39,335
===== ===== ===== ========= ========== =========
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 May 31, 2002
and August 31, 2001 and its related results of operations for the three
month and nine-month periods ended May 31, 2002 and 2001, respectively, and
cash flows for the nine months ended May 31, 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 described in Notes 2 and 8, 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.
7
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 $997,000 as of May 31,
2002.
Net Income (Loss) Per Common Share - Net income (loss) 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 9.
The weighted average shares outstanding used in calculating net income
(loss) per common share for the three and nine-month periods ended May 31,
2002 and 2001 consisted of the following:
Three Months Ended Nine Months Ended
May 31, May 31,
2002 2001 2002 2001
----------- --------- --------- ---------
Basic:
Shares outstanding at
beginning of period 91,548,580 5,084,773 5,084,606 5,084,606
Issuance of fractional
shares due to reverse
stock split - - 167 167
Issuance of new shares - - 51,489,205 -
----------- --------- ---------- ---------
Total 91,548,580 5,084,773 56,573,978 5,084,773
Effect of dilution:
Convertible preferred
stock - - 13,866,621 -
Warrants 5,033,168 - 3,795,621 -
Options 4,550,754 - 3,413,767 -
----------- --------- ---------- ---------
Diluted 101,132,502 5,084,773 77,649,987 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 $2,948,000 and $9,042,000 of amounts previously
8
reported as selling, general and administrative expenses during the three
and nine-month periods ended May 31, 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
8) 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, 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 1,668,885 shares of the
Series A Preferred Stock were subsequently converted into 41,722,125 shares
of Class A Common Stock of the Company (see Note 9). 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.
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 8).
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
9
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 8). 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
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. 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
10
business to Cliffstar in the transaction that closed on March 8, 2000. The
Company claims that (1) Cliffstar breached the Asset Purchase Agreement by
failing to make required payments under the Asset Purchase Agreement and by
failing to negotiate in good faith concerning a cranberry sauce purchase
agreement between the parties; (2) Cliffstar breached an interim cranberry
sauce purchase agreement between the two companies by failing to adequately
perform and to pay the Company the required amounts due under it; (3)
Cliffstar breached its fiduciary duty to the Company based on the same (or
similar) conduct; (4) Cliffstar breached the promissory note issued by it
in the transaction by failing to make its payments in a timely manner and
failing to pay all of the interest due; (5) Cliffstar breached a co-packing
agreement entered into in connection with the sale by failing to make
required payments thereunder and other misconduct; and (6) Cliffstar
breached the Asset Purchase Agreement's arbitration provision, which
provides that any disagreements over the valuation of finished goods,
work-in-process and raw material inventory purchased by Cliffstar shall be
submitted to arbitration for resolution. On April 10, 2001, the Court
granted the Company's Petition to Compel Arbitration. Accordingly, the
price dispute over finished goods, work-in-process and raw material
inventory is currently in arbitration. The Company seeks compensatory
damages in an amount in excess of $5,000,000, plus punitive damages for
Cliffstar's breaches of its fiduciary duties and attorneys' fees.
Cliffstar has asserted counterclaims against the Company, alleging that (1)
the Company fraudulently induced Cliffstar to enter into the Asset Purchase
Agreement; (2) the Company has breached the Asset Purchase Agreement by
failing to negotiate in good faith a cranberry sauce purchase agreement, by
failing to provide Cliffstar with sufficient quantities of cranberry
concentrate meeting Cliffstar's "specifications," by selling inventory that
did not have a commercial value at least equal to the Company's carrying
value, by failing to notify Cliffstar that the Company intended to
write-down its cranberry inventory, by not providing Cliffstar its selling
prices, by decreasing its level of service to customers after the parties
signed the Asset Purchase Agreement, and by refusing to turn over certain
labels, films and plates relating to the private label juice business to
Cliffstar; (3) the Company breached the co-packing agreement by prematurely
terminating that agreement; (4) the Company converted the labels, films and
plates relating to the private label juice business; (5) the Company
intentionally interfered with Cliffstar's contractual relations, or
reasonable expectations of entering into business relations, with the
printers who hold the labels, films and plates; and (6) the Company
breached the Transition Agreement by failing to remit to Cliffstar the
excess of Cliffstar's interim payment for work-in-process and raw material
inventory, by withholding a portion of the work-in-process and raw material
inventory from Cliffstar, and by artificially building up its
work-in-process and raw material inventory before and after the sale of the
private label juice business to Cliffstar. Cliffstar seeks compensatory
damages in an amount not stated in the counterclaims, punitive damages for
the alleged intentional interference claim, 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.
