UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-16130
Northland Cranberries, Inc.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1583759
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2930 Industrial Street
P. O. Box 8020
Wisconsin Rapids, Wisconsin 54495-8020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (715) 424-4444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Class A Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 26, 2002:
$5,208,363
Number of shares issued and outstanding of each of the registrant's classes of
common stock as of November 26, 2002:
Class A Common Stock, $.01 par value: 91,548,580 shares
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE:
Proxy Statement for 2003 annual meeting of shareholders (to be filed with the
Commission under Regulation 14A within 120 days after the end of the
registrant's fiscal year and, upon such filing, to be incorporated by reference
into Part III, to the extent indicated therein).
PART I
Special Note Regarding Forward-Looking Statements
We make certain "forward-looking statements" in this Form 10-K, such as
statements about our future plans, goals and other events which have not yet
occurred. We intend that these statements will qualify for the safe harbors from
liability provided by the Private Securities Litigation Reform Act of 1995. You
can generally identify these forward-looking statements because we use words
such as we "believe," "anticipate," "expect" or similar words when we make them.
Forward-looking statements include, among others, statements about actions by
our competitors, sufficiency of our working capital, potential operational
improvements and our efforts to improve profitability, sales and marketing
strategies, expected levels of trade and marketing spending, anticipated market
share and sales of our branded products, cranberry concentrates and other
products, and disposition of significant litigation. These forward-looking
statements involve risks and uncertainties and the actual results could differ
materially from those discussed in the forward-looking statements. These risks
and uncertainties include, without limitation, risks associated with (i) our
ability to reinvigorate our Northland and Seneca brand names, regain lost
distribution capabilities and branded products market share and generate
increased levels of branded product sales; (ii) the level of cranberry inventory
held by industry participants; (iii) the development, market share growth and
consumer acceptance of our branded juice products; (iv) the resolution of
certain litigation related to the sale of the net assets of our private label
juice business and claims asserted by us against our principal competitor
regarding what we believe to be anticompetitve tactics and unlawful
monopolization within the cranberry products industry; (v) agricultural factors
affecting our crop and the crop of other North American growers; and (vi) 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-K. We disclaim any
duty to update these statements or other information in this Form 10-K based on
future events or circumstances. Please read this entire Form 10-K to better
understand our business and the risks associated with our operations.
Specifically, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of our current financial
condition and our recent debt and equity restructuring.
Item 1. Business.
General; History
We are a vertically integrated grower, handler, processor and marketer of
cranberries, branded cranberry products and fruit beverages. As of November 26,
2002, we owned or operated 21 cranberry producing marshes with 2,009 planted
acres in Wisconsin. We also maintain multi-year crop purchase contracts with 44
independent cranberry growers to purchase all of the cranberries harvested from
an aggregate of up to 1,743 contracted acres.
Our products include:
o Northland brand 100% juice cranberry blends (containing 27% cranberry
juice), which we sell through supermarkets, drug store chains, mass
merchandisers, club stores, foodservice outlets and convenience stores;
o Seneca and TreeSweet bottled and canned fruit beverages, including apple,
grape, cranberry and orange juice products, and frozen juice concentrate
products, including apple, grape and cranberry juice products;
o Northland brand fresh cranberries, which we sell to retail and wholesale
customers;
o Awake frozen orange-flavored concentrate; and
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o cranberry juice concentrate, single-strength cranberry juice, single
strength and concentrate cranberry juice purees, sweetened dried cranberries,
chocolate-coated cranberries and frozen whole and sliced cranberries, which we
sell to industrial and ingredient customers.
We also provide contract packaging services to third parties utilizing our
owned manufacturing facility located in Jackson, Wisconsin.
We began our business in 1987 as a cranberry grower and member of the Ocean
Spray Cranberries, Inc. marketing cooperative. In 1993, we left Ocean Spray and
introduced Northland brand fresh cranberries. In October 1995, we introduced our
family of Northland 100% juice cranberry blends. By June 1997, we had
successfully achieved national distribution. In fiscal 1999, we acquired the
juice division of Seneca Foods Corporation, including the right to produce and
sell nationwide Seneca brand products, TreeSweet and Awake brand names, as well
as additional processing, distribution and receiving facilities. In fiscal 2000,
we sold our private label juice business, which we acquired in July 1998 from
Minot Food Packers, Inc., to Cliffstar Corporation. In June 2001, we sold our
bottling and packaging facility in Mountain Home, North Carolina, to Clement
Pappas NC, Inc. In June 2001, we also sold our private label and food service
cranberry sauce business to Clement Pappas and Company, Inc.
Fiscal 2002
During the first quarter of fiscal 2002 we continued to experience lost
distribution and decreased market share of our products in various markets, we
believe primarily as a result of Ocean Spray's tactics and dominance in the
cranberry products industry, as well as competition from regional brands.
Although we were successful in retaining distribution in many markets, the lack
of sufficient working capital at the beginning of fiscal 2002 limited our
ability to promote our products through media advertising. Prior to November 6,
2001, we were in default under the terms of our loan documents with our
then-current bank group and other third parties, had difficulty generating
sufficient cash flow to meet our obligations on a timely basis, and were often
delinquent on various payments to third party trade creditors and others. We
reached the point where we felt it was imperative to reach an agreement with our
then-current bank group and to refinance our bank debt, or else we believed we
were faced with liquidating or reorganizing Northland in a bankruptcy proceeding
in which our creditors would have likely received substantially less value than
we felt they could receive in a restructuring transaction and our shareholders
would have likely been left holding shares without any value. On November 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."
Restructuring Transaction
On November 5, 2001, in contemplation of completing the Restructuring, we
effected a one-for-four reverse stock split of our outstanding capital stock
(which was previously approved by our shareholders at our 2001 annual meeting of
shareholders). In addition, we voluntarily delisted our shares of Class A Common
Stock from trading on the Nasdaq National Market and obtained quotation of our
shares of Class A Common Stock on the Over-The-Counter Bulletin Board under a
new symbol ("NRCNA") effective on the opening of trading on November 6, 2001.
All share and per share information included in this Form 10-K reflect the
reverse stock split.
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 shares of Class A Common Stock to certain bank group
members which decided to continue as our lenders after the Restructuring. Sun
Northland did not provide the foregoing consideration to our former bank group;
instead, Sun Northland entered into a Stock Purchase Agreement with us (which we
refer to as the "Purchase Agreement"), pursuant to which Sun Northland assigned
its rights to those Assignment, Assumption and Release Agreements to us
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and gave us $7.0 million in cash, in exchange for (i) 37,122,695 shares of Class
A Common Stock, (ii) 1,668,885 Series A Preferred shares (each share of which
was automatically converted into 25 shares of Class A Common Stock upon the
amendment to the Company's Articles of Incorporation, which was approved at the
2002 annual meeting of shareholders and became effective on February 4, 2002,
increasing the number of authorized Class A Common Stock from 60,000,000 shares
to 150,000,000 shares), and (iii) 100 shares of our newly created Series B
Preferred Stock, which were subsequently transferred to a limited liability
company controlled by our Chief Executive Officer. Using funding provided by our
new secured lenders and Sun Northland, we acquired a substantial portion of our
outstanding indebtedness from the members of our then-current bank group (under
the terms of the Assignment, Assumption and Release Agreements that were
assigned to us by Sun Northland) in exchange for the consideration noted above,
which resulted in the forgiveness of approximately $81.2 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 shares of Class A Common Stock 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 shares of Class A Common Stock
and Series A Preferred Stock (subsequently converted into Class A Common Stock
as noted above) we issued to Sun Northland, and (ii) the additional 7,618,987
shares of Class A Common Stock 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 shares of Class A Common Stock that
we issued to key employees in the Restructuring, Sun Northland owns
approximately 77.1% of our fully-diluted shares of Class A Common Stock.
As a result of and following the Restructuring we were once again able to
aggressively market and support the sale of our Northland and Seneca brand juice
products. Our products continue to be available in all 50 states and, as of
September 8, 2002, our Northland brand 100% juice cranberry blends were
available in supermarkets nationwide that account for approximately 61% of total
grocery sales according to data compiled by Information Resources, Inc. ("IRI"),
compared to 78% at the end of fiscal 2001. Additionally, IRI data indicated
that, for the 12-week period ended September 8, 2002, our Northland brand 100%
juice cranberry products achieved a 5.1% market share of the supermarket
shelf-stable cranberry beverage category on a national basis, down from a 6.0%
market share for the 12-week period ended September 9, 2001. Market share of our
Seneca brand cranberry juice product line for the same period decreased from
approximately 0.4% to approximately 0.1%, resulting in a total combined market
share of supermarket shelf-stable cranberry beverages for our Northland and
Seneca branded product lines of approximately 5.2% for the 12-week period ended
September 8, 2002, down from approximately 6.4% for the 12-week period ended
September 9, 2001.
Our costs to manufacture branded products continued to increase in the
first quarter of fiscal 2002 due to our facilities not being utilized to
capacity. As a result, we took several steps during the fiscal year to reduce
costs and improve cash flows from operations, including:
o closing our facility in Dundee, New York;
o redistributing production volume to our Jackson, Wisconsin facility
and third party contract manufacturers;
o selling our manufacturing facility in Cornlieus, Oregon;
o selling our Hanson, Massachusetts marsh;
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o terminating the lease on the marshes in Nantucket, Massachusetts;
o selling an office facility in Wisconsin Rapids;
o reducing personnel at our corporate offices to reflect current sales
volumes and production levels; and
o focusing our attention on improving our inventory control system, thus
increasing our inventory turns of finished goods and non-cranberry raw
material.
During fiscal 2002 we continued to closely monitor our levels of trade
spending in the retail grocery markets, including reducing the number of trade
promotions and promotion rates for all brands. We also took additional steps
during the year, which we believe helped us to compete in the marketplace in
fiscal 2002, including:
o updating the label of our Northland 100% juice cranberry blends in an
effort to make it more appealing to consumers and enhance its visual
presence on the shelf;
o pursuing growth of cranberry concentrate, frozen whole and sliced
cranberries and our other cranberry-based products through business
opportunities with industrial and ingredient customers, both
domestically and internationally; and
o exploring and utilizing alternative sales channels, such as club
stores and food service providers including restaurants, hospitals and
schools.
These steps, in combination with the Restructuring, helped us to return to
profitability in fiscal 2002 and achieve (i) an increase in gross margins due
primarily to reductions in depreciation costs and other overhead; (ii) lower
operating expenses; and (iii) more efficient trade spending due to the change in
our promotional and pricing strategies. As of August 31, 2002, we were in
compliance with all of our debt arrangements.
In fiscal 2002, we did not have revenues from any one customer that
exceeded 10% of our total net revenues. In fiscal 2001 and 2000, we had revenues
from one customer, Nestle USA, of approximately $12.9 and $45.9 million, or
10.2% and 22.2% of our total net revenues, respectively. In October 2002, Nestle
USA transferred production and packing of bottled beverages from us to our
principal competitor, Ocean Spray Cranberries, Inc. 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.
Branded Products
Products
Our family of Northland 100% juice cranberry blends is our primary branded
product. We introduced Northland 100% juice cranberry blends in late 1995 in an
effort to offer consumers an alternative to the Ocean Spray brand and achieved
national distribution in the summer of 1997. As of September 8, 2002, our
Northland 100% juice cranberry blends were available in all 50 states and in
supermarkets nationwide that account for approximately 61% of total grocery
sales. We currently produce and sell eight flavors of Northland 100% juice
cranberry blends, including traditional cranberry, cranberry apple, cranberry
raspberry, cranberry grape, cranberry peach, cranberry cherry, cranberry
blackberry and cranberry orange. We have three bottle sizes, all in plastic,
available for general distribution, including 46, 64, and 96 ounce sizes. The
96-ounce size was developed specifically for the club and mass merchandise
channels.
Northland 100% juice cranberry blends are also available in two can sizes.
The 5.5 ounce can is sold in retail six-packs and used as a sampling device. The
46 ounce can is sold to retail grocery accounts in markets where the Northland
brand is approved for participation in the Women, Infants and Children program
administered by the United States Department of Agriculture.
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We also produce and sell several varieties of Seneca juice products. As of
the end of fiscal 2002, our Seneca cranberry juice drink product line was
available in supermarkets that account for 1.8% of total grocery sales,
according to IRI data. The Seneca cranberry products were designed to compete
against other non-premium cranberry drink brands and to complement the Northland
brand of 100% juice products.
We also sell citrus juice products under the TreeSweet label. TreeSweet
products are now sold in 64 ounce plastic and 5.5 and 46 ounce tin sizes. We
also sell frozen orange-flavored concentrate under the Awake brand.
Our foodservice business manufactures and markets juice products in
industry-specific packaging to businesses and public institutions such as
restaurants, hotels, schools and hospitals. We offer our foodservice products in
a variety of sizes and packages under the Northland, Seneca and TreeSweet
brands.
We also grow and package Northland brand fresh cranberries and primarily
sell them in 12-ounce plastic bags to food retailers and wholesalers during the
fall. We also currently sell sweetened dried cranberries to industrial and
ingredient customers. In conjunction with our fall 2002 sales of Northland brand
fresh cranberries, we offered sweetened dried cranberries, both chocolate coated
and non-coated, for sale to consumers through retail produce departments. We
intend to continue to expand our sweetened dried cranberries business in fiscal
2003.
Marketing
Our principal consumer marketing strategy for our family of Northland 100%
juice cranberry blends highlights the differences in flavor and juice content
between Northland brand 100% juice cranberry blends and many competing products
of Ocean Spray and others which contain less than 100% juice. Currently,
Northland is the only 100% juice brand with 27% cranberry juice in every flavor.
In fiscal 2003, we intend to focus our marketing efforts on:
o Media Advertising
- During fiscal 2003, we intend to maintain an advertising strategy
that will focus on the health benefits and taste of Northland 100% juice
cranberry blends. We intend to use television commercials to emphasize that
other branded juice drinks contain less total juice and cranberry content
than our Northland 100% juice cranberry blends. We ran 15 and 30 second
television commercials beginning in the first quarter of fiscal 2003.
Additionally, we are evaluating the use of print medium in fiscal 2003 to
expand the reach of our marketing campaign.
o Sales Promotion
- We intend to continue to offer purchase incentives to attract
first-time buyers and prompt consumers who already drink Northland 100%
juice cranberry blends to purchase more of our products. These incentives
will be offered through "cents off" coupons to be delivered using various
industry standard vehicles. We also intend to use a 5.5 ounce size package
as a sampling device intended to motivate consumers to try our products.
o Package Labeling
- In the fourth quarter of fiscal 2002, we updated the Northland label
in an effort to make it more appealing and to enhance our product's visual
presence on the shelf. The new design is intended to better communicate
four points: the Northland brand name, the 100% juice content of our
Northland products, the 27% cranberry juice of our Northland products, and
the absence of added sugars. On the back panel, we continue to inform
consumers that research has shown that regular consumption of products
containing 27% cranberry juice helps to maintain a healthy urinary tract.
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Sales
Industry-wide dollar sales of supermarket shelf-stable cranberry beverages
were flat during fiscal 2002 versus fiscal 2001. However, total category dollar
sales-grocery still exceeded $810 million for the 52 weeks ending September 8,
2002. The supermarket shelf-stable cranberry beverage category is composed of
cranberry drinks and 100% juice cranberry blends. According to industry data,
sales of 100% juice cranberry blends accounted for over 20% of the cranberry
category for the 52 weeks ending September 8, 2002, although segment sales were
down 12% for that same period.
Our sales of branded products in fiscal 2002 accounted for approximately
58.3% of net revenues, compared to approximately 68.0% in fiscal 2001 and 47.6%
in fiscal 2000. We expect to realize increased sales of our branded juice
products in fiscal 2003 by:
o working to regain sales distribution of our Northland and Seneca
brand products in retail grocery channels and expand alternative
distribution channels such as convenience stores, super-centers, mass
merchandisers and drug stores;
o continuing to review and revise our trade promotion plans and
control trade promotion spending; and
o on a periodic basis, offering discounts on our products and other
trade incentives to retailers and wholesalers to temporarily reduce the
price of our products to consumers and to obtain store display features and
retail advertisements. We believe these efforts will help increase our
product visibility while providing savings to our consumers. We anticipate
that we will continue these trade promotion activities in fiscal 2003. In
fiscal 2002, we substantially modified our trade promotional strategies
with the expectation of maximizing value received for our trade
expenditures.
We expect that Crossmark, Inc. will continue to act as our broker for the
Northland and Seneca brands throughout the United States in most channels of
distribution during fiscal 2003. Crossmark employs over 10,000 people on a
nationwide basis. We believe that its access to state of the art management
systems will allow for greater focus on and implementation of our promotional
programs than we have been able to achieve to date. In addition, as a result of
our agreement with Crossmark, Crossmark will continue to focus on the Northland
and Seneca brands in the areas of field sales and sales information within each
individual market region.
Our branded juice sales efforts in fiscal 2002 were coordinated by our Vice
President-Sales. In fiscal 2002, we added additional field managers to our sales
force as well as additional personnel to monitor retail objectives. These
additions to our branded juice sales team were made to supplement our current
staff and help us to focus our sales efforts in conjunction with Crossmark. In
addition to their experience with our branded products to date, our sales staff
personnel have prior sales experience working for companies such as ConAgra,
Inc., H.J. Heinz Company, Campbell's Soup Company, Sara Lee, SmithKline Beecham
and Ralston Purina. Between our personnel and those within Crossmark, the
organization has current or past experience with nearly every major branded
grocery manufacturer in the country.
Competition
The shelf-stable cranberry juice and drinks market is dominated by Ocean
Spray. Based on industry data, nationwide retail supermarket bottled
shelf-stable cranberry beverage sales were approximately $810 million for the
52-weeks ending September 8, 2002, showing no growth versus the previous year.
The shelf-stable cranberry beverage market is significantly larger if you
include all sales channels as opposed to just supermarkets.
Ocean Spray dominates most of the markets in which we compete. Ocean Spray
is an agricultural marketing cooperative comprised of over 700 member-growers
located in the United States, Canada and elsewhere, accounting for over 70% of
all cranberries grown in North America. After consulting with outside legal
counsel, we believe Ocean Spray does not qualify for certain protections under
federal antitrust law and have commenced a lawsuit in the United States District
Court for the District of Columbia seeking injunctive relief and damages based
on, among other things, what we believe to be its unlawful monopolization of the
cranberry products industry.
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Northland 100% juice cranberry blends compete with:
o Ocean Spray's branded cranberry juice products;
o branded cranberry juice products of regional producers; and
o private label cranberry juice products.
Our Northland branded juice products are 100% juice cranberry blends which
contain 27% cranberry juice in every flavor. Our competitors' products typically
consist of less than 100% juice, and in several instances, contain significantly
less than 27% cranberry juice content. For example, many of Ocean Spray's
cranberry juice blends contain from 6% to 21% juice with the remainder being
water and sweeteners such as high fructose corn syrup. Like Ocean Spray, other
competitors' juices often use sugar or corn syrup additives as sweeteners. We
believe that we should have an advantage over our competitors due to the
perceived health and other benefits of our 100% juice products. We also believe
that we should have an advantage because we are currently the only major
manufacturer of 100% juice blends with an entire product line that contains 27%
cranberry juice, a formulation that studies suggest is beneficial to human
health. The success of our branded juice products will continue to depend on the
opportunities we have to convince consumers to think highly of their quality and
taste compared to that of our competitors' products.
Northland 100% juice cranberry blends are premium-priced products because
of their quality. Our products compete mainly with other premium-priced branded
cranberry beverages, but also with private label products, which are usually
lower-priced.