On June 7, 2002, the court granted the Company's motion for summary
judgment and dismissed Cliffstar's fraud claim. 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
11
collectible; (2) the Company has strong factual and legal defenses in all
material respects to Cliffstar's remaining counterclaims; and (3) the note
and accounts receivable due from Cliffstar as of May 31, 2002 are
collectible.
The action is in the final stages of discovery, with expert discovery
scheduled to be concluded by August 16, 2002. The court has scheduled trial
for commencement on October 7, 2002.
On May 13, 2002, the Company received Cliffstar's earn-out calculation for
the year 2000. The Company believes that Cliffstar's earn-out calculation
was not prepared in accordance with the Asset Purchase Agreement. To date,
Cliffstar has not provided the Company with the earn-out calculation for
the year 2001. Accordingly, on June 7, 2002, the Company filed a separate
suit against Cliffstar in the United States District Court, Northern
District of Illinois, seeking access to all relevant books and records of
Cliffstar relating to the earn-out calculations and claiming Cliffstar
breached the Asset Purchase Agreement by failing to pay the Company
earn-out payments for the years 2000 and 2001. The Company seeks
compensatory damages in an amount in excess of $1,000,000, plus attorneys'
fees.
The resolution of the legal proceedings cannot be predicted with certainty
at this time. Management intends to vigorously defend the remaining
counterclaims and to pursue any claims the Company may have against
Cliffstar, including any actions to collect the amounts outstanding.
As of May 31, 2002, the note receivable from Cliffstar had an outstanding
balance of $24,000,000 and the Company had other outstanding accounts
receivable due from Cliffstar aggregating approximately $5,411,000.
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
$1,685,000 and $8,688,000 during the three and nine-month periods ended May
31, 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
12
expenses is not available, as the Company's accounting system does not
segregate such items by type of product.
5. INVENTORIES
Inventories as of May 31, 2002 and August 31, 2001 consisted of the
following (in thousands):
May 31, 2002 August 31, 2001
Raw materials $ 12,991 $ 18,677
Finished goods 3,233 3,281
Deferred crop costs 4,178 2,424
-------- --------
Total inventories $ 20,402 $ 24,382
======== ========
6. ASSETS HELD FOR SALE
On May 31, 2002, the Company closed its manufacturing facility in
Cornelius, Oregon. The land and buildings were transferred from property
and equipment to assets held for sale at carrying value which approximates
estimated fair value, less costs of disposal. No gain or loss on this
transfer was recognized. The equipment will be moved to the Company's
Wisconsin Rapids, Wisconsin facility to be utilized at its manufacturing
facility there.
7. 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 $69,000 was paid
during the nine months ended May 31, 2002.
13
8. REVOLVING LINE OF CREDIT FACILITY, LONG-TERM DEBT AND OBLIGATIONS
SUBSEQUENTLY FORGIVEN OR EXCHANGED FOR COMMON STOCK
Long-term debt as of May 31, 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):
May 31, August 31,
2002 2001
Term loans payable $ 15,988 $ -
Fee notes payable 3,673 -
Restructured bank notes 32,240 -
Restructured insurance company note 20,015 -
Revolving credit facility with banks - 139,305
Term loans payable to insurance company - 19,096
Other obligations 4,633 9,469
Accrued interest on restructured obligations - 14,181
-------- ---------
Total 76,549 182,051
Less obligations subsequently forgiven or
exchanged for common stock - 84,087
-------- ---------
Amounts to be paid 76,549 97,964
Less current maturities of long-term debt 18,657 33,375
-------- ---------
Long-term debt $ 57,892 $ 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 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
14
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 nine months ended May 31, 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 nine months
ended May 31, 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 May 31, 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 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.
15
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 nine months ended May 31, 2002.
The extraordinary gain on the forgiveness of indebtedness recognized during
the nine months ended May 31, 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
========
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,
16
2006. Interest on the revolving credit facility is payable monthly at the
greater of prime, as defined, plus 1%, or 7% (7% as of May 31, 2002). As of
May 31, 2002, there was approximately $2,889,000 of outstanding borrowings
under this facility. Approximately $5,600,000 of additional borrowings were
available to the Company under the facility as of May 31, 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% (7% as of May 31, 2002).
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-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, respectively, was classified as a noncurrent liability for
financial reporting purposes, as such amounts were not to be paid as part
of the restructuring.
9. 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
17
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 shares of Class A
Common Stock of the Company on February 4, 2002. There are currently no
shares of 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 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
18
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.
10. 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 nine-month
periods ended May 31, 2002 due to the utilization of certain net operating
loss carryforwards for which no benefit had been previously provided. As a
result of a recent tax law change regarding the use of net operating loss
carrybacks, we were able to carry back additional losses and recognize a
tax benefit of approximately $339,000 in the three months ended May 31,
2002. A tax benefit of approximately $2,1000,000 was recognized in the
second quarter of fiscal 2001 for certain refunds related to farm loss
carrybacks.
As described in Notes 2 and 8, 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 nine month period ended May
31, 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.
11. SUBSEQUENT EVENTS
On July 1, 2002, the Company completed the sale of a cranberry marsh in
Hanson, Massachusetts for approximately $ 3,500,000 in net proceeds, which
approximated its carrying value. The facility was included in assets held
for sale in the accompanying Condensed Consolidated Balance Sheets. The net
proceeds were used to pay down borrowings on the Restructured Bank Notes.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
GENERAL
In fiscal 2001 and the first two months 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 had 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 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
20
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 8 of Notes to Condensed Financial Statements for a further
discussion of the Restructuring.
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 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.
On May 31, 2002, we closed our Cornelius, Oregon concentrating facility. We
intend to sell the facility and have transferred cranberry concentrate
production to our Wisconsin Rapids, Wisconsin concentrating facility. On June
28, 2002, we discontinued operations at our bottling plant located in Dundee,
New York. We intend to sell the facility and have moved additional production to
our Jackson, Wisconsin facility. We intend to utilize various co-packers for the
balance of the Dundee production. We expect these closures will reduce operating
costs and provide cash flow for use in our operations.
21
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 nine-month periods
ended May 31, 2001 to conform to the new requirements and, as a result,
approximately $2.9 million and $9.0 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
implemented in fiscal 2001 and the first three quarters of fiscal 2002. We
believe we have sufficient working capital and borrowing capacity to once again
market and support the sale of our Northland and Seneca brand juice products.
Our focus for the remainder of fiscal 2002 continues to be on improving our
operations, reducing debt and implementing a balanced marketing approach with an
emphasis on profitable growth.
CRITICAL ACCOUNTING POLICIES
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, 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.
RESULTS OF OPERATIONS
Total net revenues for the three months ended May 31, 2002 were $24.2 million, a
decrease of 11.3% from net revenues of $27.3 in the prior year's third quarter.
Net revenues for the nine months ended May 31, 2002 were $78.5 million, a
decrease of 20.2% from net revenues of $98.4 million in the prior year's nine
month period. 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 $1.7 million and $8.7 million of net revenues,
22
respectively, for the three month and nine-month periods ended May 31, 2001.
These net revenue decreases were partly 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 May 19, 2002 showed that our Northland brand 100% juice
products achieved a 5.6% market share of the supermarket shelf-stable cranberry
beverage category on a national basis, down from a 6.8% market share for the
12-week period ended May 20, 2001. The total combined market share of
supermarket shelf-stable cranberry beverages for our Northland and Seneca
branded product lines was 5.6% for the 12-week period ended May 19, 2002
compared to a 7.6% market share for the 12-week period ended May 20, 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., by September 30, 2002. 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 $1.7 million and $4.8 million in the three and
nine-month periods ended May 31, 2002, respectively. We are currently reviewing
alternatives for replacing the lost Nestle business and maximizing utilization
of our Jackson, Wisconsin manufacturing facility.