We also compete in the markets for frozen juice concentrate and
shelf-stable canned fruit juices and drinks with our Seneca, Treesweet, and
Awake branded products. Our principal competitors in the frozen juice
concentrate market include several established brand names such as Welch's, Tree
Top, Minute Maid and Tropicana. Our principal competitors in the market for
shelf-stable canned fruit juices and drinks include Welch's, Mott's, Tree Top,
Minute Maid and many regional brands. Many of these competitors have greater
brand name recognition and greater marketing and distribution resources than we
do. We cannot be certain that we will be successful in competing against these
competitors. Ocean Spray does not compete in the frozen juice concentrate
market.
Industrial/Ingredients/International
Products
Our Industrial/Ingredients/International group manages both sales and
procurement of the following products:
o cranberry juice concentrate;
o frozen whole and sliced cranberries;
o retail and commercial fresh fruit;
o not-from-concentrate and single-strength cranberry juice;
o single-strength and concentrated cranberry purees;
o sweetened-dried cranber ries, with and without chocolate coating;
o custom blended cranberry and non-cranberry concentrate blends;
and
o brokered commercial products sold through strategic partnerships.
In addition, the Industrial/Ingredients/International group also manages:
o international sales of our retail brands;
o processing of a variety of fruits into specified concentrates and
blends; and
o procurement of non-cranberry juice concentrates and flavors.
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Sales
During fiscal 2002, cranberry concentrate continued to be our principal
industrial/ingredients product in terms of sales dollars, accounting for
approximately 21.7% of our net revenues compared to approximately 11.4% in
fiscal 2001 and 3.3% in fiscal 2000. We realized significant sales growth over
fiscal 2001 across the broad range of our industrial/ingredient cranberry-based
product lines, primarily due to two price increases of cranberry concentrate
during the season and steadily rising demand for our premium-sorted frozen whole
and sliced cranberries. Our industrial/ingredient sales efforts in fiscal 2002
were coordinated by our Vice President-Industrial/Ingredient/International group
and conducted primarily through our internal industrial/ingredient sales force
as well as a limited network of independent brokers.
Competition
Ocean Spray dominates the production and sale of cranberry concentrate and
other cranberry ingredients in the United States and, through its control over
the cranberry supply, we believe is able to effectively dictate market pricing
and output for these products. We compete with Ocean Spray and regional
suppliers for the sale of cranberry concentrate, non-cranberry concentrate
blends, not-from-concentrate and single-strength cranberry juice, fresh
cranberries and frozen whole and sliced cranberries to commercial and ingredient
customers including, but not limited to, juice processors, bakeries,
re-packagers, wholesale distributors and produce retailers and wholesalers. We
believe our position as a vertically integrated grower, handler and processor of
cranberries improves our ability to offer a long-term reliable supply of high
quality cranberry products uniquely suited to the needs of our industrial,
ingredient and fresh fruit trading partners.
International
International demand for cranberry products increased in fiscal 2002
compared to fiscal 2001, and we believe this trend will continue, in part, due
to public awareness of research studies suggesting that the regular consumption
of cranberry products may provide health benefits, including maintenance of a
healthy urinary tract. With our company-owned processing facility strategically
situated in Wisconsin and co-packers located on both coasts, we believe we have
both qualitative and competitive advantages in providing cranberry products to
commercial customers throughout the world. Our sales of cranberry concentrate,
customized non-cranberry blends and retail brands to international customers
during fiscal 2002 were approximately $2.5 million, compared to approximately
$1.6 million in fiscal 2001 and $2.7 million in fiscal 2000.
Manufacturing
Receiving and Processing
An important part of our business strategy is our ability to process our
grown and purchased cranberries. We currently own and operate a processing
facility located in the heart of the Wisconsin cranberry growing area in
Wisconsin Rapids. We recently sold our processing facility in Oregon and we now
utilize a contract processor to press and concentrate the cranberries from our
growers on the west coast. We utilize our manufacturing facilities in the
various stages of processing cranberries. For example:
o Raw cranberries are brought to our receiving stations, or a contract
facility. We own a 172,000 square foot receiving station and fresh fruit
packaging facility in Wisconsin Rapids, Wisconsin. This receiving station,
along with contract receiving facilities in Wisconsin and Oregon, cleans
and sort raw cranberries.
o After sorting, the cranberries we sell as fresh fruit during the
fall are stored in temperature-controlled facilities until they are
packaged and distributed for sale. Cranberries we use to make our juice and
other cranberry products are cleaned, sorted and stored in freezer
facilities around the country, including the owned 62,400 square foot
freezer facility in Wisconsin Rapids or at independent freezer facilities,
until they are sent to our processing plant or contract processor.
o Frozen raw cranberries are pressed and concentrated at our
processing plant in Wisconsin Rapids, Wisconsin, or at a contract
processor. The resulting concentrated cranberry juice is stored frozen and
then shipped either to bulk ingredient customers or to one of our owned or
contracted bottling facilities.
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Packaging and Bottling
In an effort to reduce costs and consolidate manufacturing, we closed
and/or sold certain facilities and revised our manufacturing strategy in fiscal
2002. We now own one facility located in Jackson, Wisconsin and contract package
at facilities in North Carolina and California, having closed our Dundee, New
York facility in July 2002. The owned facility along with our network of
contract packaging plants are strategically located to service customers
throughout the country. We intend to evaluate the use of additional contract
packaging in an effort to improve customer service and cost.
The Jackson, Wisconsin plant is a bottling and packaging facility totaling
136,000 square feet, including 55,000 square feet of production area, 70,000
square feet of dry warehouse and 5,000 square feet of cooler and bulk tank
storage area. This plant is capable of producing all sizes of PET bottles and
two sizes of tin cans (5.5 ounce and 46 ounce).
In addition to our Jackson, Wisconsin facility, we utilize three third
party contract-packaging providers to service the southeastern and western
markets - one in Fullerton, California that produces PET bottled products; one
in Ventura, California that produces frozen concentrated juice products; and one
in Mountain Home, North Carolina (which we formerly owned and sold in fiscal
2001), which produces shelf-stable and frozen products primarily for
distribution in the southeastern market. All facilities are strategically
located in high volume markets to minimize freight costs and maximize service
levels.
In addition to utilizing third party contract-packaging providers in the
packaging and bottling of our products, we also perform contract packaging
services for third parties at our owned facility to improve facility utilization
and reduce production costs. These contract-packaging arrangements have been an
integral part of production at our owned facilities. We believe we are an
attractive contract packager for third party beverage manufacturers because we
have developed a production and quality control program in conjunction with our
own branded products, adaptable to the demands of other national brands.
Additionally, we have the ability to adapt to new products and production
schemes in a short span of time, making our facility an attractive alternative
for the introduction of new products and processes. Contract packaging services
accounted for approximately 10.1% of net revenues in fiscal 2002, compared to
approximately 11.6% in fiscal 2001 and 24.9% in fiscal 2000.
Distribution
Our primary distribution strategy for fiscal 2002 was to maximize
distribution from our owned and contracted production locations and to minimize
distribution centers that are not associated with a production facility. During
fiscal 2002, the distribution centers we utilized were reduced from seven to six
in an effort to improve overall production costs and reduce finished goods
inventory. Of the six remaining distribution centers, all but two are either on
the site of or are directly associated with a production facility.
We have an internal transportation department that contracts with
independent carriers to distribute our products to grocery customers and
customers in other channels. We believe that the strategic locations of our
owned production facilities and the contract packaging plants, along with our
distribution strategy and our in-house transportation department, contributes to
lower costs overall while continuing to provide timely response to customer
demands.
Agricultural Operations
We own or operate 21 cranberry marshes and approximately 2,009 planted
acres in Wisconsin as of November 26, 2002. During fiscal 2002, we sold our
Hanson, Massachusetts marsh for approximately $4,000,000 and terminated our
lease on the Nantucket, Massachusetts marshes. The terms of the Hanson sale
enabled us to harvest approximately 100 acres for the 2002 harvest. With
completion of the 2002 harvest, we have concluded agricultural operations in
Massachusetts.
In the fall of 2001 (i.e., fiscal 2002), we harvested approximately 381,000
barrels from 1,912 acres. The 2001 growing season was impacted by the
implementation of a federal marketing order, which restricted the aggregate
volume of cranberries that growers in the United States could harvest. This
limit was approximately 65% percent of a given grower's historic average.
-10-
We also contract with other cranberry growers in Wisconsin and Oregon to
purchase their crop. In fiscal 2002, we bought approximately 192,000 barrels of
cranberries from other growers. As of November 26, 2002, we maintained
multi-year crop purchase contracts with 44 independent cranberry growers to
purchase all of the cranberries harvested from an aggregate of up to 1,743
contracted acres, subject to federal marketing order limitations. These
contracts generally last for seven years, starting with the 1999 calendar year
crop, and pay the growers at a market rate, as defined, for all raw cranberries
delivered (plus $3 per barrel in certain circumstances) and certain incentives
for premium cranberries. The ability to harvest our own fruit, combined with the
contracted acreage, provides us with geographical diversity in our crop and
spreads our agricultural risk.
During 2002, we entered into agreements to amend our contracts with most of
our growers. The amendments revised our payment schedule and allow us to better
manage our cash flow. We have also obtained waivers from most of our growers
relating to our deferral of payments required under our contract for the 2000
calendar year crop. All of the growers under contract have delivered their 2002
crop.
For the 2002 growing season, no federal marketing order restricting the
volume of cranberry harvests was in effect. Our fall 2002 harvest (i.e., fiscal
2003) has been completed on our owned and leased marshes. Production from 2,049
harvested acres totaled approximately 307,000 barrels of cranberries. During the
fall 2002 harvest, we also purchased approximately 270,000 barrels of
cranberries from contract growers.
The quality and quantity of cranberries produced in any given year is
dependent upon certain factors over which we have little or no control. For
example, extremes in temperature, rainfall levels, storms and hail, or crop
infestations can all adversely impact the quality and/or quantity of the harvest
in any crop year. In addition, Ocean Spray exercises control over cranberry
production and hence, we believe, levels of output in the industry. While we
make efforts to reduce the potential adverse effects these factors may have on
our internal crop, our cranberry production remains subject to these
agricultural and industry factors.
We also purchase insurance coverage for most of our marshes, which is
subsidized by the federal government. These policies help insure against bad
weather and other contingencies which may affect our crop. They generally insure
us for at least 50% of the average crop yield over the past 10 years on each
marsh.
Regulation
Cranberry Products Regulation
The production, packaging, labeling, marketing and distribution of our
fresh cranberries and cranberry juice products are subject to the rules and
regulations of various federal, state and local food and health agencies,
including the United States Food and Drug Administration, the United States
Department of Agriculture, the Federal Trade Commission and the Environmental
Protection Agency. We believe we have complied, and will be able to comply, in
all material respects with such rules, regulations and laws.
The Cranberry Marketing Committee ("CMC") of the United States Department
of Agriculture has the authority to recommend that the Secretary of the USDA
impose harvest restrictions on cranberry growers if the CMC believes there will
be an oversupply of cranberries for the coming crop year. During fiscal 2002,
the Secretary of the USDA did not invoke volume regulations. During fiscal 2001
and 2000, the Secretary of the USDA, at the request and based on the
recommendation of the CMC, invoked volume regulations to restrict the
industry-wide harvest of cranberries for the harvests occurring in the fall of
2000 and the fall of 2001. In 2000, the volume of cranberries that growers in
the United States could harvest was limited to approximately 85% of a grower's
given historical production. In 2001, the limit was lowered to 65% of historical
production.
Environmental and Other Governmental Regulation
It can be difficult under federal laws for cranberry growers and other
developers to obtain permits to create new cranberry marshes in wetlands in the
United States. To do so, such growers must generally observe a "no net loss" of
wetlands policy. That is, they must show that the proposed development activity
will not result in a loss of wetland acreage, or they must restore the
functional value of acreage they propose to disturb. Given this strict
requirement, as well as water quality legislation in Wisconsin and
Massachusetts, we believe it is currently unlikely that we, or other cranberry
growers or developers in the
-11-
United States, will be able to secure permits for cranberry marsh development or
expansion in wetland acreage. However, we and other growers or developers may
renovate existing wetland acreage from time to time and replant older cranberry
vine varieties with higher-yielding vine varieties. Also, certain developers
have created upland cranberry marshes, which are marshes that are not on wetland
acreage.
Pursuant to permits previously received, in the past several years certain
growers have planted, cultivated, and developed new cranberry-producing acreage
in several states and abroad, particularly in Canada. Many of these previously
planted acres have recently become productive or should become productive in the
near future.
We are currently taking steps to clean up certain contamination caused by
underground storage tanks at one of our marshes in Wisconsin and our former
marsh in Hanson, Massachusetts. Contamination from underground storage tanks
also exists at our Bridgeton, New Jersey, facility, at which we ceased
operations in fiscal 2001 and which is held for sale. We are currently working
with the former owner of the facility, who is contractually obligated to
indemnify us, to clean up the site. All of the sites have been reported to the
appropriate state regulatory agencies. In addition, all clean-up activities are
subject to state supervision. Based on information available as of August 31,
2002, we believe most of the costs of such activities will be covered by state
reimbursement funds or claims against the prior owners of the properties. With
respect to the Hanson property, $160,000 in proceeds from the sale of the
property has been placed in escrow to cover the expected cost of cleanup. Based
on information available as of August 31, 2002, we believe the escrow amount
will be sufficient to fund the cleanup. We do not expect to incur material
liabilities as a result of these remedial activities. We intend to continue our
efforts during fiscal 2003 to sell our Bridgeton, New Jersey property.
We do not expect environmental or other governmental legislation or
regulation to have a material effect on our capital expenditures, results of
operations or competitive position, other than as we have described above.
Seasonality
Before fiscal 1997, our business was very seasonal because we sold most of
our crop to cranberry processors. Now that we have evolved from a cranberry
grower to a consumer products company, the seasonality of our business has been
reduced because we offer our products for sale throughout the entire year. We do
expect, however, that our results of operations will continue to fluctuate from
quarter to quarter depending mainly upon the level of media advertising and
other promotional expenditures in any given quarter, the level of distribution
we can achieve, as well as seasonal sales of fresh fruit.
Materials and Supplies
We buy bottles, caps, flavorings, juice concentrates and packaging from
independent third parties. We get most of the materials and supplies necessary
for growing and cultivating cranberries, including water and sand, from our own
marshes. We purchase and expect to continue to purchase most of our fertilizer
and pesticides from our subsidiary, Wildhawk, Inc. We purchase the rest of the
raw materials and supplies, including the materials used to package our fresh
fruit, from various sources.
If necessary, we believe we would be able to find other sources for these
raw materials and supplies without a material delay or adverse effect on our
business.
-12-
Trademarks and Formulae
We own the Northland, TreeSweet, and Awake trademarks, which are registered
in the United States Patent and Trademark Office. We have also entered into a
99-year license agreement with Seneca which allows us to market and sell Seneca
brand juice and concentrate. The Northland and Seneca trademarks are important
in the sale of our branded cranberry juice and other fruit juice and fruit
products.
We use proprietary flavor formulations to make our cranberry blends. We
protect the confidentiality of these formulations by requiring co-packers to
enter into confidentiality agreements with us.
Employees
As of August 31, 2002, we had 299 full-time employees, as compared to 403
as of August 31, 2001. As of November 26, 2002, we had approximately 247
full-time employees. In addition to our full-time employees, we hired:
o approximately 15 seasonal workers during the 2002 crop
cultivation season;
o approximately 230 seasonal workers to harvest our crop in 2002;
and
o approximately 215 seasonal employees to operate the cranberry
processing facility in Wisconsin Rapids during 2002.
As a result of our continuing efforts to reduce costs, either through
attrition or permanent layoffs, our workforce was reduced by approximately 104
employees in fiscal 2002. We reduced our workforce by 16 employees when we
closed and sold our Cornelius, Oregon facility, 44 employees during the fourth
quarter of fiscal 2002 when we closed our Dundee, New York, plant and the
remaining 44 employees throughout fiscal 2002 as we adjusted our administrative
personnel to reflect the current sales and production levels. We also laid off
43 employees at our Jackson facility during the first quarter of 2003 after
Nestle USA, one of our principal co-pack customers, entered into a "strategic
operations alliance" with Ocean Spray and moved most of its production to Ocean
Spray's bottling facilities.
Our collective bargaining agreements with unions representing the former
Minot employees in New Jersey have been terminated as a result of the closing of
our Bridgeton, New Jersey plant. In December 1998, we entered into a collective
bargaining agreement with a union representing employees in Jackson, Wisconsin.
That agreement covers approximately 39 employees and was recently extended
through January 1, 2005. We believe our current relationships with our
employees, both union and non-union, are good.
Item 2. Properties
In Wisconsin Rapids, Wisconsin we own an office building on Industrial
Street near our processing plant and an office building on West Grand Avenue. In
an effort to consolidate our offices and improve efficiency, we sold our former
corporate headquarters in Wisconsin Rapids during fiscal 2002.
We own a 172,000 square foot receiving station, fresh fruit packaging and
concentrate facility located on 40 acres in Wisconsin Rapids. This facility
includes 62,400 square feet of freezer space, 45,000 square feet of cooler
space, 8,500 square feet of dry warehouse and 55,100 square feet devoted to
cranberry receiving and cleaning, fresh fruit packaging and concentrate
production.
We own a production and warehouse facility in Bridgeton, New Jersey. We
have leased approximately 90,000 first floor square footage of the warehouse
building to a warehouseman and distributor whose main offices are located in
Bayonne, New Jersey. The lease has an original term of one year, which renews
each year unless either party gives notice of its intent not to renew in
accordance with the provisions of the lease. Total available square footage of
this facility is estimated at roughly 290,000. We are currently attempting to
lease an additional 45,000 square feet under a comparable arrangement. We will
continue our efforts to sell the facility and/or lease the remaining space.
-13-
We closed our Dundee, New York, bottling and packaging plant in fiscal
2002. The facility totals 139,000 square feet, including 40,000 square feet of
production area, 53,000 square feet of dry warehouse, 17,200 square feet of
freezer space and 21,000 square feet of cooler and bulk tank storage area. This
facility is currently being held for sale.
In Jackson, Wisconsin, we own a bottling facility totaling 136,000 square
feet including 55,000 square feet of production area, 70,000 square feet of dry
warehouse and 5,000 square feet of cooler and bulk storage area.
In 2002, we sold a 46,000 square foot pressing and juice concentrating
facility and dry warehouse in Cornelius, Oregon for approximately $1,300,000.
In Eau Claire, Michigan, we own a 79,000 square foot storage facility and
distribution center. This facility is currently being held for sale.
We sold our Hanson, Massachusetts marsh for approximately $4,000,000 during
fiscal 2002, which included a 49,000 square foot receiving station located on a
seven-acre parcel of the property.
In addition to our facilities, we own 20 cranberry marshes and manage
another one. We have set forth in the following table information about each of
our 21 cranberry marshes as of November 26, 2002. We own all of these marshes in
fee simple (or we manage or operate them, as indicated below), subject to
mortgages. All of our marshes have storage buildings and repair shops for
machinery, trucks and harvest and irrigation equipment. Each also has a house on
site or close to the site which serves as the marsh manager's residence. Many of
our marshes also have residences for assistant marsh managers. We believe that
all of our facilities are suitable and adequate for our existing needs. We
terminated the lease with the Nantucket Conservation Foundation, Inc., from whom
we leased a marsh in Nantucket, Massachusetts, on December 31, 2001 and ceased
operations.
November 26, 2002
------------------------- Calendar Year
Approximate Approximate Acquired
Marsh Division Name and Location Marsh Acres Planted Acres or Leased
- -------------------------------- ----------- ------------- ---------
Associates Division (two marshes), Jackson County, Wisconsin..... 4,198 159 1983/1996
Meadow Valley Division, Jackson County, Wisconsin................ 2,150 77 1984
Fifield Division, Price County, Wisconsin........................ 2,460 196 1985
Three Lakes Division, Oneida County, Wisconsin................... 1,542 80 1985
Chittamo Division, Douglas and Washburn Counties, Wisconsin...... 620 55 1985
Biron Division, Wood County, Wisconsin........................... 473 209 1987
Warrens Division, Monroe County, Wisconsin....................... 160 62 1987
Trego Division, Washburn County, Wisconsin....................... 1,715 96 1988
Gordon Division, Douglas County, Wisconsin....................... 880 149 1988
Mather Division, Juneau County, Wisconsin........................ 2,500 148 1989
Nekoosa Division (two marshes), Wood County, Wisconsin........... 569 85 1989
Crawford Creek Division (two marshes), Jackson County,
Wisconsin...................................................... 304 134 1991
Hills Division, Jackson County, Wisconsin (1).................... 465 70 1991
Yellow River (two marshes), Juneau County, Wisconsin............. 1,714 252 1994
Dandy Creek, Monroe County, Wisconsin............................ 350 55 1996
Manitowish Waters (two marshes), Vilas County, Wisconsin......... 345 182 1996
------ ------
Total......................................................... 20,445 2,009
====== ======
-14-
(1) We operate this marsh under a management agreement with the owner. The agreement,
which expires on December 31, 2002, requires us to manage, operate and harvest the marsh.
The agreement also requires us to purchase the harvest from the owner at a price
equivalent to what we will pay our independent growers, with revenues and expenses to be
shared as defined in the agreement.
ITEM 3. Legal Proceedings
On March 8, 2000, we sold the net assets of our private label juice
business to Cliffstar Corporation. The private label juice business assets sold
consisted primarily of finished goods and work-in-process inventories, raw
materials inventories consisting of labels and ingredients that relate to
customers of the private label juice business (other than cranberry juice and
cranberry juice concentrates), certain trademarks and goodwill, contracts
relating to the purchase of raw materials inventory and the sale of products,
and 135,000 gallons of cranberry juice concentrate. No plants or equipment were
included in the sale. Cliffstar also assumed certain obligations under purchased
contracts. In connection with the sale, we received from Cliffstar an unsecured,
subordinated promissory note for $28,000,000 (non-cash investing activity) which
is to be collected over six years and which bears interest at a rate of 10% per
annum, as well as approximately $6,800,000 in cash (subject to potential
post-closing adjustments) related to inventory transferred to Cliffstar on the
closing date. We recognized a pre-tax gain of approximately $2,100,000 in
connection with the sale of the net assets.
Additionally, Cliffstar is contractually obligated to make certain annual
earn-out payments to us for a period of six years from the closing date based
generally on operating profit from Cliffstar's sale of cranberry juice products.
We also entered into certain related agreements with Cliffstar, including among
them, a co-packing agreement pursuant to which Cliffstar contracted for
specified quantities of Cliffstar juice products to be packed by us.
On July 7, 2000, Cliffstar filed suit against us in the United States
District Court, Western District of New York, alleging, among other things, that
we breached certain representations and warranties in the Asset Purchase
Agreement. That lawsuit was subsequently dismissed, and on July 31, 2000, we
filed a lawsuit against Cliffstar in the Northern District of Illinois. We claim
that (1) Cliffstar breached the Asset Purchase Agreement by failing to make
required payments under the Asset Purchase Agreement and by failing to negotiate
in good faith concerning a cranberry sauce purchase agreement between the
parties; (2) Cliffstar breached an interim cranberry sauce purchase agreement
between the two companies by failing to adequately perform and to pay us the
required amounts due under it; (3) Cliffstar breached its fiduciary duty to us
based on the same (or similar) conduct; (4) Cliffstar breached the promissory
note issued by it in the transaction by failing to make its payments in a timely
manner and failing to pay all of the interest due; (5) Cliffstar breached a
co-packing agreement entered into in connection with the sale by failing to make
required payments thereunder and other misconduct; and (6) Cliffstar breached
the Asset Purchase Agreement's arbitration provision, which provides that any
disagreements over the valuation of finished goods, work-in-process and raw
material inventory purchased by Cliffstar shall be submitted to arbitration for
resolution. On April 10, 2001, the Court granted our Petition to Compel
Arbitration. Accordingly, the price dispute over finished goods, work-in-process
and raw material inventory is currently in arbitration.
Cliffstar asserted counterclaims against us, alleging that (1) we
fraudulently induced Cliffstar to enter into the Asset Purchase Agreement; (2)
we 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 our carrying value, by failing to notify Cliffstar that we
intended to write-down our cranberry inventory, by not providing Cliffstar our
selling prices, by decreasing our level of service to customers after we signed
the Asset Purchase Agreement, and by refusing to turn over certain labels, films
and plates relating to the private label juice business to Cliffstar; (3) we
breached the co-packing agreement by prematurely terminating that agreement; (4)
we converted the labels, films and plates relating to the private label juice
business; (5) we intentionally interfered with Cliffstar's contractual
relations, or reasonable expectations of entering into business relations, with
the printers who hold the labels, films and plates; and (6) we breached the
Transition Agreement by failing to remit to Cliffstar the excess of Cliffstar's
interim payment
-15-
for work-in-process and raw material inventory, by withholding a portion of the
work-in-process and raw material inventory from Cliffstar, and by artificially
building up our work-in-process and raw material inventory before and after the
sale of the private label juice business to Cliffstar. We denied the allegations
of Cliffstar's counterclaims in all material respects.
On June 7, 2002, the court granted our motion for summary judgment and
dismissed Cliffstar's fraud claim. On October 23, 2002, after a trial to a jury
on the remaining claims, the District Court entered final judgment in our favor
and against Cliffstar in the amount of $6,674,450. The judgment is subject to
rulings on post-verdict motions and appeal. It is our opinion, after consulting
with outside legal counsel, that the judgment will withstand post-verdict
motions and be affirmed if appealed. However, the resolution of the legal
proceedings cannot be predicted with certainty at this time.
On May 13, 2002, we received Cliffstar's earn-out calculation for the year
2000. We believe that Cliffstar's earn-out calculation was not prepared in
accordance with the Asset Purchase Agreement. To date, Cliffstar has not
provided us with the earn-out calculation for the year 2001. Accordingly, on
June 7, 2002, we 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. We are seeking
compensatory damages in an amount in excess of $1,000,000, plus attorneys' fees.
The outcome of this suit cannot be predicted with certainty at this time.
On April 5, 2002, we also received correspondence from counsel for
Cliffstar demanding that we pursue claims against certain of our current and
former directors and officers for alleged breach of fiduciary duties,
entrenchment, mismanagement and waste of corporate assets. On April 22, 2002, an
independent Special Committee of our Board of Directors was appointed to
investigate the claims alleged by Cliffstar. On November 5, 2002, the Special
Committee completed its investigation and concluded in the exercise of its
business judgment that pursuing the claims demanded by Cliffstar would not be in
the best interests of Northland and its shareholders.
On November 11, 2002, together with Clermont, Inc., we filed an antitrust
lawsuit against Ocean Spray Cranberries, Inc. The lawsuit, which was filed in
the United States District Court for the District of Columbia, alleges that
Ocean Spray has engaged in anticompetitive tactics and unlawfully monopolized
the cranberry products industry to the detriment of its competitors and
consumers. As the proceeding is in the preliminary stages, we cannot predict the
outcome with certainty at this time.
Item 4. Submission of Matters to a Vote of Shareholders.
We did not submit any matters to a vote of our shareholders during the
fourth quarter of fiscal 2002.
Executive Officers
As of November 26, 2002, each of our executive officers is identified below
together with information about each officer's age, current position with us and
employment history for at least the past five years:
Name Age Current Position
- ---- --- ----------------
John Swendrowski 54 Chairman of the Board, Chief Executive
Officer and Treasurer
Ricke A. Kress 51 President and Chief Operating Officer
Nigel J. Cooper 45 Vice President - Finance
Kenneth A. Iwinski 40 Vice President - Legal and Secretary
William J. Haddow, Sr. 54 Vice President - Purchasing and Logistics
Steven E. Klus 56 Vice President - Manufacturing
John B. Stauner 41 Vice President - Agricultural Operations
Robert M. Wilson 46 Vice President - Industrial/Ingredients
-16-
Our executive officers are generally elected annually by the Board of
Directors after the annual meeting of shareholders. Each executive officer holds
office until his successor has been duly qualified and elected or until his
earlier death, resignation or removal.
John Swendrowski originally founded Northland in 1987 and has served as our
Chief Executive Officer since that time.
Ricke Kress was appointed President and Chief Operating Officer in July
2001. Previously he served as our Executive Vice President since October 2000;
Non Branded Group President since October 1999; and Non Branded Sales President
since November 1998. Prior to that time, he held several positions with Seneca
Foods Corporation, including serving as its Senior Vice President - Technical
Services since June 1997, President-Juice Division since October 1995 and Senior
Vice President-Operations since June 1994.
Nigel Cooper was appointed Vice President - Finance in May 2002. He joined
us as Corporate Controller in October 2000. Before that he was a financial and
accounting consultant with Resources Connection from 1999. Prior to that he held
controller positions with InterAct Security, Riverplace Inc., Separation
Technology and W. Security Systems, Inc. He spent four years with Price
Waterhouse in the U.K. and is a Chartered Accountant.
Ken Iwinski was appointed Vice President-Legal in January 2001 and
Secretary in October 2001. He joined the Company in November 1998 as Assistant
Corporate Counsel/Assistant Secretary. Prior to joining the Company, he
practiced law with the business law firm of Meissner Tierney Fisher & Nichols,
S.C., in Milwaukee, Wisconsin since May 1992.
Bill Haddow was named Vice President - Purchasing and Logistics in
September 1998. Before that, he served as Vice President-Purchasing,
Transportation and Budget since October 1996; Vice President-Purchasing and
Transportation from May 1993; and Assistant Vice President-Purchasing from 1989.
Steve Klus was appointed Vice President-Manufacturing in January 2001 as
the Company underwent an internal organizational restructuring. Previously he
served as our Manufacturing Division President since September 1998. He joined
us in April 1996 as the Director of Strategic Product Planning. He was appointed
Vice President-Manufacturing in October 1996. Before that, he served as
President-Eastern Division of Seneca Foods Corporation in New York from May
1990.
John Stauner was appointed Vice President - Agricultural Operations in
January 2001 as the Company underwent an internal organizational restructuring.
Previously he served as our Agricultural Operations Division President since
September 1998; Vice President-Agricultural Operations since October 1996; Vice
President-Operations from May 1995; and Assistant Vice President of Operations
since we were formed in 1987.
Robert M. Wilson was appointed Vice President-Industrial/Ingredients, which
includes international and fresh fruit sales, in January 2001 as the Company
underwent an internal organizational restructuring. He joined us as our
Industrial-Ingredients Division President in April 1999 when we purchased
Potomac Foods of Virginia, Inc., a broker of fruit juices and other fruit
products. Before that, he was the President and owner of Potomac Foods of
Virginia, Inc., since 1986.
-17-
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder Matters.
Sale Price Range of Class A Common Stock (1)
- --------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- --------------------------------------------------------------------------------
Fiscal Year Ended August 31, 2002
High $ 3.24 $ 1.05 $ 1.08 $ 1.05
Low $ 0.45 $ 0.45 $ 0.50 $ 0.80
Fiscal Year Ended August 31, 2001
High $ 7.00 $ 7.00 $ 5.25 $ 7.41
Low $ 1.75 $ 1.00 $ 1.95 $ 3.00
(1) All information in this table has been restated to give effect to the
one-for-four reverse stock split of our Class A Common Stock effected as of the
close of business on November 5, 2001. The range of sale prices listed for each
quarter includes intra-day trading prices. These quotations represent
inter-dealer prices, without retail mark-up, mark-down, or commissions, and may
not necessarily represent actual transactions.
On November 26, 2002 there were approximately 329 shareholders of record
for the shares of our Class A Common Stock.
During fiscal 2001, shares of our Class A Common Stock traded on The Nasdaq
Stock Market under the symbol "CBRYA." On November 5, 2001 (which was subsequent
to the end of fiscal 2001), in contemplation of completing the Restructuring, we
effected a one-for-four reverse stock split of our outstanding capital stock
(which was previously approved by our shareholders at our 2001 annual meeting of
shareholders). All share information in the table above has been restated to
give effect to the reverse stock split. Additionally, in furtherance of the
Restructuring, we voluntarily delisted our Class A Common Stock from trading on
The Nasdaq Stock Market and obtained quotation of our Class A Common Stock on
the Over-The-Counter Bulletin Board under a new symbol ("NRCNA") effective on
the opening of trading on November 6, 2001. During fiscal 2001, we had two
shareholders of record for the shares of our Class B Common Stock. No public
market existed for the shares of our Class B Common Stock during fiscal 2001. On
November 5, 2001, the record holders of the shares of Class B Common Stock
voluntarily converted their shares, pursuant to the terms of our Articles of
Incorporation, into shares of Class A Common Stock on a one-for-one basis. As a
result, as of November 26, 2001, there are no shares of Class B Common Stock
issued and outstanding.
See Item 6 for information on cash dividends paid on our common stock.
Subsequent to the dividend payment in the third quarter of fiscal 2000, we
indefinitely suspended further dividend payments on our common stock. On
November 26, 2002, the last sale price of shares of our Class A Common Stock was
$1.07 per share.
On November 6, 2001, in connection with the Restructuring, we issued (i)
37,122,695 shares of Class A Common Stock, (ii) 1,668,885 Series A Preferred
shares, and (iii) 100 shares of our Series B Preferred Stock to Sun Northland.
Each share of the Series A Preferred share was automatically converted into 25
shares of Class A Common Stock immediately upon the amendment to the Company's
Articles of Incorporation, which was approved at the 2002 Annual Meeting of
Shareholders and became effective on February 4, 2002. This amendment increased
the number of authorized Class A Common Stock from 60,000,000 shares to
150,000,000 shares. 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 on February
4, 2002. There are currently no shares of Series A Preferred Stock outstanding.
The consideration for the issuance of such shares consisted of $7.0 million cash
and the assignment by Sun Northland to us of Assignment, Assumption and Release
Agreements with members of our then-current bank group that gave us the right to
acquire our then-existing
-18-
indebtedness contained in those agreements in exchange for a total of
approximately $38.4 million in cash and the issuance by us of approximately
$25.7 million in the form of promissory notes and 7,618,987 shares of Class A
Common Stock to certain bank group members who decided to continue as our
lenders after the Restructuring. We issued these shares to Sun Northland in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended. See Notes 2 and 10 of Notes to Consolidated
Financial Statements.
On November 6, 2001, in connection with the Restructuring and as mentioned
above, we issued (i) 7,618,987 shares of Class A Common Stock to certain bank
group members who decided to continue as our lenders after the Restructuring
(including U.S. Bank, National Association, ARK CLO 2000-1 Limited, and St.
Francis Bank, F.S.B.), and (ii) warrants to purchase an aggregate of 5,086,106
shares of Class A Common Stock at an exercise price of $.01 per share, to
Foothill Capital Corporation and Ableco Finance LLC, members of our new secured
lending group. In consideration of the issuance of these shares of Class A
Common Stock, as well as approximately $12.4 million in cash and a promissory
note in the principal amount of approximately $25.7 million, U.S. Bank, National
Association, ARK CLO 2000-1 Limited, and St. Francis Bank, F.S.B. essentially
agreed to forgive approximately $28.2 million (for financial reporting purposes)
of our then-outstanding indebtedness (or approximately $36.3 million of the
aggregate principal and interest due such banks as of the date of the
Restructuring). In consideration of the issuance of the warrants, Foothill
Capital Corporation and Ableco Finance LLC agreed to enter into a revolving
credit facility with us in the principal amount of $30 million and to provide us
an additional $20 million in financing through two separate term notes, each in
the principal amount of $10 million. The warrants are immediately exercisable.
We issued these shares and warrants in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act of 1933, as
amended. See Notes 2 and 10 of Notes to Consolidated Financial Statements.
The 100 shares of our Series B Preferred Stock that we sold to Sun
Northland in the Restructuring were subsequently transferred by Sun Northland
for nominal consideration to a limited liability company whose managing member
is the Company's Chief Executive Officer and whose other members include among
others certain officers of the Company.
Our Amended and Restated Credit Agreement with U.S. Bank National
Association, as Agent, and our Loan and Security Agreement with Foothill Capital
Corporation, as the Arranger and Administrative Agent, prohibit us from making
any distributions on or redemptions of our capital stock, except that under
certain circumstances, we may redeem employee-owned stock upon the employee's
termination or death.
-19-
Item 6. Selected Financial Data.
(In thousands, except per share data)
------------------------------------------------------------------------------
Year Ended August 31
------------------------------------------------------------------------------
Statement of Operations Data: (1) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 101,476 $ 125,826 $ 207,020 $ 201,285 $ 95,109
Cost of sales (2) 69,693 115,496 253,397 152,481 62,475
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) 31,783 10,330 (46,377) 48,804 32,634
Costs and expenses:
Selling, general and administrative expenses (24,829) (25,522) (53,654) (30,974) (21,022)
Writedowns of long-lived assets and assets
held for sale (80,125) (6,000)
Gain (loss) on disposals of businesses and
property and equipment 51 2,118 2,229 (67) (11)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 7,005 (93,199) (103,802) 17,763 11,601
Interest expense (6,561) (18,936) (14,556) (8,565) (6,826)
Interest income 2,526 2,730 1,387
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,970 (109,405) (116,971) 9,198 4,775
Income taxes benefit (expense) 339 34,892 12,000 (3,618) (1,920)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 3,309 (74,513) (104,971) 5,580 2,855
Extraordinary gain on forgiveness of
indebtedness, net of $32,800 in income taxes 50,499
Net income (loss) $ 53,808 $ (74,513) $ (104,971) $ 5,580 $ 2,855
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average shares
outstanding - diluted (3) 83,588 5,085 5,083 5,052 3,817
Per share data:(3)
Income (loss) before
extraordinary gain
- diluted $ 0.04 $ (14.65) $ (20.65) $ 1.10 $ 0.75
Extraordinary gain $ 0.60
Net income (loss) $ 0.64 $ (14.65) $ (20.65) $ 1.10 $ 0.75
Cash dividends:
Class A common $ 0.48 $ 0.64 $ 0.64
Class B common $ 0.436 $ 0.582 $ 0.582
- -------------------------------------------------------------------------------------------------------------------------------
August 31
------------------------------------------------------------------------------
Balance Sheet Data:(1) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Current Assets $ 39,931 $ 84,538 $ 85,457 $ 141,484 $ 71,298
Current Liabilities 33,060 52,893 226,948 30,916 21,811
Total Assets 126,885 180,416 284,235 354,921 250,872
Long-term debt 54,533 64,589 3,927 147,797 64,276
Obligations Subsequently Forgiven or
Exchanged for Common Stock 84,087
Shareholders' equity (deficiency in assets) 39,292 (21,154) 53,359 160,553 153,870
- -------------------------------------------------------------------------------------------------------------------------------
(1) See Notes 3 and 4 to Notes to Consolidated Financial Statements for a discussion of significant dispositions affecting
the comparability of information reflected herein. In addition, on July 1, 1998, we acquired certain net assets of Minot Food
Packers, Inc. for $35.2 million and the issuance of 34,247 Class A shares. On December 30, 1998, we also acquired the eastern
juice division of Seneca Foods Corporation for approximately $28.7 million in cash, and assumed certain liabilities in connection
with the acquisition.
(2) See Note 5 to Notes to Consolidated Financial Statements for a discussion of the $17.6 million and $57.4 million
inventory lower of cost or market adjustments during the years ended August 31, 2001 and 2000, respectively.
(3) All share and per share data have been restated to give effect to our November 5, 2001 one-for-four reverse stock split.