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 resume media advertising of our Northland brand
100% juice cranberry blends. The resumption of media advertising, combined with
our trade promotion spending has provided a more balanced marketing approach in
fiscal year 2002. Our promotional and pricing strategies focused our efforts on
profitability as opposed to revenue growth and as a result we anticipate that
our total net revenues for fiscal year 2002 will be less than those of fiscal
year 2001.
Cost of sales for the three months ended May 31, 2002 was $16.1 million compared
to $20.8 million for the third quarter of fiscal 2001, resulting in gross
margins of 33.6% and 23.8% in each respective period. Cost of sales for the nine
months ended May 31, 2002 was $53.5 million compared to $74.8 million for the
first nine months of fiscal 2001, resulting in gross margins of 31.9% and 24.0%
in each respective period. The increase in the gross margin rate in the third
quarter and the first nine 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.
Selling, general and administrative expenses were $6.0 million, or 24.9% of net
revenues, for the three months ended May 31, 2002, compared to $5.2 million, or
18.9% of net revenues, in the prior year's third fiscal quarter. During the nine
months ended May 31, 2002, we significantly increased media advertising expense
which resulted in higher levels of selling, general and administrative expenses
compared to the third quarter of 2001. For the nine months ended May 31, 2002,
selling, general and administrative expenses were $18.5 million compared to
$17.9 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 $17.2 million,
or 21.9% 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. The gain on disposal of property and equipment
23
in the nine month period ending May 31, 2001 of $0.4 million resulted primarily
from the sale of certain real estate and other assets.
Interest expense was $1.1 million and $5.4 million for the three and nine-month
periods ended May 31, 2002, compared to $4.4 million and $13.9 million during
the same periods of fiscal 2001. The decrease resulted primarily from reduced
debt levels following our Restructuring. Interest expense in the fourth quarter
of fiscal 2002 will be lower than comparable quarter in the prior year because
of these reduced debt levels. See "Financial Condition" below.
Interest income of $0.6 million and $1.9 million for the three and nine-month
periods ended May 31, 2002 and $0.7 million and $2.1 million in the comparable
periods of fiscal 2001 is associated with an unsecured, subordinated promissory
note receivable from Cliffstar Corporation.
In the three and nine-month periods ended May 31, 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 of $339,000 recognized in the three months ended May 31, 2002 related to
additional loss carry backs as a result of a change in tax law regarding the use
of net operating loss carrybacks. The incurred tax benefit recognized in the
nine months ended May 31, 2001 related to a refund from a farm loss carryback
received in the second quarter of fiscal year 2001.
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 $14.4 million in the first nine
months of fiscal 2002 compared to $2.4 million in the same period of fiscal
2001. Income before extraordinary item plus depreciation and amortization was
$7.4 million in the first nine months of fiscal 2002 compared to $4.0 million in
the comparable period of fiscal 2001. Decreases in receivables, prepaid expenses
and other current assets provided $4.4 million of cash in the first nine months
of fiscal 2002 compared to $11.2 million in the first nine months of fiscal
2001. Accounts payable and accrued liabilities decreased, resulting in a use of
cash of $1.3 million in the first nine months of fiscal 2002 compared to a use
of cash of $16.7 million in the first nine months of fiscal 2001. The decrease
in payables and accrued liabilities in the first nine months of fiscal 2002
primarily resulted from a reduction in operating costs. Inventories decreased
$4.0 million in the first nine months of fiscal 2002 compared to $4.4 million in
the first nine months of fiscal 2001. The decrease in inventories is a result of
our efforts to improve management of our inventory through reductions in
purchases of raw materials and also increases in sales of cranberry concentrate.
Working capital was $6.5 million at May 31, 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 as a result of our Restructuring (see Note 8). The current ratio
exclusive of the current deferred income tax asset was 1.2 to 1.0 at May 31,
2002, compared to 1.0 to 1.0 at August 31, 2001.