-20-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
General
Early in fiscal 2002, primarily as a result of losses suffered in the
previous two fiscal years, 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. To do otherwise, we believed, we would be 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 the transactions that we refer to as
the Restructuring. Generally speaking, in the Restructuring, Sun Northland
entered into certain Assignment, Assumption and Release Agreements with members
of our then-current bank group which gave Sun Northland, or its assignee, the
right to acquire our indebtedness held by members of our then-current bank group
in exchange for a total of approximately $38.4 million in cash, as well as our
issuance of a promissory note in the principal amount of approximately $25.7
million and 7,618,987 Class A shares to certain bank group members which decided
to continue as our lenders after the Restructuring. Sun Northland did not
provide the foregoing consideration to our former bank group; instead, Sun
Northland entered into the Purchase Agreement with us, pursuant to which Sun
Northland assigned its rights to those Assignment, Assumption and Release
Agreements to us and gave us $7.0 million in cash, in exchange for (i)
37,122,695 Class A shares, (ii) 1,668,885 Series A Preferred shares (each of
which was automatically converted into 25 Class A shares upon adoption of an
amendment to our articles of incorporation on February 4, 2002 increasing our
authorized Class A shares), and (iii) 100 shares of our newly created Series B
Preferred Stock, which were subsequently transferred to a limited liability
company controlled by our Chief Executive Officer. Using funding provided by our
new secured lenders and Sun Northland, we acquired a substantial portion of our
outstanding indebtedness from the members of our then-current bank group (under
the terms of the Assignment, Assumption and Release Agreements that were
assigned to us by Sun Northland) in exchange for the consideration noted above,
which resulted in the forgiveness of approximately $81.2 million (for financial
reporting purposes) of our outstanding indebtedness (or approximately $89.0
million of the aggregate principal and interest due the then-current bank group
as of the date of the Restructuring). We also issued warrants to acquire an
aggregate of 5,086,106 Class A shares to Foothill Capital Corporation and Ableco
Finance LLC which are immediately exercisable and have an exercise price of $.01
per share.
See Notes 2 and 10 of Notes to Condensed Financial Statements for a further
discussion of the Restructuring.
With the equity capital we received in the Restructuring, combined with the
associated debt forgiveness, we were once again able to market our Northland and
Seneca brand products during fiscal 2002 and build on the operational
improvements and cost reduction measures we began in fiscal 2001. Income before
extraordinary item for fiscal 2002 was $3.3 million. Net income was $53.8
million after an extraordinary gain, net of income taxes, of $50.5 million
resulting from forgiveness of debt in the Restructuring.
In fiscal 2003 we intend to continue our focus on improving our cash
position and results of operations through 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
-21-
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.
Fiscal 2002 Compared to Fiscal 2001
Net Revenues. Our total net revenues decreased 19.4% to $101.5 million in
fiscal 2002 from $125.8 million in fiscal 2001. The decrease resulted primarily
from (i) reduced sales of Northland and Seneca branded products due to previous
lost distribution which caused us to change our promotional and pricing
strategies and reduce marketing spending; 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. Trade spending,
slotting and consumer coupons, which are reported as a reduction of net revenue,
were down 26.9% to $12.2 million in fiscal 2002 from $16.6 million in fiscal
2001. The decrease in net revenues in fiscal 2002 from reduced sales of our
branded products was partially offset by an increase in sales of cranberry
concentrate, as we reduced cranberry concentrate inventory during the year. We
anticipate that sales of cranberry concentrate will decrease in fiscal 2003.
Industry data indicated that, for the 12-week period ended September 8,
2002, 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 6.0% market share for the 12-week period ended September 9, 2001.
Market share of our Seneca brand cranberry juice product line for the same
period decreased from approximately 0.4% to approximately 0.1%, resulting in a
total combined market share of supermarket shelf-stable cranberry beverages for
our Northland and Seneca branded product lines of approximately 5.2% for the
12-week period ended September 8, 2002, down from approximately 6.4% for the
12-week period ended September 9, 2001. With the equity capital we received in
the Restructuring and cash from operations, we plan to increase advertising
spending in fiscal 2003, and we anticipate our new spending levels will help to
reverse the declining sales and market share trends for our Northland and Seneca
brands in fiscal 2003.
Cost of Sales. Our cost of sales for fiscal 2002 was $69.7 million compared
to $115.5 million in fiscal 2001, resulting in gross margins of 31.3 % and 8.2%,
respectively. The decrease in cost of sales resulted primarily from reduced
sales of Northland and Seneca branded products and reduced sauce and co-packing
costs. In addition to the reduced costs, the improved margins in fiscal 2002
resulted from the impact of a $17.6 million write down of the carrying value of
our cranberry inventory in the fourth quarter of fiscal 2001 and the effects of
improved manufacturing efficiencies and other cost control measures including a
reduction in personnel costs resulting from our restructuring efforts.
Cranberry concentrate sales increased to approximately 21.7% of net
revenues in fiscal 2002 compared to approximately 11.4% of net revenues in
fiscal 2001. Since sales of cranberry concentrate generally result in lower
margins than sales of our branded products, gross margins in fiscal 2002 were
negatively impacted by higher cranberry concentrate sales. We anticipate that
cranberry concentrate sales will decrease as a percentage of net revenues in
fiscal 2003, primarily due to anticipated increased sales of branded products as
well as decreased concentrate sales.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were $24.8 million, or 24.4% of net revenues, in fiscal
2002, compared to $25.5 million, or 20.3% of net revenues, 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 $24.1 million or 23.7% of net revenues. The increase
as a percentage of net revenues was mainly attributable to an increase in
advertising expense of $6.5 million or 220.4%. Other selling and administrative
expenses decreased by $6.7 million, mainly due to a reduction in legal and
consulting expenses following the Restructuring.
-22-
Gain on Disposal of Property and Equipment. In fiscal 2002, we recognized a
net $0.1 million gain on the sale of various assets. We sold (i) our office
facility in Wisconsin Rapids, Wisconsin; (ii) our processing facility in
Cornelius, Oregon; and (iii) our cranberry marshes in Hanson, Massachusetts. We
also closed our juice packaging facility in Dundee, New York and sold the
related equipment. In fiscal 2001, we recognized a $2.1 million gain associated
with the sale of the net assets of our private label sauce business and
manufacturing facility in Mountain Home, North Carolina, as well as certain
property and equipment.
Interest Expense. Our interest expense was $6.6 million for fiscal 2002,
compared to $18.9 million in fiscal 2001. The decrease in our interest expense
was due to reduced debt levels between periods as a result of the Restructuring
and reduced interest rates. The weighted average interest rate on our borrowings
for fiscal 2002 was approximately 6.5%.
Interest Income. Our interest income was $2.5 million in fiscal 2002
compared to $2.7 million in fiscal 2001. Interest income was recognized
primarily as a result of an unsecured, subordinated promissory note we received
in connection with the sale of our private label juice business in March 2000.
Income Tax Benefit. In fiscal 2002 we recognized income tax benefit of
$339,238. This was a result of certain refunds of Federal Alternative Minimum
Tax (AMT) related to a change in the tax law for AMT carry-backs. In fiscal 2001
we recognized income tax benefits of $34.9 million. Of this amount, $2.1 million
resulted from certain refunds received in 2001 related to farm loss carry-backs.
The balance resulted from the recognition of a tax benefit of $32.8 million for
certain net operating loss carry-forwards which were utilized for financial
reporting purposes during the first quarter of fiscal 2002 related to
forgiveness of certain indebtedness (see Note 12 of Notes to Consolidated
Financial Statements).
Net Income. - Income and per share earnings for fiscal 2002 before
extraordinary gain of $50.5 million were $3.3 million and $0.04 per diluted
share, up from fiscal 2001 net loss and per share earnings of $(74.5) million
and $(14.65) per diluted share. Net income and per share earnings for fiscal
2002 were $53.8 million and $0.64 per diluted share including the $50.5 million
extraordinary gain. Weighted average shares outstanding for fiscal 2002 were
83.6 million compared to 5.1 million for fiscal 2001. Weighted shares increased
in fiscal 2002 because of the issuance of Class A shares and warrants to
purchase Class A shares in the Restructuring.
Fiscal 2001 Compared to Fiscal 2000
Net Revenues. Our total net revenues decreased 39.2% to $125.8 million in
fiscal 2001 from $207.0 million in fiscal 2000. The decrease resulted primarily
from (i) reduced sales of Northland and Seneca branded products, which we
believe resulted from, among other things, a disadvantageous cost structure for
cranberry inputs that, in turn, caused us to change our promotional and pricing
strategies and reduce marketing spending; (ii) reduced co-packing revenue from a
major customer that during the first quarter of fiscal 2001 switched from an
arrangement where we purchased substantially all of the ingredients and sold the
customer finished product to a fee for services performed arrangement; (iii) the
sale of our private label juice business in March 2000; and (iv) the sale of our
cranberry sauce business and a manufacturing facility in June 2001, which
reduced co-packing revenue and revenue from cranberry sauce sales. Trade
spending, slotting and consumer coupons, which is reported as a reduction of net
revenues instead of as a selling, general and administrative expense, was down
72.0% to $16.6 million in fiscal 2001 from $59.2 million in fiscal 2000.
Industry data indicated that, for the 12-week period ended September 9,
2001, our Northland brand 100% juice products achieved a 6.0% market share of
the supermarket shelf-stable cranberry beverage category on a national basis,
down from a 10.9% market share for the 12-week period ended September 10, 2000.
Market share of our Seneca brand cranberry juice product line for the same
period decreased from approximately 2.7% to approximately 0.4%, resulting in a
total combined market share of supermarket shelf-stable cranberry beverages for
our Northland and Seneca branded product lines of approximately 6.4% for the
12-week period ended September 9, 2001, down from approximately 13.6% for the
12-week period ended September 10, 2000.
Cost of Sales. Our cost of sales for fiscal 2001 was $115.5 million
compared to $253.4 million in fiscal 2000, resulting in gross margins of 8.2%
and (22.4)%, respectively. The decrease in cost of sales resulted primarily from
reduced sales of Northland and Seneca branded products, the elimination of costs
associated with production of private label juice products and reduced costs for
reduced sauce and co-packing revenues. Additionally, the decrease resulted from
the change during the first quarter of fiscal 2001 in our arrangement with a
significant co-packing customer from an arrangement where we purchased
substantially all of the ingredients and sold the customer finished product to a
fee for services performed arrangement. The improved margins in fiscal 2001 were
also favorably impacted by improved manufacturing efficiencies and cost
controls.
Because our cost to grow the fall 2001 crop and the cost of on-hand
inventories were in excess of market value, we wrote down the carrying value of
our cranberry inventory by approximately $17.6
-23-
million in the fourth quarter of fiscal 2001, and by approximately $57.4 million
in fiscal 2000. These charges were based on management's best estimates of
future product sale prices and consumer demand patterns. In fiscal 2000, we also
recognized a restructuring charge of $1.9 million related to costs associated
with closing our Bridgeton, New Jersey plant and associated employee termination
related costs. Our gross profit without taking into account the effects of these
items would have been $27.9 million and $12.9 million in fiscal 2001 and fiscal
2000, respectively, which would have resulted in gross margins of 22.2% in
fiscal 2001 and 6.2% in fiscal 2000.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were $25.5 million, or 20.3% of net revenues, in fiscal
2001, compared to $53.7 million, or 25.9% of net revenues, in fiscal 2000. The
$28.2 million reduction in our selling, general and administrative expenses in
fiscal 2001 was primarily due to (i) a general lack of available cash to fund a
meaningful advertising campaign, which resulted in significant reductions in
advertising and other marketing and sales promotion expenses compared to fiscal
2000 (in which we incurred greater marketing and promotional expenses to support
the Seneca brand and the launch of a new Seneca line of cranberry juice
products, as well as undertook an aggressive marketing campaign to support
development and growth of our Northland brand products); (ii) significant
revisions to our trade promotional practices to reflect our new focus away from
growing sales and market share and toward more profitable operations; (iii) a
reduction in personnel costs resulting from our restructuring efforts; and (iv)
a reduction in personnel costs and selling commissions resulting from our
alliance with Crossmark. The decrease in our selling, general and administrative
expenses was partially offset by increases in outside professional fees incurred
in connection with developing a "turnaround" plan for our operations,
negotiating the terms of our credit facilities with our lenders, related
covenant defaults and forbearance agreements, and continuing efforts to seek
additional or alternative debt and equity financing.
Writedown of Long-Lived Assets and Assets Held for Sale. We periodically
evaluate the carrying value of property and equipment and intangible assets in
accordance with SFAS No. 121. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the assets' carrying
values may not be recoverable. In the fourth quarter of fiscal 2001, we
restructured our operations and identified certain long-lived assets to be held
for sale. We also concluded that the estimated future cash flows of our
long-lived assets were below the carrying value of those assets. Accordingly,
during the fourth quarter of fiscal 2001 and in accordance with SFAS No. 121, we
recorded an impairment charge of approximately $80.1 million related to
writedowns to assets held for sale, property and equipment held for use, and
goodwill and other intangible assets. During the year ended August 31, 2000, we
recorded an impairment writedown of $6.0 million related to a closed facility
that is held for sale.
Gain on Disposal of Property and Equipment. In fiscal 2001, we recognized a
$2.1 million gain associated with the sale of the net assets of our private
label sauce business and a manufacturing facility in Mountain Home, North
Carolina, as well as certain property and equipment. In fiscal 2000, we recorded
a $2.2 million gain associated with the sale of the net assets of our private
label juice business and certain property and equipment.
Interest Expense. Our interest expense was $18.9 million for fiscal 2001,
compared to $14.6 million in fiscal 2000. The increase in our interest expense
was due to increased debt levels between periods and higher interest rates
during 2001 due in part to revised terms of our revolving credit facility as a
result of our defaults thereunder. The weighted average interest rate on our
borrowings for fiscal 2001 was approximately 10.6%.
Interest Income. Our interest income was $2.7 million in fiscal 2001 and
$1.4 million in fiscal 2000. Interest income was recognized primarily as a
result of an unsecured, subordinated promissory note we received in connection
with the sale of our private label juice business in March 2000.
Income Tax Benefit. In 2001 we recognized income tax benefits of $34.9
million. Of this amount, $2.1 million resulted from certain refunds received in
2001 related to farm loss carry-backs. The balance resulted from the recognition
of a tax benefit of $32.8 million for certain net operating loss carry-forwards
which were utilized for financial reporting purposes during the first quarter of
fiscal 2002 related to forgiveness of certain indebtedness (see Note 12 of Notes
to Consolidated Financial Statements). In fiscal 2000, we recorded a tax benefit
of $12.0 million.
-24-
Financial Condition
In fiscal 2002, net cash provided by operating activities was $17.4 million
compared to $4.7 million in fiscal 2001. Receivables, prepaid expenses and other
current assets decreased $4.0 million from August 31, 2001 as a result of
declining revenue levels, which provided us additional cash to pay down accounts
payable and accrued liabilities. Inventories decreased $6.1 million, due
primarily to 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 decreased $24.7 million to $6.9 million
at August 31, 2002 from $31.6 million as of August 31, 2001. This was primarily
due to the realization of the $32.8 million current deferred income tax asset
resulting from the forgiveness of indebtedness in connection with the
Restructuring. The decrease was also due in part to a reduction in inventory and
accounts receivable offset by the reduction in the current maturity of long-term
debt as a result of the Restructuring. Our current ratio exclusive of the
current deferred income tax asset increased to 1.2 to 1.0 at August 31, 2002
from 1.0 to 1.0 at August 31, 2001.
Net cash provided by investing activities was $9.2 million in fiscal 2002
compared to $14.8 million in fiscal 2001. Collections on the note receivable
from Cliffstar were $3.0 million in fiscal 2002 versus $1.8 million in fiscal
2001. Property and equipment purchases increased from $0.4 million in fiscal
2001 to $0.8 million in fiscal 2002. Proceeds from disposals of businesses,
property and equipment and assets held for sale was $7.0 million in fiscal 2002
compared to $13.4 million in fiscal 2001, and consisted primarily of the sale of
our Hanson, Massachusetts marsh, the sale of our Cornelius, Oregon concentrate
plant and the sale of an office building in Wisconsin Rapids, Wisconsin.
Our net cash used in financing activities was $27.9 million in fiscal 2002
compared to net cash provided by financing activities of $18.2 million in fiscal
2001. This was in large part due to the Restructuring. Net payments in
settlement of the revolving credit facility amounted to $39.8 million. These
payments were in part financed by proceeds from the issuance of long-term debt
in the amount of $20.0 million, reduced by debt issuance costs of $1.3 million.
There were also proceeds from the issuance of preferred stock and common stock
in the amounts of $2.9 million and $2.6 million respectively. Payments on
long-term debt and other obligations, excluding the Restructuring, amounted to
$13.0 million. Our new revolving credit facility subsequent to the Restructuring
increased by $0.6 million. In fiscal 2000, we paid dividends on our common stock
of $2.4 million; however, we suspended dividend payments on our common stock
indefinitely following the third quarter dividend payment in fiscal 2000.
Long-Term Debt and Other Arrangements. As part of the Restructuring, we
entered into an Amended and Restated Credit Agreement with certain members of
our former bank group which evidences, among other things, our obligation to
repay the revised term loan in the original principal amount of approximately
$25.7 million that we issued to those creditors in the Restructuring.
Additionally, we entered into a Loan and Security Agreement on November 6,
2001 with Foothill Capital Corporation and Abelco Finance LLC. Under this loan
agreement, Foothill and Abelco provided us with two term loans, each in the
principal amount of $10 million, and a new $30 million revolving credit
facility. The term loans and the credit facility mature and/or expire on
November 6, 2006, and interest accrues on the outstanding principal balance
thereunder at the greater of 7.0% or the prime rate, as defined, plus 1%. As of
August 31, 2002, the remaining principal balance on the terms loans was $15.5
million.
In addition to the Restructuring, we also restructured and modified the
terms of approximately $20.7 million in outstanding borrowings under two term
loans with an insurance company, consolidating those two term loans into one new
note with a stated principal amount of approximately $19.1 and a stated interest
rate of 5% for the first two years of the note, increasing by 1% annually
thereafter, with a maximum interest rate of 9% in the sixth and final year. The
note is payable in monthly installments of approximately $186,000 commencing
December 1, 2001, adjusted periodically as the stated interest rate increases,
with a final payment of approximately $11.6 million due November 1, 2007. The
effective interest rate to be recognized for financial reporting purposes will
approximate $4.5%. The note is collateralized by specific assets.
-25-
We also issued fee notes to Foothill and Abelco in the aggregate principal
amount of $5 million, which are payable in full on November 6, 2006. The fee
notes were discounted for financial reporting purposes and will be charged to
operations as additional interest expense over the terms of the related debt.
The following table sets forth our long-term debt and long-term debt and
obligations subsequently forgiven or exchanged for common stock as of August 31,
2002 and 2001:
2002 2001
Term loans payable $ 15,461,497 $ 0
Fee notes payable 3,738,227 0
Restructured bank notes 28,296,727 0
Restructured insurance company note 19,689,258 0
Revolving credit facility with banks 0 139,304,700
Term loans payable to insurance company 0 19,095,673
Other obligations 2,914,736 9,469,673
Accrued interest on restructured obligations 0 14,180,867
------------ ------------
Total 70,100,445 182,050,913
Less obligations subsequently forgiven or
exchanged for common stock 0 84,087,222
------------ ------------
Amounts to be paid 70,100,445 97,963,691
Less current maturities of long-term debt 15,567,889 33,374,495
------------ ------------
Long-term debt $ 54,532,556 $ 64,589,196
============ ============
Aggregate annual principal payments required under terms of the debt
agreements as of August 31, 2002, after giving effect to the Restructuring and
the various obligations that were forgiven, consisted of the following:
Years Ending Principal
August 31, Payments
2003 $ 15,567,889
2004 14,266,989
2005 14,428,601
2006 13,770,756
2007 172,339
Thereafter 11,893,871
-------------
Total $ 70,100,445
=============
In the first quarter of fiscal 2002, we also renegotiated the terms of our
unsecured debt arrangements with certain of our larger unsecured creditors,
resulting in the cancellation of approximately $3.5 million of additional
indebtedness previously owing to those creditors that was recognized as an
extraordinary gain, net of legal fees, other direct costs and income taxes.
As also required by the Purchase Agreement, we entered into a Management
Services Agreement with Sun Capital Partners Management, LLC an affiliate of Sun
Northland, pursuant to which Sun Capital Partners Management, LLC provides
various financial and management consulting services to us in exchange for an
annual fee (which is paid in quarterly installments) equal to the greater of
$400,000 or 6% of our EBITDA (as defined therein), provided that the fee may not
exceed $1 million a year unless approved by a majority of our directors who are
not affiliates of Sun Capital Partners Management, LLC. In fiscal 2002, the
company paid approximately $460,000 to Sun Capital Partners Management, LLC
under the terms of the Management Services Agreement. This agreement terminates
on the earlier of November 6, 2008 or the date on which Sun Northland and its
affiliates no longer own at least 50% of our voting power.
-26-
We recognized a pre-tax extraordinary gain on the forgiveness of
indebtedness of approximately $83.3 million during the first quarter or fiscal
2002, net of the amount of legal fees and other direct costs incurred and the
estimated fair value of the Class A shares issued to the bank in the
Restructuring. For financial reporting purposes, the $83.3 million gain on the
forgiveness of indebtedness was reported net of income taxes, which approximate
$32.8 million, resulting in a net extraordinary gain of $50.5 million.
The extraordinary gain, combined with the additional equity contributed by
Sun Capital, the common stock issued to the participating banks and the warrants
issued to Foothill and Abelco, provided us with approximately $57.4 million of
additional stockholders' equity during the first quarter of fiscal 2002.
As of August 31, 2002, we had outstanding borrowings of $0.6 million under
our $30 million revolving credit facility with Foothill and Abelco. As of August
31, 2002, we had approximately $4.9 million of unused borrowing available under
this facility. We believe that we will be able to fund our ongoing operational
needs for the foreseeable future through (i) cash generated from operations; and
(ii) financing available under our revolving credit facility with Foothill and
Abelco. We do not have any significant capital expenditure commitments and
continue to review our capital requirements in an effort to match expenditures
with revenues.
As of August 31, 2002 we were in compliance with all of our debt
arrangements.
Quarterly Results
Our quarterly results in fiscal 2002 varied significantly from comparative
quarters in the prior fiscal year and from quarter to quarter during fiscal
2002:
o Net revenues vary in each of the quarters. This variation was
directly related to our actions to refocus our trade promotional strategies
to emphasize profitability, as opposed to generating revenue growth.
o Our significant net income in the first quarter of 2002 was a result
of the extraordinary gain from our Restructuring, net of income taxes. The
losses before income taxes in the fourth quarter of fiscal 2001 resulted
from a $17.6 million lower of cost or market inventory adjustment and an
$80.1 million charge for impairment of long-lived assets and assets held
for sale.
Our quarterly results will likely continue to fluctuate in fiscal 2003 and
will likely cause comparisons with prior quarters to be unmeaningful, largely
because (i) while we anticipate significant increases in marketing and trade
promotional spending during future quarterly periods, such spending may vary
based on then current market and competitive conditions and other factors; (ii)
we anticipate revenues to increase as we focus our promotional strategies on
regaining distribution; and (iii) we expect to continue to realize cost savings
from previous internal restructuring efforts.
The following table contains unaudited selected historical quarterly
information, which includes adjustments, consisting only of normal recurring
adjustments (except for (i) during the quarter ended August 31, 2001, we
recorded an inventory lower of cost or market adjustment of $17.6 million to
cost of sales and an $80.1 million charge for impairment of long-lived assets
and assets held for sale; (ii) during the quarter ended August 31, 2001, we
recognized gains on the disposals of certain private label businesses and
related property and equipment of $1.7 million, and (iii) during the quarter
ended August 31, 2001, we recorded an income tax benefit of $32.8 million
related to certain net operating loss carryforwards), that we considered
necessary for a fair presentation:
-27-
Fiscal Quarters Ended
(In thousands, except per share data)
Fiscal 2002 Fiscal 2001
----------- ----------- ------------ ------------ ------------- ------------ ------------ -----------
Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 28, Nov. 30
2002 2002 2002 2001 2001 2001 2001 2000
----------- ----------- ------------ ------------ ------------- ------------ ------------ -----------
Net revenues $22,954 $24,231 $23,975 $30,316 $27,378 $27,333 $29,405 $41,710
Gross profit (loss) 6,764 8,137 7,299 9,583 (13,341) 6,498 7,327 9,846
Writedowns of long-lived
assets and assets held
for sale (80,125)
Loss (income) before taxes
and extraordinary gain (44) 1,605 187 1,222 (103,742) (2,406) (3,445) 188
Extraordinary gain on
forgiveness of
indebtedness, net of
$32,800 in income taxes 50,499
Net (loss) income $(44) $1,944 $187 $51,721 $(70,942) $(2,406) $(1,353) $188
Net income (loss) per
share-diluted: (1)
Weighted average shares
outstanding 101,133 101,133 100,989 30,492 5,085 5,085 5,085 5,085
Income before taxes and
extraordinary gain 0.00 0.02 0.00 0.04 (13.95) (0.47) (0.27) 0.04
Extraordinary gain 0.00 0.00 0.00 1.66 0.00 0.00 0.00 0.00
Net (loss) income per
share $ 0.00 $ 0.02 $ 0.00 $ 1.70 $(13.95) $(0.47) $(0.27) $ 0.04
(1) All share and per share data has been restated to give effect to our November 5, 2001 one-for-four reverse stock split.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We do not enter into any material futures, forwards, swaps, options or
other derivative financial instruments for trading or other purposes. Our
primary exposure to market risk is related to changes in interest rates and the
effects those changes may have on our earnings as a result of our long-term
financing arrangements. We manage our exposure to this market risk by monitoring
interest rates and possible alternative means of financing. Our earnings are
affected by changes in short-term interest rates under our revolving credit
facility and certain term loans, pursuant to which our borrowings bear interest
at a variable rate. Based upon the debt outstanding under our revolving credit
facility and certain term loans as of August 31, 2002, an increase of 1.0% in
market interest rates would have increased interest expense and decreased
earnings before income taxes by approximately $0.2 million. As a result of the
Restructuring, we currently have significantly less debt outstanding than we did
at August 31, 2001, and as a result we would be less impacted by an increase in
market interest rates. This analysis does not take into account any actions we
might take in an effort to mitigate our exposure in the event interest rates
were to change materially. See Note 10 of Notes to Consolidated Financial
Statements.
-28-
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board
of Directors of Northland Cranberries, Inc.:
We have audited the accompanying consolidated balance sheets of Northland
Cranberries, Inc. and subsidiaries (the "Company") as of August 31, 2002 and
2001, and the related consolidated statements of operations, shareholders'
equity (deficiency in assets) and cash flows for each of the three years in the
period ended August 31, 2002. Our audits also included the consolidated
financial statement schedule listed at Item 15(a)(2). These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Northland Cranberries, Inc. and
subsidiaries as of August 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
2002, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
November 12, 2002
-29-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2002 AND 2001
- --------------------------------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 264,406 $ 1,487,002
Accounts receivable - net 7,497,616 10,629,588
Current portion of note receivable and accounts
receivable - other 10,189,594 8,530,238
Inventories 18,273,415 24,381,940
Prepaid expenses and other current assets 605,849 878,983
Deferred income taxes 0 32,800,000
Assets held for sale 3,100,000 5,830,000
------------ ------------
Total current assets 39,930,880 84,537,751
NOTE RECEIVABLE, Less current portion 18,500,000 23,000,000
PROPERTY AND EQUIPMENT - Net 63,836,271 71,907,266
OTHER ASSETS 825,039 970,509
DEBT ISSUANCE COST, NET 3,792,923 0
------------ ------------
TOTAL ASSETS $126,885,113 $180,415,526
============ ============
See notes to consolidated financial statements.
-30-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2002 AND 2001
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY IN ASSETS) 2002 2001
CURRENT LIABILITIES:
Revolving line of credit facility $ 559,765 $ 0
Accounts payable 7,904,914 6,928,762
Accrued liabilities 9,027,853 12,589,434
Current maturities of long-term debt 15,567,889 33,374,495
------------- -------------
Total current liabilities 33,060,421 52,892,691
LONG-TERM DEBT, Less current maturities 54,532,556 64,589,196
OBLIGATIONS SUBSEQUENTLY FORGIVEN OR
EXCHANGED FOR COMMON STOCK 0 84,087,222
------------- -------------
Total liabilities 87,592,977 201,569,109
------------- -------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 15 and 16)
SHAREHOLDERS' EQUITY (DEFICIENCY IN ASSETS):
Common stock - Class A, $.01 par value, 91,548,580
and 4,925,555 shares issued and outstanding, respectively 915,486 49,256
Common stock - Class B, $.01 par value, 0 and 159,051
shares issued and outstanding, respectively 0 1,591
Redeemable preferred stock - Series B, 100 and 0 shares
issued and outstanding, respectively 0 0
Additional paid-in capital 154,901,775 149,129,317
Accumulated deficit (116,525,125) (170,333,747)
------------- -------------
Total shareholders' equity (deficiency in assets) 39,292,136 (21,153,583)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY IN ASSETS) $ 126,885,113 $ 180,415,526
============= =============
-31-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------------------
2002 2001 2000
NET REVENUES $ 101,476,260 $ 125,825,641 $ 207,020,280
COST OF SALES 69,693,141 115,495,961 253,396,905
------------- ------------- -------------
GROSS PROFIT (LOSS) 31,783,119 10,329,680 (46,376,625)
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (24,829,114) (25,522,336) (53,654,139)
WRITEDOWNS OF LONG-LIVED ASSETS AND
ASSETS HELD FOR SALE 0 (80,125,000) (6,000,000)
GAIN ON DISPOSALS OF BUSINESSES
AND PROPERTY AND EQUIPMENT 51,607 2,118,257 2,228,691
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 7,005,612 (93,199,399) (103,802,073)
INTEREST EXPENSE (6,561,205) (18,936,343) (14,556,330)
INTEREST INCOME 2,525,931 2,730,694 1,387,827
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 2,970,338 (109,405,048) (116,970,576)
INCOME TAX BENEFIT 339,238 34,892,000 12,000,000
------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM 3,309,576 (74,513,048) (104,970,576)
EXTRAORDINARY GAIN ON FORGIVENESS OF
INDEBTEDNESS, NET OF $32,800,000 IN
INCOME TAXES 50,499,046 0 0
------------- ------------- -------------
NET INCOME (LOSS) $ 53,808,622 $ (74,513,048) $(104,970,576)
============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income (loss) before extraordinary gain $ 0.05 $ (14.65) $ (20.65)
Extraordinary gain 0.77 0.00 0.00
------------- ------------- -------------
Net income (loss) $ 0.82 $ (14.65) $ (20.65)
Diluted:
Income (loss) before extraordinary gain $ 0.04 $ (14.65) $ (20.65)
Extraordinary gain 0.60 0.00 0.00
------------- ------------- -------------
Net income (loss) $ 0.64 $ (14.65) $ (20.65)
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER SHARE:
Basic 65,389,494 5,084,606 5,082,510
Diluted 83,588,491 5,084,606 5,082,510
See notes to consolidated financial statements.
-32-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------------------
2002 2001 2000
OPERATING ACTIVITIES:
Net income (loss) $ 53,808,622 $ (74,513,048) $(104,970,576)
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment 4,031,240 8,962,236 8,157,849
Amortization of tradenames, trademarks and goodwill 0 774,275 794,916
Amortization of debt issuance costs and debt discount 1,605,190 0 0
Extraordinary gain on forgiveness of indebtedness (50,499,046) 0 0
Provision for deferred income taxes 0 (32,800,000) (11,323,000)
Provision for inventory lower of cost or market adjustments 0 17,603,000 57,400,000
Provision for writedown of assets held for sale 0 14,980,000 6,000,000
Provision for writedown of property and equipment 0 50,484,000 0
Provision for writedown of intangible assets 0 14,661,000 0
Gain on disposals of businesses and property and equipment (51,607) (2,118,257) (2,228,691)
Changes in assets and liabilities (net of effects
of business acquisitions and dispositions):
Receivables, prepaid expenses and other current assets 3,980,953 10,331,194 5,019,396
Inventories 6,108,525 5,569,367 (15,176,886)
Accounts payable and accrued liabilities (1,535,790) (9,245,139) 25,390,681
------------- ------------- -------------
Net cash provided by (used in) operating activities 17,448,087 4,688,628 (30,936,311)
------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from disposals of businesses, property and equipment and
assets held for sale 7,017,386 13,435,019 8,676,478
Property and equipment purchases (786,023) (406,412) (5,397,401)
Collections on note receivable 3,000,000 1,750,000 250,000
Net decrease in other assets 0 33,802 497,721
------------- ------------- -------------
Net cash provided by investing activities 9,231,363 14,812,409 4,026,798
------------- ------------- -------------
FINANCING ACTIVITIES:
Net increase (decrease) in borrowings under
revolving credit facilities 559,765 (15,695,300) 30,950,000
Proceeds from issuance of long-term debt 20,000,000 0 0
Payments on long-term debt and other obligations (12,990,251) (2,482,946) (2,388,289)
Net payments in settlement of revolving credit facility (39,772,624) 0 0
Payments for debt issuance costs (1,258,936) 0 0
Proceeds from issuance of preferred stock 2,942,153 0 0
Proceeds from issuance of common stock 2,617,847 0 0
Dividends paid 0 0 (2,431,863)
Exercise of stock options 0 0 174,750
------------- ------------- -------------
Net cash (used in) provided by financing activities (27,902,046) (18,178,246) 26,304,598
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,222,596) 1,322,791 (604,915)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,487,002 164,211 769,126
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 264,406 $ 1,487,002 $ 164,211
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION - Cash paid during
the year for:
Interest (net of amounts capitalized) $ 4,042,879 $ 4,937,583 $ 13,672,749
Income taxes (refunded) - net (345,383) (3,193,197) 698,736
SUPPLEMENTAL NON-CASH INVESTING AND
FINANCING ACTIVITIES (Notes 2 and 10)
See notes to consolidated financial statements.
-33-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Convertible Retained Shareholders'
Preferred Additional Earnings Equity
Stock - Common Stock Paid-in (Accumulated (Deficiency
Series A Class A Class B Capital Deficit) in Assets)
BALANCE, AUGUST 31, 1999 $ 0 $ 49,139 $ 1,591 $ 148,920,912 $ 11,581,740 $ 160,553,382
Stock options exercised (11,650
shares) 117 174,633 174,750
Tax benefit from exercise of
stock options 33,772 33,772
Cash dividends paid:
Class A ($0.48 per share) (2,362,466) (2,362,466)
Class B ($0.43632 per share) (69,397) (69,397)
Net loss (104,970,576) (104,970,576)
--------- -------- -------- ------------ ------------- -------------
BALANCE, AUGUST 31, 2000 0 49,256 1,591 149,129,317 (95,820,699) 53,359,465
Net loss (74,513,048) (74,513,048)
--------- -------- -------- ------------ ------------- -------------
BALANCE, AUGUST 31, 2001 0 49,256 1,591 149,129,317 (170,333,747) (21,153,583)
Conversion of Class B common shares
to Class A common stock (159,051
shares) 1,591 (1,591) 0
Issuance of Class A common stock for
fractional shares due to reverse
stock split (167 shares) 0 0
Exchange of debt for Class A common
stock (7,618,987 shares) 76,190 600,224 676,414
Issuance of Class A common stock
(37,122,695 shares), net of stock
issuance expenses 371,227 2,246,620 2,617,847
Issuance of warrants to purchase
5,086,106 shares of Class A common
stock 400,683 400,683
Issuance of convertible preferred
stock- Series A (1,668,885 shares), 16,689
net of stock issuance expenses 2,925,464 2,942,153
Conversion of convertible preferred
stock--Series A (1,668,885 shares) to
Class A common stock (41,722,125
shares) (16,689) 417,222 (400,533) 0
Net income 53,808,622 53,808,622
--------- -------- -------- ------------ ------------- -------------
BALANCE, AUGUST 31, 2002 $ 0 $ 915,486 $ 0 $ 154,901,775 $(116,525,125) $ 39,292,136
========= ======== ======== ============ ============= =============
See notes to consolidated financial statements.
-34-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The business of Northland Cranberries, Inc. (the
"Company") consists principally of growing and selling cranberries and
cranberry products. The Company's vertical integration business strategy
includes marketing and selling its Northland, Seneca, TreeSweet and Awake
brand cranberry and other fruit juice products, fresh, frozen, and dried
cranberries, and cranberry concentrate domestically through retail
supermarkets and through other distribution channels, both domestically and
internationally. In addition, the Company produces and packages juice
beverages for other companies on a contract-manufacturing basis.
Business Risks - Prices paid to growers for raw cranberries are effectively
determined by Ocean Spray, the industry leader, which controls the bulk of
the cranberry supply in North America. The Company currently operates in a
marketplace that has experienced aggressive selling activities as the
industry responds to the excess cranberry supply levels. In July 2000, the
United States Department of Agriculture ("USDA") adopted a volume
regulation under a federal marketing order which was designed to reduce the
industry-wide cranberry crop for the 2000 calendar year crop from levels of
that of the previous three years. In June of 2001, the USDA adopted a
volume regulation under a federal marketing order for the 2001 calendar
year crop which was intended to further reduce the industry-wide cranberry
crop. No such order was adopted for the 2002 calendar year crop. In
addition, Federal legislation signed on October 27, 2000 provided for an
aggregate of approximately $20 million in direct payments to certain
growers with funds from the Commodity Credit Corporation ("CCC") and
approximately $30 million in funding for the USDA to purchase cranberry
products for school lunch and other meal programs. The Company received
approximately $1,190,000 in direct payments from the CCC during the year
ended August 31, 2001, which was recorded as net revenues in the
consolidated statement of operations for the year then ended. In addition,
the Company was awarded contracts and provided concentrate and frozen
cranberries to other contract awardees which generated net revenues of
approximately $ 1,875,000 and $4,677,000 during the years ended August 31,
2002 and 2001, respectively, related to sales under the USDA cranberry
product purchase programs.
Management of the Company believes, that as a result of the restructuring
(see Note 2), the Company's debt facilities and expected cash flows from
operations, will be sufficient to support the Company's liquidity
requirements for the remainder of the year ending August 31, 2003, and the
foreseeable future.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents - Cash and cash equivalents consist primarily of
amounts on deposit at various banks.
Concentration of Credit Risk and Significant Customer - The Company
manufactures and sells to wholesale food processors, distributors and
retailers throughout the United States. The Company performs certain credit
evaluation procedures and does not require collateral. Accounts receivable
are stated net of allowances for doubtful accounts of approximately
$358,000 and $300,000 as of August 31, 2002 and 2001, respectively. During
the year ended August 31, 2002, the Company did not have net revenues from
any customer that exceeded 10% of net revenues. During the years ended
August 31, 2001 and 2000, the Company had revenues from a customer, for
which the Company produces and packages juice beverages,
-35-
of approximately $12,862,000 and $45,888,000, respectively, or 10.2% and
22.2%, respectively, of net revenues. The reduction in net revenues
resulted primarily from a change during the first quarter of the year ended
August 31, 2001 from an arrangement where the Company purchased
substantially all of the ingredients and sold the customer finished product
for a fee for services performed arrangement.
Inventories - Inventories, which primarily consist of cranberries,
cranberry and other concentrates, juice, packaging supplies and deferred
crop costs, are stated at the lower of cost or market. Inventory market
writedowns are provided when the estimated sales value of such inventories,
less estimated completion and disposition costs, are less than the cost or
carrying value of the inventories. The market estimates are based on
management's best estimates of future selling prices and costs for the
periods during which the cranberries are grown and the cranberries and
cranberry related products are expected to be sold. The market estimates
are dependent upon several factors including, but not limited to, price,
product mix, demand, costs and the period of time which it takes to sell
the inventory. Such factors are all subject to significant fluctuations.