24
Net cash provided by investing activities was $3.8 million in the first nine
months of fiscal 2002 compared to $1.4 million in the similar period of fiscal
2001. Collections on the note receivable from Cliffstar Corporation contributed
to the positive cash flow in both fiscal periods. Proceeds from the disposal of
property and equipment in the first nine months of fiscal 2002 were primarily
the result of the sale of an office facility in Wisconsin Rapids for $1.3
million in the second quarter of fiscal 2002. Other proceeds from disposals of
property and equipment provided $0.8 million, offset by property and equipment
purchases of $0.3 million. In fiscal 2001, proceeds from disposals of property
and equipment provided $0.5 million, offset by property and equipment purchases
of $0.4 million.
Net cash used in financing activities was $19.5 million in the first nine months
of fiscal 2002 compared to $1.6 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 8 of Notes to Condensed
Consolidated Financial Statements) and to pay various debt issuance costs. Since
our restructuring, we have paid $5.7 million on long-term debt and other
obligations for total payments of $6.9 million in the first nine months of
fiscal year 2002 compared to $1.5 million in the same period in fiscal year
2001.
The following schedule sets forth our contractual long-term debt obligations as
of May 31, 2002 (in thousands):
Payments Due by Period
Total 0-1 year 2-3 years 4-5 years After 5 years
------- -------- --------- --------- -------------
Long-Term Debt $76,549 $18,657 $12,997 $14,034 $30,861
We have multiple-year crop purchase contracts with 46 independent cranberry
growers pursuant to which we have contracted to purchase all of the cranberries
harvested from up to 1,729 contracted acres owned by these growers, subject to
federal marketing order limitations. These contracts generally last for five
years, starting with the 2001 calendar year crop, and automatically renew after
every harvest, unless cancelled. Under the contracts we 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 May 31, 2002, we had outstanding borrowings of $2.9 million under our
$30.0 million revolving credit facility with Foothill and Ableco. As of May 31,
2002, we had approximately $5.6 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 May 31, 2002, we were in compliance with all of our debt arrangements.
25
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
consumer acceptance of our branded juice products; (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
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.
26
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 May 31, 2002, an increase of 1.0% in market interest
rates would increase annual interest expense by approximately $0.3 million.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------- ------------------
On June 7, 2002 the court granted our motion for summary judgement and dismissed
Cliffstar Corporation's fraud claim. The action is in the final stages of
discovery, with expert discovery scheduled to be concluded by August 16, 2002.
Trial is scheduled to commence on October 7, 2002.
On June 7, 2002 we filed a separate suit against Cliffstar Corporation in the
United States District Court, Northern District of Illinois, seeking access to
all relevant books and records of Cliffstar Corporation relating to the earn-out
calculations under the Asset Purchase Agreement and claiming that Cliffstar
Corporation breached the Asset Purchase Agreement by failing to pay us earn-out
payments for the years 2000 and 2001. We are seeking compensatory damages in
excess of $ 1,000,000 plus attorneys' fees.
For further information on the litigation with Cliffstar Corporation see Note 3
of Notes to Condensed Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ------- ------------------------------------------
There were no changes in securities and use of proceeds in the third quarter of
fiscal 2002.
ITEM 5. OTHER INFORMATION.
- ------- ------------------
Pursuant to a Unanimous Consent Action of the Board of Directors effective May
24, 2002, the Board unanimously voted to increase the size of the Board of
Directors from eight to nine members and to appoint C. Daryl Hollis to serve as
a member of the Board until the next annual meeting of the shareholders of the
Company and the election and qualification of his successor.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------- ---------------------------------
A. Exhibits
No exhibits were filed with this Form 10-Q report.
B. Form 8-K
No current reports on Form 8-K were filed during the third quarter of
fiscal 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHLAND CRANBERRIES, INC.
DATE: July 15, 2002 By: /s/ Nigel J. Cooper
-------------------------------------
Nigel J. Cooper
Vice President - Finance
29
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ---------- -----------
None
30