Cranberries and cranberry content of inventories are accounted for using
the specific identification costing method, which approximates the
first-in, first-out ("FIFO") costing method. All other inventory items are
accounted for using the FIFO costing method. Deferred crop costs consist of
those costs related to the growing of the crop that will be harvested in
the following fiscal year.
Assets Held for Sale - Assets held for sale are carried at the lower of
estimated fair value, less costs of disposal, or the original carrying
value of the assets.
Property and Equipment - Property and equipment are stated at cost, less
depreciation and amortization using the straight-line method over the
estimated useful lives. The costs related to the development of new
productive cranberry beds are capitalized during the development period
until commercial production is achieved (generally the fifth growing season
after planting). The Company depreciates buildings, land improvements,
cranberry vines, bulkheads and irrigation equipment over 30 to 40 years and
other depreciable assets over 3 to 10 years.
Long-Lived Assets - The Company periodically evaluates the carrying value
of property and equipment and intangible assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying values may not be
recoverable. If the sum of the expected future undiscounted cash flows is
less than the carrying value of the assets, a loss is recognized for the
difference between the fair value and carrying value of the assets. In the
fourth quarter of the year ended August 31, 2001, the Company decided to
restructure its operations and sell various long-lived assets, and
concluded that the estimated future cash flows of its long-lived assets
were below the carrying value of such assets. This was primarily the result
of deterioration in the long-term prospects for the cranberry growing and
processing industry over the summer due, in part, to the implementation of
a USDA cranberry marketing order for the 2001 calendar year crop, continued
large levels of excess cranberry inventories held by the Company and other
industry participants, forecasted future cranberry market prices for the
next several years, as well as continued reductions in the Company's
anticipated cranberry and cranberry concentrate usage requirements related
to the Company's recent decline in revenues and market share. Accordingly,
the Company recorded an impairment charge of $80,125,000 related to
writedowns to assets held for sale, property and equipment held for use,
and goodwill and other intangible assets in accordance with SFAS No. 121.
The estimated fair value was based on anticipated future cash flows,
discounted at a rate commensurate with the risk involved. During the year
ended August 31, 2000, the Company recorded an impairment writedown of
$6,000,000 related to a closed facility that is held for sale (see Notes 6
and 8).
Income Taxes - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes" which requires an asset and
liability approach to financial accounting and reporting for income taxes.
-36-
Net Revenues - The Company recognizes revenue when product is shipped and
title passes to the customer. Revenue is recognized as the net amount to be
received after deducting estimated amounts for coupons, discounts, trade
allowances and product returns. See New Accounting Standards described
elsewhere in Note 1 for reclassifications of previously reported net
revenues.
Shipping and Handling Fees - In accordance with EITF Issue No. 00-10, the
Company recognizes as revenues shipping and handling fees billed to
customers and the corresponding cost is included in cost of sales.
Advertising - Advertising costs incurred to produce media for advertising
for major new campaigns are expensed in the period in which the advertising
first takes place. Other advertising costs are expensed when incurred.
Advertising expenses of approximately $9,437,000, $2,946,000 and
$14,127,000 during the years ended August 31, 2002, 2001 and 2000,
respectively, are included in selling, general and administrative expenses.
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 $211,000 as of August
31, 2002.
Net Income (Loss) Per Share - Net income (loss) per share is calculated in
accordance with SFAS No. 128, "Earnings Per Share." Basic net income (loss)
per share and diluted net income (loss) per share are computed by dividing
net income (loss) by the weighted average number of common shares
outstanding. Diluted net income per share is computed by dividing net
income (loss) 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
11. The shares outstanding used to compute the diluted earnings per share
for 2002 excluded outstanding options to purchase 195,525 shares of Class A
Common Stock. The options were excluded because their weighted-average
exercise prices were greater than the average market price of the common
shares and their inclusion would have been antidilutive.
Segment Information - The Company operates principally in a single consumer
foods line of business, encompassing the growing, manufacturing and selling
of cranberries and cranberry products. Within this segment, the Company
recorded approximately (i) 58.3%, 68.0% and 47.6% of net revenues in fiscal
2002, 2001 and 2000, respectively, from the sale of branded products; (ii)
21.7%, 11.4% and 3.3% of net revenues in fiscal 2002, 2001 and 2000,
respectively, from the sale of cranberry concentrate; and (iii) 10.1%,
11.6% and 24.9% of net revenues in fiscal 2002, 2001 and 2000,
respectively, from providing contract packaging services to third parties.
Comprehensive Income (Loss) - There is no difference between comprehensive
income (loss) and net income (loss) for each of the three years in the
period ended August 31, 2002.
Fair Value of Financial Instruments - The Company is required to disclose
the estimated fair value of certain financial instruments in accordance
with SFAS No. 107, "Disclosures About Fair Value of Financial Instruments."
Considerable judgment is required to interpret market data to develop
estimates of fair value. As of August 31, 2001, the Company was
experiencing financial difficulties and had not made its scheduled payments
on certain accounts payable and long-term debt obligations that were
subsequently restructured and/or forgiven, and on November 6, 2001, as
described in Notes 2 and 10, announced the completion of a debt and equity
restructuring in which certain creditors agreed to forgive and restructure
the amounts owed to them by the Company. Accordingly, management has
determined that it is not practicable to estimate the fair value of the
Company's long-term debt obligations. The Company believes the carrying
amount of its other financial instruments (cash and cash equivalents,
accounts receivable, notes receivable, accounts payable and accrued
liabilities) is a reasonable estimate of the fair value of such instruments
due to the short-term nature of such instruments and the market interest
rates applicable to similar instruments. However, as described in Note 3,
there are certain uncertainties with respect to a note and related accounts
receivable due from the buyer of a private label juice business sold on
March 8, 2000. The ultimate resolution of this matter could significantly
affect any estimates of the fair value of the note and related accounts
receivable.
-37-
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. On
an ongoing basis, management reviews its estimates, including those related
to allowances for doubtful accounts, product returns, and trade discounts
and incentives, valuation of inventories, future cash flows associated with
assets held for sale and long-lived assets, useful lives for depreciation
and amortization, valuation allowances for deferred income tax assets,
litigation, environmental liabilities and contracts based on currently
available information. Changes in facts and circumstances may result in
revised estimates and actual results could differ from those estimates.
New Accounting Standards - Effective in the fourth quarter of the year
ended August 31, 2001, the Company adopted Emerging Issues Task Force
("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and
Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer
in Connection with the Purchase or Promotion of the Vendor's Products."
EITF Issue No. 00-14 provides guidance on the financial reporting of the
cost of consumer coupons, amongst other items, in the consolidated
statements of operations. EITF Issue No. 00-25 provides guidance on the
financial reporting of the costs associated with sales incentives provided
to customers in the consolidated statements of operations. Under the new
accounting standards, the cost of consumer coupons and sales incentives
provided to retailers are reported as a reduction in net revenues. The
Company previously reported the cost of consumer coupons and sales
incentives provided to retailers as selling, general and administrative
expenses. Consolidated financial statements for year ended August 31, 2000
have been reclassified to conform to the new requirements, and as a result,
approximately $59,191,000 of amounts previously reported as selling,
general and administrative expenses have been reclassified and reported as
a reduction of net revenues.
In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees.
SFAS No. 143 requires entities to record the fair value of a liability for
an asset retirement obligation in the period the liability is incurred.
When the liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over time,
the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the estimated useful life of the
related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon
settlement. The Company adopted SFAS No. 143, effective September 1, 2002.
The adoption of SFAS No. 143 did not have a material impact on the
consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 144 also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144
requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired.
SFAS No. 144 also broadens the presentation of discontinued operations to
include more disposal transactions. The Company adopted SFAS No. 144
effective September 1, 2002. The adoption of SFAS No. 144 did not have a
material impact on the consolidated financial statements.
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In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" effective for years beginning after May 15, 2002. SFAS No.
145, among other things, eliminated the prior requirement that all gains
and losses from the early extinguishment of debt were to be classified as
an extraordinary item. Upon adoption of SFAS No. 145, gains and losses from
the early extinguishment of debt are now classified as an extraordinary
item only if they meet the "unusual and infrequent" criteria contained in
Accounting Principles Board Opinion ("APBO") No. 30. In addition, upon
adoption of SFAS No. 145, all gains and losses from early extinguishment of
debt that had previously been classified as an extraordinary item are to be
reassessed to determine if they would have met the "unusual and infrequent"
criteria of APBO No. 30; any such gain or loss that would not have met the
APBO No. 30 criteria are retroactively reclassified and reported as a
component of income before extraordinary item. Upon adoption, the Company
will reclassify the amount currently presented as an extraordinary item as
other income within the consolidated statements of operations.
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
10) 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 77.1% 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 11). 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 members include
among others certain 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 10).
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. In fiscal 2002 the Company paid
approximately $460,000. 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.
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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 10). 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
(non-cash investing activity) which is to be collected over six years and
which bears interest at a rate of 10% per annum, as well as approximately
$6,800,000 in cash (subject to potential post-closing adjustments) related
to inventory transferred to Cliffstar on the closing date. The Company
recognized a pre-tax gain of approximately $2,100,000 in connection with
the sale of the net assets.
Additionally, Cliffstar is contractually obligated to make certain annual
earn-out payments to the Company for a period of six years from the closing
date based generally on operating profit from Cliffstar's sale of cranberry
juice products. 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.
The private label juice business had revenues of approximately $23,600,000
for the year ended August 31, 2000. The Company recognized gross profit of
approximately $3,700,000 on such revenues during the year ended August 31,
2000. Information with respect to selling, general and administrative
expenses with respect to the private label juice business is not available,
as the Company's accounting system did not segregate such expenses by type
of product.
On July 7, 2000, Cliffstar filed suit against the Company in the United
States District Court, Western District of New York, alleging, among other
things, that the Company breached certain representations and warranties in
the Asset Purchase Agreement. That lawsuit was subsequently dismissed, and
on July 31, 2000, the Company filed a lawsuit against Cliffstar in the
Northern District of Illinois. 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
-40-
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.
Cliffstar 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. 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. On October 23, 2002, after
a trial to a jury on the remaining claims, the District Court entered final
judgment in favor of the Company and against Cliffstar in the amount of
$6,674,450 (this includes outstanding accounts receivable aggregating
$3,414,000 due from Cliffstar as of August 31, 2002). The judgment is
subject to rulings on post-verdict motions and appeal. It is the opinion of
the Company's management, after consulting with outside legal counsel, that
the judgment will withstand post-verdict motions and be affirmed if
appealed. However, the resolution of the legal proceedings cannot be
predicted with certainty at this time. Accordingly, no amounts have been
recorded with respect to the judgment.
Cliffstar made the required $250,000 principal and related accrued interest
payment on the note receivable that was due on May 31, 2000 on June 13,
2000, and the Company, after consulting with its outside legal counsel,
concluded that the payment was received late and, thus, the note is in
default with future interest accruing at the default rate of 12%. The
Company received Cliffstar's scheduled August 31, 2000 principal payment of
$250,000 together with approximately $700,000 of accrued interest at 10% on
September 8, 2000. The Company received Cliffstar's scheduled November 30,
2000 principal payment of $250,000 together with approximately $686,000 of
accrued interest at 10% on December 22, 2000. The Company received
Cliffstar's scheduled February 28, 2001 principal payment of $250,000
together with approximately $679,000 of accrued interest at 10% on March 2,
2001. The Company received Cliffstar's scheduled May 31, 2001, August 31,
2001, November 30, 2001, February 28, 2002, May 31, 2002, and August 31,
2002 principal payments aggregating $4,000,000 together with approximately
$3,860,547 of accrued interest at 10% on the scheduled due dates. Although
the jury verdict on October 22, 2002 determined that Cliffstar breached the
note, the Company has recognized interest income on the note receivable at
a rate of 10% in the consolidated financial statements pending the
resolution of post-verdict motions and any appeal of the judgment.
Although the note is in default, the Company has classified the balance
outstanding in the accompanying consolidated balance sheets in accordance
with the scheduled payment dates provided for in the note, as this is how
the Company anticipates payments will be received pending final resolution
of this matter.
-41-
Aggregate annual scheduled principal payments required under the terms of
the Cliffstar note agreement as of August 31, 2002, consisted of the
following:
Years Ending Principal
August 31, Payments
2003 $ 4,500,000
2004 6,000,000
2005 8,000,000
2006 4,500,000
--------------
Total $ 23,000,000
==============
On May 13, 2002, the Company received Cliffstar's earn-out calculation for
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
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 legal proceeding
is in its early stages and the resolution cannot be predicted with
certainty.
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 to Clement Pappas and Company, Inc. ("Clement
Pappas"), and a related manufacturing facility in Mountain Home, North
Carolina to Clement Pappas NC, Inc., for aggregate cash proceeds of
approximately $12,475,000. The proceeds of the sale were utilized primarily
to reduce the Company's bank debt. The Company recognized a pre-tax gain of
approximately $1,707,000 in connection with the sale of the net assets.
Additionally, Clement Pappas is contractually obligated to make certain
payments to the Company for a period of up to five years from the closing
date based on total case sales of cranberry sauce, as defined, subject to
an aggregate minimum payment of $1,000,000 and an aggregate maximum payment
of $2,500,000. The Company received a payment of approximately $288,000
related to the first year of this agreement. The remaining present value of
the future aggregate minimum payments has been recorded as an asset in the
accompanying August 31, 2002 consolidated balance sheet. The Company also
entered into certain related agreements with Clement Pappas NC, Inc.,
including among them, a co-packing agreement pursuant to which the Company
contracted for specified quantities of juice products to be packed by
Clement Pappas NC, Inc. with an initial term of one year following the
closing date. This term shall extend automatically, thereafter, from year
to year, for an additional period of one year, subject to certain
conditions as specified in the agreement.
The Company had net revenues of approximately $7,859,000 and $14,143,000
during the years ended August 31, 2001 and 2000, respectively, related to
the private label sauce business and the activities related to producing
and packing juice beverages for other customers at the Mountain Home
facility. Other information with respect to gross profit and selling,
general and administrative expenses is not available, as the Company's
accounting system did not segregate such items by type of product.
-42-
5. INVENTORIES
Inventories as of August 31, 2002 and 2001 consisted of the following:
2002 2001
Raw materials $ 8,396,440 $ 17,788,874
Finished goods 3,188,891 4,169,378
Deferred crop costs 6,688,084 2,423,688
------------ ------------
Total inventories $ 18,273,415 $ 24,381,940
============ ============
During the years ended August 31, 2001 and 2000, the Company recorded
approximately $17,603,000 (fourth quarter) and $57,400,000 ($27,000,000 in
the second quarter and $30,400,000 in the fourth quarter), respectively, of
pre-tax, lower of cost or market charges to cost of sales which reduced the
carrying value of its inventory to its estimated market value. The
Company's lower of cost or market charges were based upon management's best
estimates of future product sale prices and consumer demand patterns.
6. RESTRUCTURING CHARGES
During the fourth quarter of the year ended August 31, 2000, the Company
recorded an $8,250,000 pre-tax restructuring charge consisting primarily of
a $6,000,000 impairment write down of a manufacturing facility in
Bridgeton, New Jersey that discontinued production and closed on November
22, 2000, and $2,250,000 of plant closing costs and employee termination
benefits (of which $1,900,000 of was charged to cost of sales and $350,000
of employee termination benefits were charged to selling, general and
administrative expenses). Approximately 130 employees received notification
of their termination during the year ended August 31, 2000 as a result of
the restructuring plan, primarily at the closed manufacturing facility and
in the Company's sales department. All of the plant closing costs and
employee termination benefits provided for at the time of the restructuring
were paid during the year ended August 31, 2001, with the exception of
approximately $456,000 of estimated obligations under a defined benefit
pension plan which covered certain former Bridgeton employees, of which
approximately $83,000 was paid during the year ended August 31, 2002. In
accordance with the terms of the benefit plan, remaining amounts will be
paid out over the remaining benefit period.
7. ASSETS HELD FOR SALE
As of August 31, 2002 assets held for sale consists primarily of the
remaining land and building related to the manufacturing facility in
Bridgeton, New Jersey. The soil and water on this property is contaminated
as the result of a leaking underground storage tank, for which the Company
received an environmental indemnification agreement from the previous owner
of the facility, at the time of the Company's purchase of the facility.
During the fourth quarter of the year ended August 31, 2001, the carrying
value of the facility was written down by approximately $4,398,000 to
$1,500,000, its current estimated fair value, less costs of disposal. The
Company is currently working with the former owner to complete the
remediation efforts. The Company anticipates difficulties selling the
facility while the remediation is in process.
In addition to the land and building in Bridgeton, New Jersey, assets held
for sale as of August 31, 2002 include the land, building and equipment
related to the manufacturing facility in Dundee, New York. On June 28,
2002, the Company discontinued operations at this facility. The production
performed at this facility, including certain equipment, has been
transferred to the Jackson, Wisconsin facility. The
-43-
Company intends to sell the land and building. The remaining equipment at
this facility was sold, for approximately $550,000, in the first quarter of
fiscal 2003. The carrying value of the assets held for sale at Dundee, New
York, as of August 31, 2002 is approximately $1,300,000, which represents
the estimated fair value of this property less costs to sell. The remaining
assets held for sale as of August 31, 2002, consist of the land and
building related to a closed storage/distribution facility in Eau Claire,
Michigan.
Assets held for sale as of August 31, 2001 consisted of the remaining land
and building related to the manufacturing facility in Bridgeton, New
Jersey, the land and building related to a closed storage/distribution
facility in Eau Claire, Michigan, a cranberry marsh in Hanson,
Massachusetts, which was sold in the fourth quarter of fiscal 2002, and
certain equipment at two leased cranberry marshes in Nantucket,
Massachusetts which was sold to the lessor of the facility when we
terminated the lease on December 31, 2001. During the fourth quarter of the
year ended August 31, 2001, the Company recorded aggregate impairment
write-downs for these assets of $14,980,000, which included approximately
$4,398,000 related to the Bridgeton, New Jersey facility.
The estimation process involved in determining if assets have been impaired
and in the determination of fair value is inherently uncertain since it
requires estimates of current, as well as future market conditions and
events. In determining fair value, the Company considered, among other
things, property appraisals and the range of preliminary purchase prices
being discussed with potential buyers.
8. LONG-LIVED ASSETS
Property and equipment as of August 31, 2002 and 2001 consisted of the
following:
2002 2001
Land $ 4,512,143 $ 5,559,741
Land improvements 7,696,210 7,696,210
Cranberry vines, bulkheads and irrigation equipment 32,764,483 32,758,540
Buildings and improvements 16,936,886 19,192,225
Equipment and vehicles 14,000,571 15,525,822
----------- -----------
Property and equipment - at cost 75,910,293 80,732,538
Less accumulated depreciation and amortization 12,074,022 8,825,272
----------- -----------
Property and equipment - net $63,836,271 $71,907,266
=========== ===========
During the fourth quarter of the year ended August 31, 2001, the Company
recorded an impairment write down of $50,484,000 related to property and
equipment. The cost and accumulated depreciation and amortization of the
respective assets were restated to reflect the new carrying values as a
result of the write down. The Company capitalized approximately $87,000 of
interest during the year ended August 31, 2000.
During the fourth quarter of the year ended August 31, 2001, the Company
recorded an impairment write down of $14,661,000 for the remaining
unamortized cost of the intangible assets.
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9. ACCRUED LIABILITIES
Accrued liabilities as of August 31, 2002 and 2001 consisted of the
following:
2002 2001
Interest $ 505,304 $ 85,661
Trade and consumer promotions 2,614,753 4,051,098
Compensation and other employee benefits 1,133,536 1,648,665
Property taxes 585,063 829,213
Income taxes 99,612 120,465
Commissions 344,069 439,020
Legal and professional fees 1,875,668 3,097,453
Other 1,869,848 2,317,859
----------- -----------
Total accrued liabilities $ 9,027,853 $12,589,434
=========== ===========
Approximately $14,181,000 of outstanding accrued interest as of August 31,
2001 on certain restructured obligations has been classified as long-term
debt and obligations subsequently forgiven or exchanged for common stock
(see Note 10).
10. LONG-TERM DEBT AND OBLIGATIONS SUBSEQUENTLY FORGIVEN OR EXCHANGED FOR
COMMON STOCK
Long-term debt and obligations subsequently forgiven or exchanged for
common stock as of August 31, 2002 and 2001 consisted of the following:
2002 2001
Term loans payable $ 15,461,497 $ 0
Fee notes payable 3,738,227 0
Restructured bank notes 28,296,727 0
Restructured insurance company note 19,689,258 0
Revolving credit facility with banks 0 139,304,700
Term loans payable to insurance company 0 19,095,673
Other obligations 2,914,736 9,469,673
Accrued interest on restructured obligations 0 14,180,867
------------ ------------
Total 70,100,445 182,050,913
Less obligations subsequently forgiven or
exchanged for common stock 0 84,087,222
------------ ------------
Amounts to be paid 70,100,445 97,963,691
Less current maturities of long-term debt 15,567,889 33,374,495
------------ ------------
Long-term debt $ 54,532,556 $ 64,589,196
============ ============
As of August 31, 2002, the Company was in compliance with its various
financial covenants contained in its agreements covering its long-term debt
obligations. 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
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November 6, 2001. 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 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 year ended August 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 were 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 year ended
August 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 August 31, 2002),
applied against the outstanding stated principal balance of the
Restructured Bank Notes, with an additional $1,700,000 that was paid 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 $15,549,848 due on November 1, 2006.
In addition, the Company is required to pay the agent bank an annual agency
fee of
-46-
0.25% of the outstanding stated principal balance due on such notes as of
the date of the restructuring and on each anniversary date thereof during
the term of the notes. The Restructured Bank Notes are collateralized by
specific assets of the Company and the Company is required to make certain
mandatory prepayments to the extent of any net proceeds received from the
sale of such collateralized assets or to the extent that a note received in
connection with the sale of such assets, or assets previously sold, is
collected. The applicable prepayments are to be applied in inverse order
against the stated additional payments due under the Restructured Bank
Notes, commencing with the November 1, 2006 scheduled payment.
On November 6, 2001, the Company and the insurance company holding the two
term loans entered into a new loan agreement which restructured and
modified the terms of the two original loan agreements (with an aggregate
outstanding principal and interest balance of approximately $20,680,000 as
of the restructuring date) under which the Company issued a new note to the
insurance company (the "Restructured Insurance Company Note") with a stated
principal amount of approximately $19,096,000 and a stated interest rate of
5% for the first two years of the note, increasing by 1% annually
thereafter, with a maximum interest rate of 9% in the sixth and final year
of the Restructured Insurance Company Note. The Restructured Insurance
Company Note is payable in monthly installments of approximately $186,000
commencing December 1, 2001, adjusted periodically as the stated interest
rate increases, with a final payment of approximately $11,650,000 due
November 1, 2007. The Restructured Insurance Company Note may require an
acceleration of principal payments of approximately $17,000 per month,
should the Company's required per barrel price paid to contract growers
exceed $32 per barrel, as defined, and continue for the remaining term of
the Restructured Insurance Company Note, as long as the price equals or
exceeds $32 per barrel. The Restructured Insurance Company Note is
collateralized by specific assets of the Company. Under SFAS No. 15, no
gain was recognized on the restructuring and modification of the term
loans, as the total scheduled principal and interest payments due under the
Restructured Insurance Company Note are in excess of the amounts owed the
insurance company as of the date of the restructuring, with the excess
(approximately $4,406,000) recognized as interest expense over the term of
the Restructured Insurance Company Note, using the interest method. The
effective interest rate recognized for financial reporting purposes
approximates 4.5%.
In addition, in connection with the restructuring, the Company restructured
certain obligations consisting of various term loans and vendor 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 year
ended August 31, 2002.
The extraordinary gain on the forgiveness of indebtedness recognized during
the year ended August 31, 2002, is summarized as follows (in thousands):
Forgiveness of indebtedness:
Revolving credit facility with banks $ 81,219,000
Other obligations 3,465,000
------------
Total 84,684,000
Less legal fees and other direct costs 1,385,000
------------
Extraordinary gain 83,299,000
Less income taxes 32,800,000
------------
Net extraordinary gain $ 50,499,000
============
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
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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 August 31, 2002). As of August 31,
2002, there was approximately $560,000 of outstanding borrowings under this
facility. Approximately $4,900,000 of additional borrowings was available
to the Company under the facility as of August 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 August 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 effective interest rate
recognized for financial reporting purposes approximates 7.0%
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.
Aggregate annual principal payments required under terms of the debt
agreements as of August 31, 2002, after giving effect to the debt and
equity restructuring and the various obligations that were forgiven,
consisted of the following:
Years Ending Principal
August 31, Payments
2003 $ 15,567,889
2004 14,266,989
2005 14,428,601
2006 13,770,756
2007 172,339
Thereafter 11,893,871
------------
Total $ 70,100,445
============
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11. SHAREHOLDERS' EQUITY (DEFICIENCY IN ASSETS) AND REDEEMABLE PREFERRED STOCK
The authorized common stock of the Company as of August 31, 2002 consists
of 150,000,000 shares of Class A Common Stock and 4,000,000 shares of Class
B Common Stock. As of August 31, 2002 there are 91,548,580 shares of Class
A Common Stock outstanding. No shares of Class B Common Stock are
outstanding as of August 31, 2002. The shares of Class A Common Stock are
entitled to one vote per share and the shares of Class B Common Stock are
entitled to three votes per share. Holders of Class A Common Stock are
entitled to receive cash dividends equal to at least 110% of any cash
dividends paid on the shares of Class B Common Stock. However, cash
dividends may be paid on Class A Common Stock without a concurrent cash
dividend being paid on the Class B Common Stock. If at any time the
outstanding shares of Class B Common Stock fall below 2% of the outstanding
shares of Class A Common Stock, they will be automatically converted into
Class A Common Stock.
Effective November 5, 2001, the Company's Articles of Incorporation were
amended (i) effecting a one-for-four reverse stock split of the Class A
Common Stock and Class B Common Stock (with fractional shares resulting
from such reverse stock split being rounded up to the next whole share);
(ii) creating and authorizing the issuance of up to 2,000,000 shares of
preferred stock, $.01 par value per share, designated as Series A Preferred
Stock; and (iii) creating and authorizing the issuance of 100 shares of
preferred stock, $.01 par value per share, designated as Series B Preferred
Stock. All share and per share information included in the consolidated
financial statements has been restated to give effect to the reverse stock
split. The Company was previously authorized to issue 5,000,000 shares of
preferred stock with a par value of $.01, and no such shares were issued.
On November 5, 2001, the Class B Common Stock shareholders voluntarily
converted their shares, pursuant to the terms of the Company's Articles of
Incorporation, into shares of Class A Common Stock on a one-for-one basis.
Convertible Preferred Stock - Each share of the Series A Preferred Stock
was automatically converted into 25 shares of Class A Common Stock
immediately upon effectiveness of the amendment to the Company's Articles
of Incorporation, which was approved at the 2002 Annual Meeting of
Shareholders and became effective on February 4, 2002. This amendment
increased the number of authorized Class A Common Stock from 60,000,000
shares to 150,000,000 shares. As a result of the amendment, 1,668,885
Series A Preferred shares were converted in to 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.
Redeemable Preferred Stock - The Series B Preferred Stock has no voting
rights and no dividend preference. In the event of liquidation, the shares
of Series B Preferred Stock have a preference in liquidation after the
shares of Series A Preferred Stock equal to the par value of each share of
Series B Preferred Stock. The Series B Preferred Stock is subject to
mandatory redemption upon (i) the consummation of a transaction following
which neither Sun Northland, LLC nor its affiliates owns or controls
securities possessing at least 10% of the voting power of the Company, or
(ii) the distribution of assets to holders of the Company's capital stock
upon the sale of substantially all the Company's assets. The redemption
price in such a circumstance varies depending upon the number of shares of
Series B Preferred Stock then outstanding and the internal rate of return
(as defined in the Articles of Incorporation) recognized by Sun Northland,
LLC in connection with the event triggering such redemption. Generally, the
redemption price in such circumstances is zero if Sun Northland, LLC's
internal rate of return is less than or equal to 40%, and increases as Sun
Northland, LLC's internal rate of return increases. The 100 shares of
Series B Preferred Stock that the Company sold to Sun Northland, LLC in the
Restructuring were subsequently transferred by Sun Northland, LLC for
nominal consideration to a limited liability company whose managing member
is the Company's Chief Executive Officer and whose other members include
among others certain officers of the Company.
-49-
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.
Stock Options - During 1995, the Company adopted the 1995 Stock Option Plan
(the "1995 Plan"), which provides for the issuance of options to purchase
up to 200,000 shares of Class A Common Stock to key employees and
non-employee directors of the Company. Stock options granted under the 1995
Plan are exercisable at a price established by the Compensation and Stock
Option Committee, which shall not be less than 100% of the fair market
value on the date of grant for a period determined by the Compensation and
Stock Option Committee, not to exceed 10 years, and vest over a period of 1
to 5 years.
On November 6, 2001, the Company adopted the 2001 Stock Option Plan (the
"2001 Plan"), which provides for the issuance of options to purchase up to
5,014,081 shares of Class A Common Stock to certain officers and key
employees. Upon adoption of the 2001 Plan, options were granted with an
exercise 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 vest one-fourth annually beginning on the first
anniversary of the date of the grant, provided that the optionee then
remains employed by us. The 2001 Plan has a change in control clause, which
provides that all options under the 2001 Plan which have been granted which
are not exercisable as of the effective date of the change in control will
automatically accelerate and become exercisable upon the effective date of
the change in control.
On August 8, 2002, the Company adopted the 2002 Stock Option Plan (the
"2002 Plan"), which provides for the issuance of options to purchase up to
1,500,000 shares of Class A Common Stock to certain directors, officers,
other key employees and consultants of the Company. Stock options granted
under the 2002 Plan are exercisable at a price established by the
Compensation and Stock Option Committee, which shall not be less than 100%
of the fair market value on the date of grant for a period determined by
the Compensation and Stock Option Committee, not to exceed 10 years.
Vesting is determined by the Board at the time of grant. The 2002 Plan has
a change in control clause, which provides that all options under the 2002
Plan which have been granted which are not exercisable as of the effective
date of the change in control will automatically accelerate and become
exercisable upon the effective date of the change in control.
-50-
The status of the stock option plans existing as of August 31, 2002 was as
follows:
Number Weighted Average
Price Range of Shares Exercise Price
Outstanding as of August 31, 1999 $ 10.50-79.00 251,878 $ 39.88
Granted 6.25-22.00 25,125 19.76
Exercised 15.00 (11,650) 15.00
Cancelled 20.25-79.00 (22,706) 40.56
---------------- ----------- ---------------
Outstanding as of August 31, 2000 6.25-79.00 242,647 38.96
Granted 3.12- 5.20 38,000 3.16
Cancelled 3.12-79.00 (85,122) 32.81
---------------- ----------- ---------------
Outstanding as of August 31, 2001 3.12 -79.00 195,525 34.68
Granted 0.09 - 1.04 5,464,081 0.17
---------------- ----------- ---------------
Outstanding as of August 31, 2002 $ 0.09 -79.00 5,659,606 $ 1.36
================ =========== ===============
Exercisable as of August 31, 2002 $ 0.09-79.00 146,804 $ 41.45
Exercisable as of August 31, 2001 6.25-79.00 141,517 41.08
Exercisable as of August 31, 2000 10.50-79.00 203,772 38.88
Available for grant after August 31, 2002 1,113,625
The following table summarizes information about stock options outstanding
as of August 31, 2002:
Options Exercisable
-------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life-Years Price Exercisable Price
$0.09 - 22.00 5,542,781 4.0 $ 0.34 37,117 $ 18.90
26.75 - 40.00 28,575 2.5 32.57 28,262 32.53
40.50 - 79.00 88,250 4.4 54.85 81,425 54.83
------------------- --------------- --------------- ------------- -------------- -------------
$ 0.09 - 79.00 5,659,606 4.0 $ 1.36 146,804 $ 41.45
=================== =============== =============== ============= ============== =============
The Company has adopted the disclosure - only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has elected to
continue to follow the provisions of APBO No. 25, "Accounting for Stock
Issued to Employees" and its related interpretations; accordingly, no
compensation cost has been reflected in the consolidated financial
statements for its stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS
No. 123, the Company's net income (loss) and net income (loss) per share
for the years ended August 31, 2002, 2001 and 2000 would have been reduced
to the pro forma amounts indicated below:
2002 2001 2000
Net income (loss):
As reported $ 53,808,622 (74,513,048) $(104,970,576)
Pro forma 53,426,000 (74,609,000) (105,280,000)
Net income (loss) per share - diluted:
As reported $ 0.64 $ (14.65) $ (20.65)
Pro forma 0.64 (14.67) (20.71)
-51-
The weighted-average fair value per share of stock options granted during
the years ended August 31, 2002, 2001 and 2000 was $ 0.07, $2.52 and
$12.32, respectively. For purposes of pro forma disclosure, the estimated
fair value of the stock options is amortized to expense over the vesting
period of the stock options.
For the purpose of these disclosures, the fair value of each stock option
granted was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for the years
ended August 31, 2002, 2001 and 2000:
2002 2001 2000
Expected volatility 107.5% 75% 67%
Risk-free interest rate 5.1% 5.5% 5.9%
Dividend rate during the expected term 0% 0% 0%
Expected life in years 4 9 9
12. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which generally requires the recognition of deferred income tax assets and
liabilities based on the expected future income tax consequences of events
that have previously been recognized in the Company's financial statements
or tax returns. In addition, a valuation allowance is recognized if it is
more likely than not that some or all of the deferred income tax assets
will not be realized.
Income tax benefit, excluding tax expense on the debt forgiveness, for the
years ended August 31, 2002, 2001 and 2000 was as follows:
2002 2001 2000
Current benefit:
Federal $ 339,238 $ 2,092,000 $ 677,000
State -- -- --
----------- ----------- -----------
Total current benefit 339,238 2,092,000 677,000
----------- ----------- -----------
Deferred benefit:
Federal -- 26,205,000 10,484,000
State -- 6,595,000 839,000
----------- ----------- -----------
Total deferred benefit -- 32,800,000 11,323,000
----------- ----------- -----------
Total benefit for income taxes $ 339,238 $34,892,000 $12,000,000
=========== =========== ===========
A Federal Alternative Minimum Tax (AMT) benefit of $339,238 was recognized
during the year ended August 31, 2002 for certain refunds that related to a
change in the tax law for AMT carrybacks. A tax benefit of approximately
$2,092,000 was recognized during the year ended August 31, 2001 for certain
refunds related to loss carrybacks, which were received during that year.
-52-
A reconciliation of the Federal statutory income tax rate to the effective
income tax rate for the years ending August 31, 2002, 2001 and 2000 was as
follows:
2002 2001 2000
Federal income tax rate (34.0)% 34.0% 34.0%
Losses for which no benefit was provided - (8.0) (24.2)
State income taxes, net of Federal tax benefit - 4.0 0.5
Reversal of previously recognized valuation
allowance 45.4 - -
Other 0.0 1.9 -
------------ ------------ ------------
Effective income tax rate -benefit 11.4% 31.9% 10.3%
============ ============ ============
Temporary differences that give rise to deferred income tax assets and
liabilities as of August 31, 2002 and 2001 consisted of the following:
2002 2001
Deferred income tax assets:
Accounts receivable allowances $ 268,000 $ 406,000
Inventories 4,181,000 20,187,000
Intangible assets 3,649,000 3,972,000
Accrued liabilities 5,164,000 2,714,000
Federal net operating loss carryforwards 23,760,000 37,440,000
State net operating loss carryforwards 3,266,000 5,737,000
Federal alternative minimum tax credit carryforwards 1,937,000 2,276,000
Federal investment tax credit carryforwards 37,000 37,000
--------------- ---------------
Total deferred income tax assets 42,262,000 72,769,000
--------------- ---------------
Deferred income tax liabilities:
Property and equipment (3,895,000) (1,549,000)
Prepaid expenses - (13,000)
--------------- ---------------
Total deferred income tax liabilities (3,895,000) (1,562,000)
--------------- ---------------
Deferred income tax assets - net 38,367,000 71,207,000
Valuation allowance (38,367,000) (38,407,000)
--------------- ---------------
Net deferred income tax assets recognized in the
consolidated balance sheets $ - $ 32,800,000
=============== ===============
As of August 31, 2002, the Company had, for federal and state income tax
purposes, net operating loss carryforwards of approximately $68,927,000
which expire in 2021 and 2022, available to offset future federal taxable
income. In addition, as of August 31, 2002, the Company had approximately
$1,937,000 of federal alternative minimum tax credit carryforwards and
approximately $37,000 of investment tax credit carryforwards available to
offset future federal income taxes. The alternative minimum tax credit
carryforwards have no expiration date and the investment tax credit
carryforwards expire in 2004.
As described in Notes 2 and 10, the Company completed a debt and equity
restructuring on November 6, 2001. This restructuring resulted in debt
forgiveness income of differing amounts for financial and income tax
reporting purposes that has reduced the available net operating loss
carryforwards. The approximate tax effect of this income results in the
recognition of a tax expense of approximately $32,800,000 for financial
reporting purposes for the year ended August 31, 2002. The "change of
ownership" provisions of the Tax Reform Act of 1986 will significantly
restrict the utilization for income
-53-
tax reporting purposes of all net operating losses and tax credit
carryforwards that originated before the debt and equity restructuring.
Approximately $56,144,000 of the net operating loss carryforwards and all
remaining federal credits are limited by this Act so that only
approximately $1,514,000 become available for use each year.
13. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan that covers substantially all
full-time employees. The Company contributes amounts based on employee
contributions under this plan. The Company contributed approximately
$328,000, $419,000, and $561,000 to the plan during the years ended August
31, 2002, 2001 and 2000, respectively.
On April 14, 2000, the Board of Directors of the Company approved a
Severance and Stay Bonus Plan (the "Plan") that provided for discretionary
bonuses to be paid to certain employees if they continued to be employed by
the Company until there was a change in control, as defined in the
agreement. The Plan also provided for specified payments to certain
employees, if they were terminated as a result of a change in control or
during a period of time subsequent to the change in control, as defined in
the agreement. Bonuses aggregating approximately $720,000 were expensed as
of November 6, 2001, the date of the change in control as described in Note
14, and subsequently paid to certain employees. The Plan was terminated in
its entirety after such payments were made and no additional payments are
required under the Plan.
14. COMMITMENTS
Supply Contracts - The Company has multiple-year crop purchase contracts
with 44 independent cranberry growers pursuant to which the Company has
contracted to purchase all of the cranberries harvested from up to 1,743
contracted acres owned by these growers, subject to federal marketing order
limitations. These contracts generally last for seven years, starting with
the 1999 calendar year crop, and pay the growers at a market rate, as
defined, for all raw cranberries delivered (plus $3 per barrel in certain
circumstances) and certain incentives for premium cranberries. In September
2000, the Company was unable to make certain payments due to the growers
under the terms of the contracts and the Company notified the growers of
the Company's intention to also defer payments required under the contract
for the 2000 calendar year crop. The contracted growers did, however,
harvest and deliver their 2000, 2001 and 2002 calendar year crops to the
Company and the Company made the rescheduled 2000 calendar year crop
payments in full to the growers during the year ended August 31, 2001. The
Company is, however, in default under the terms of the grower contracts.
The Company has received the necessary waivers from 95% of the growers for
the default.
Leasing Activities - On April 10, 1990, the Company acquired leasehold
interests in two cranberry marshes in Nantucket, Massachusetts. On March
31, 1994, the Company entered into an agreement which extended the original
lease term through November 30, 2003. Rental payments are based on 20
percent of gross cash receipts from agricultural production, subject to
certain minimums, which are dependent upon the statewide average crop
yield. Rent expense for the years ended August 31, 2001 and 2000 was
approximately $250,000 and $225,000, respectively. In 2000, the Company
determined that it was no longer economically feasible to operate these
marshes and subsequently was released from the leases in December 2001.
Accordingly, the remaining unamortized cost of the leasehold interests of
approximately $581,000 was expensed as cost of sales during the year ended
August 31, 2000.
On September 5, 1991, the Company entered into a net lease, which was
amended in July 1993, with Equitable Life Assurance Society of the United
States ("Equitable") for the Cranberry Hills cranberry marsh, which
Equitable purchased on May 3, 1991 from Cranberry Hills Partnership
("Cranberry Hills"), a partnership controlled by the Company's CEO and two
former directors. The lease, which expired December 31, 2000, provided for
rent payments to Equitable of $400,000 during the year ended August
-54-
31, 2000. There were no payments required during the year ended August 31,
2001. There were no management fees required to be paid during the years
ended August 31, 2001 or 2000, and there are no future payments required.
On January 26, 2001, the Company entered into a management agreement with
Equitable for the management of the cranberry marsh. This agreement, which
expired on December 31, 2001, was renewed effective April 19, 2002. The
agreement which now expires on December 31, 2002, requires the Company to
manage, operate and harvest the marsh. The Company anticipates it will
again renew the agreement in fiscal 2003. The agreement requires the
Company to purchase the harvest from Equitable at a price equivalent to
what the Company will pay the independent growers as described in the
supply contracts above, with revenues and expenses to be shared, as defined
in the agreement.
15. CONTINGENCIES
On May 13, 1997, the Company guaranteed $1,000,000 of outstanding
obligations to a bank of an independent cranberry grower who subsequently
became an officer of the Company during the year ended August 31, 2001. As
of August 31, 2002, the grower/officer was in default with certain terms
and conditions contained in the related debt agreements and is currently in
the process of restructuring the debt obligations. Based on the current
financing alternatives available and the impact of these options on the
guarantee, the Company believes the resolution of this matter will not have
an adverse effect on the Company's financial statements.
16. SUBSEQUENT EVENTS
During fiscal 2002, inventory held at one of the Company's third party
storage facilities was handled improperly by the third party following
delivery to the facility. This resulted in a damage claim being made by the
Company. The Company and the owner of the facility have entered into a
settlement and release agreement with respect to the Company's claims.
Under the terms of the settlement and release agreement, the Company will
receive cash proceeds in the amount of $1.5 million and $200,000 of credits
toward storage fees over the next four years. Based on the terms of the
settlement and release agreement, the Company believes that the resolution
of this matter will result in a subsequent gain.
On November 11, 2002, the Company together with Clermont, Inc, filed an
antitrust lawsuit against Ocean Spray Cranberries, Inc. ("Ocean Spray").
The lawsuit, which was filed in the United Stated District Court for the
District of Columbia, alleges that Ocean Spray has engaged in
anticompetitive tactics and unlawfully monopolized the cranberry products
industry to the detriment of its competitors and customers. As the
proceeding is in the preliminary stages, management is unable to predict
the outcome of this matter with certainty. However, management does not
believe that the resolution of this matter will have an adverse effect on
the Company's financial condition or results of operations.
-55-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Company.
Pursuant to Instruction G, we have incorporated the information required by
this Item with respect to directors by reference to the information set forth
under the caption "Election of Directors" in our definitive proxy statement for
our 2003 annual meeting of shareholders to be filed with the Commission pursuant
to Regulation 14A within 120 days of the end of our fiscal year. The information
required by Item 405 of Regulation S-K is also incorporated by reference to the
information set forth under the caption "Other Matters--Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement. The required information
with respect to executive officers appears at the end of Part I of this Form
10-K.
Item 11. Executive Compensation.
Pursuant to Instruction G, we have incorporated the information required by
this Item by reference to the information set forth under the caption "Executive
Compensation" in the Proxy Statement; provided, however, that the subsection
titled "Executive Compensation - Report on Executive Compensation" shall not be
deemed to be incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Pursuant to Instruction G, we have incorporated the information required by
this Item by reference to the information set forth under the caption "Stock
Ownership of Management and Others" in the Proxy Statement.
The following table provides information as of August 31, 2002, regarding
our Class A Common Stock that may be issued pursuant to our equity compensation
plans:
- -------------------------- -------------------------- ------------------- -----------------------------------
(a) (b) (c)
- -------------------------- -------------------------- ------------------- -----------------------------------
Plan Category Number of securities to Weighted - Number of securities remaining
be issued upon exercise average price of available for future issuance
of outstanding options, outstanding under equity compensation plans
warrants and rights options (excluding securities reflected
in column (a))
- -------------------------- -------------------------- ------------------- -----------------------------------
Equity Compensation plan
approved by security
holders 195,525 $ 34.68 0(1)
- -------------------------- -------------------------- ------------------- -----------------------------------
Equity Compensation plan
not approved by security
holders (2) 5,464,081 $ 0.17 1,050,000
- -------------------------- -------------------------- ------------------- -----------------------------------
Total 5,659,606 $ 1.36 1,050,000
- -------------------------- -------------------------- ------------------- -----------------------------------
(1) During 1995, we adopted the 1995 Stock Option Plan (the "1995 Plan"), which was approved by
our security holders and provides for the issuance of options to purchase up to 200,000 shares of
Class A Common Stock to key employees and non-employee directors. We terminated the 1995 Plan on
August 30, 2002 and, accordingly, the 63,625 shares with respect to which options were not yet
granted under the 1995 Plan are no longer available for future issuance under the 1995 Plan. The
termination of the 1995 Plan did not affect the rights of participants thereunder with respect to
options granted to them prior to termination and all unexpired options remain effective, except as
they may lapse or terminate by their terms and conditions.
(2) The table above does not include warrants to purchase an aggregate of 5,086,106 shares of
Class A Common Stock that are immediately exercisable for an exercise price of $.01 per share that
we issued to Foothill and Ableco in connection with the Restructuring. The issuance of the warrants
was not approved by our shareholders. If the warrants were included in the table above, then the
weighted-average price of outstanding options, warrants and rights related to equity compensation
plans not approved by security holders would be $0.09.
-56-
On November 6, 2001, we adopted the 2001 Stock Option Plan (the "2001
Plan"), which was not approved by our security holders and provides for the
issuance of options to purchase up to 5,014,081 shares of Class A Common Stock
to certain officers and key employees. Upon adoption of the 2001 Plan, options
were granted with an exercise price of $.08878 per share, which is equivalent to
the per share price paid by Sun Northland, LLC for shares of our Class A Common
Stock. The 2001 Plan has a change in control clause, which provides that all
options under the 2001 Plan which have been granted which are not exercisable as
of the effective date of the change in control will automatically accelerate and
become exercisable upon the effective date of the change in control.
On August 8, 2002, we adopted the 2002 Stock Option Plan (the "2002 Plan"),
which was not approved by our security holders and provides for the issuance of
options to purchase up to 1,500,000 shares of Class A Common Stock to certain
directors, officers, other key employees and consultants. Stock options granted
under the 2002 Plan are exercisable at a price established by the Compensation
and Stock Option Committee, which shall not be less than 100% of the fair market
value on the date of grant for a period determined by the Compensation and Stock
Option Committee, not to exceed 10 years The 2002 Plan has a change in control
clause, which provides that all options under the 2002 Plan which have been
granted which are not exercisable as of the effective date of the change in
control will automatically accelerate and become exercisable upon the effective
date of the change in control.
Item 13. Certain Relationships and Related Transactions.
Pursuant to Instruction G, we have incorporated the information required by
this Item by reference to the information set forth under the caption "Certain
Transactions" in the Proxy Statement.
-57-
PART IV
Item 14. Controls and Procedures.
Our Chief Executive Officer and our Vice President - Finance, within 90
days prior to the filing date of this report, evaluated the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c). Based on that evaluation, the Chief
Executive Officer and Vice President - Finance concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to the Chief Executive Officer and Vice President - Finance to
allow timely decisions regarding required disclosure.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) The financial statements of Northland Cranberries, Inc., consisting
of our consolidated balance sheets as of August 31, 2002 and 2001, consolidated
statements of operations, cash flows and shareholders' equity for the fiscal
years ended August 31, 2002, 2001 and 2000, notes to consolidated financial
statements and independent auditors' report, are filed herewith.
(a)(2) Schedule II, Valuation and Qualifying Accounts, is filed herewith.
We have omitted other schedules because they are not required or not applicable,
or the information required to be shown is included in our financial statements
and related notes.
(a)(3) The exhibits we have filed herewith or incorporated by reference
herein are set forth on the attached Exhibit Index.*
(b) We did not file any Current Reports on Form 8-K with the Securities and
Exchange Commission during the fourth quarter of fiscal 2002.
* We will furnish to shareholders the Exhibits to this Form 10-K on request
and advance payment of a fee of $0.20 per page, plus mailing expenses.
Requests for copies should be addressed to Kenneth A. Iwinski, Vice
President-Legal and Secretary, Northland Cranberries, Inc., 2930 Industrial
Street, P.O. Box 8020, Wisconsin Rapids, Wisconsin 54495-8020.
-58-
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CRANBERRIES, INC.
Date: November, 27, 2002 By: /s/ John Swendrowski
------------------------------
John Swendrowski
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed on November 27, 2002 below by the following
persons on behalf of the Company and in the capacities indicated.
By: /s/ John Swendrowski By: /s/ Nigel J. Cooper
------------------------------ --------------------------
John Swendrowski Nigel J. Cooper
Chairman of the Board, Vice President - Finance
Chief Executive Officer and Director
By: /s/ Marc J. Leder By: /s/David Pleban
------------------------------ --------------------------
Marc J. Leder David Pleban
Director Director
By: /s/ Rodger R. Krouse By: /s/ Kevin J. Calhoun
------------------------------ --------------------------
Rodger R. Krouse Kevin J. Calhoun
Director Director
By: /s/ Clarence E. Terry By: /s/ George R. Rea
------------------------------ --------------------------
Clarence E. Terry George R. Rea
Director Director
By: /s/ Patrick J. Sullivan By: /s/ C. Daryl Hollis
------------------------------ --------------------------
Patrick J. Sullivan C. Daryl Hollis
Director Director
-59-
CERTIFICATIONS
I, John Swendrowski, certify that:
1. I have reviewed this annual report on Form 10-K of Northland
Cranberries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date November 27, 2002
---------------------------
/s/ John Swendrowski
----------------------------------
John Swendrowski
Chairman of the Board,
Chief Executive Officer and Director
-60-
I, Nigel Cooper, certify that:
1. I have reviewed this annual report on Form 10-K of Northland
Cranberries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date November 27, 2002
------------------------------
/s/ Nigel Cooper
--------------------------------
Nigel Cooper
Vice President - Finance
-61-
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Year ended August 31,
---------------------
2002 2001 2000
---- ---- ----
Valuation accounts deducted in the consolidated
balance sheets from assets to which they apply:
Accounts receivable - allowance for doubtful accounts:
Balances at beginning of year $ (300,000) $ (250,000) $ (600,000)
Additions - charged to expense (225,000) (955,000) (645,000)
Deductions - amounts written off, net of recoveries 167,000 905,000 995,000
----------------------------------------------------------
Balances at end of year $ (358,000) $ (300,000) $ (250,000)
==========================================================
Deferred income taxes - valuation allowance:
Balances at beginning of year $ (38,407,000) $ (30,760,000) $ -
Additions - allowance established (7,647,000) (30,760,000)
Deductions - allowance used 40,000
----------------------------------------------------------
Balances at end of year $ (38,367,000) $ (38,407,000) $ (30,760,000)
==========================================================
-62-
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Asset Purchase Agreement, dated as of January 5, 2000, by and between
the Company and Cliffstar Corporation. [Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated March
23, 2000.]
2.2 First Amendment to Asset Purchase Agreement, dated as of March 8,
2000, by and between the Company and Cliffstar Corporation.
[Incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K dated March 23, 2000.]
2.3 Asset Purchase Agreement, dated as of December 2, 1998, by and between
the Company and Seneca Foods Corporation. [Incorporated by reference
to Exhibit 2.0 to the Company's Current Report on Form 8-K dated
December 30, 1998.]
2.4 Stock Purchase Agreement, dated as of November 6, 2001, by and between
the Company and Sun Northland, LLC. [Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated November
21, 2001.]
2.5 Assignment, Assumption and Release Agreement, dated as of November 6,
2001, by and among Sun Northland, LLC, LaSalle Bank National
Association, St. Francis Bank, F.S.B., ARK CLO 2000-1 Limited and U.S.
Bank National Association. [Incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K dated November 21, 2001.]
2.6 Assignment Agreement, dated as of November 6, 2001, by and between the
Company and Sun Northland, LLC. [Incorporated by reference to Exhibit
2.3 to the Company's Current Report on Form 8-K dated November 21,
2001.]
2.7 Assignment, Assumption and Release Agreement, dated as of November 6,
2001, by and among Sun Northland, LLC, Wells Fargo Bank Minnesota,
National Association, Endeavor, L.L.C., Bank One Wisconsin and M&I
Marshall & Ilsley Bank. [Incorporated by reference to Exhibit 2.4 to
the Company's Current Report on Form 8-K dated November 21, 2001.]
2.8 Assignment Agreement, dated as of November 6, 2001, by and between the
Company and Sun Northland, LLC. [Incorporated by reference to Exhibit
2.5 to the Company's Current Report on Form 8-K dated November 21,
2001.]
3.1 Articles of Incorporation, as amended, effective February 4, 2002.
[Incorporated by reference to Exhibit 3.2 to the Company's Form 10-Q
-63-
EXHIBIT NO. DESCRIPTION
- ----------- -----------
for the quarterly period ended February 28, 2002.]
3.2 By-Laws of the Company, as amended, effective November 6, 2001.
[Incorporated by reference to Exhibit 3.4 to the Company's Form 10-Q
for the quarterly period ended February 28, 2002.]
4.1 Secured Promissory Note, dated as of June 14, 1989, issued by the
Company to The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K
dated July 7, 1989.]
4.2 Mortgage and Security Agreement, dated as of June 14, 1989, from the
Company to The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K
dated July 7, 1989.]
4.3 Mortgage and Security Agreement dated July 9, 1993, between the
Company and The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 4.8 to the Company's Form 10-Q
dated November 12, 1993.]
4.4 Modification Agreement, dated as of July 9, 1993, between the Company
and The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 4.9 to the Company's Form 10-Q
dated November 12, 1993.]
4.5 Modification Agreement, dated as of November 6, 2001, between the
Company and Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 4.5 to the Company's Form 10-K
for the fiscal year ended August 31, 2001.]
4.6 Secured Promissory Note, dated July 9, 1993, between the Company and
The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 4.23 to the Company's Form 10-K
for the fiscal year ended March 31, 1995.]
4.7 Stock Pledge, dated July 9, 1993, between the Company and The
Equitable Life Assurance Society of the United States. [Incorporated
by reference to Exhibit 4.24 to the Company's Form 10-K for the fiscal
year ended March 31, 1995.]
4.8 Loan and Security Agreement, dated as of November 6, 2001, by and
among the Company, Foothill Capital Corporation and Ableco Finance
LLC, as lenders, and Foothill Capital Corporation, as arranger and
administrative agent. [Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated November 21, 2001.]
4.9 Amended and Restated Credit Agreement, dated as of November 6, 2001,
by and among the Company, St. Francis Bank, F.S.B., ARK CLO 2000-1
Limited and U.S. Bank National Association, as lenders, and U.S. Bank
National Association, as agent. [Incorporated by reference to Exhibit
4.2 to the Company's Current Report on Form 8-K dated November 21,
2001.]
4.10 Common Stock Purchase Warrant, dated as of November 6, 2001, issued to
Foothill Capital Corporation. [Incorporated by reference to Exhibit
4.5 to the Company's Current Report on Form 8-K dated November 21,
2001.]
-64-
4.11 Common Stock Purchase Warrant, dated as of November 6, 2001, issued to
Ableco Finance LLC. [Incorporated by reference to Exhibit 4.6 to the
Company's Current Report on Form 8-K dated November 21, 2001.] Other
than as set forth in Exhibits 4.1 through 4.9, the Company has
numerous instruments which define the rights of holders of long-term
debt. These instruments, primarily security agreements, collateral
pledges and mortgages, including amendments and restatements of
previously executed security agreements, collateral pledges and
mortgages, were entered into in connection with (i) debt financing
provided by U.S. Bank National Association, and are disclosed in the
Amended and Restated Credit Agreement filed as Exhibit 4.9 to this
Form 10-K; (ii) and financing provided by Foothill Capital Corporation
and Ableco Finance LLC, and are disclosed in the Loan and Security
Agreement filed as Exhibit 4.8 to this Form 10-K. The Company will
furnish a copy of any of such instruments to the Commission upon
request.
-65-
*10.1 1987 Stock Option Plan, dated June 2, 1987, as amended. [Incorporated
by reference to Exhibit 10.5 to the Company's Form 10-K for the fiscal
year ended December 31, 1987.]
*10.2 Forms of Stock Option Agreement, as amended, under 1987 Stock Option
Plan. [Incorporated by reference to Exhibit 10.6 to the Company's Form
10-K for the fiscal year ended December 31, 1987.]
*10.3 Form of Modification Agreement, dated as of April 16, 1996, between
the Company and each of John B. Stauner, John Swendrowski and William
J. Haddow, modifying Stock Option Agreements previously entered into
between the parties. [Incorporated by reference to Exhibit 10.3 to the
Company's Form 10- K for the fiscal year ended August 31, 1996.]
*10.4 1989 Stock Option Plan, as amended. [Incorporated by reference to
Exhibit 4.4 to the Company's Form S-8 Registration Statement (Reg. No.
33-32525).]
*10.5 Forms of Stock Option Agreements under the 1989 Stock Option Plan, as
amended. [Incorporated by reference to Exhibits 4.5-4.8 to the
Company's Form S-8 Registration Statement (Reg. No. 33-32525).]
*10.6 1995 Stock Option Plan, as amended. [Incorporated by reference to
Exhibit 10.6 to the Company's Form 10-K for the fiscal year ended
August 31, 1997.]
*10.7 Form of Stock Option Agreements under the 1995 Stock Option Plan, as
amended. [Incorporated by reference to Exhibit 10.7 to the Company's
Form 10-K for the fiscal year ended August 31, 1996.]
*10.8 Northland Cranberries, Inc. 2001 Stock Option Plan. [Incorporated by
reference to Exhibit 99.2 to the Company's Current Report on Form 8-K
dated November 21, 2001.]
*10.9 Northland Cranberries, Inc. 2002 Stock Option Plan.
*10.10 Severance and Noncompetition Agreement, dated as of November 6, 2001,
by and between the Company and John Swendrowski. [Incorporated by
reference to Exhibit 10.11 to the Company's Form 10-K for the fiscal
year ended August 31, 2001.]
10.11 Stockholders' Agreement, dated as of November 6, 2001, by and among
Sun Northland, LLC, the minority shareholders listed therein and the
Company. [Incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K dated November 21, 2001.]
10.12 Registration Agreement, dated as of November 6, 2001, by and among the
Company, Sun Northland, LLC and the other investors signatory thereto.
[Incorporated by reference to Exhibit 4.4 to the Company's Current
Report on Form 8-K dated November 21, 2001.]
*10.13 Management Services Agreement, dated as of November 6, 2001, by and
between Northland Cranberries, Inc. and Sun Capital Partners
Management, LLC. [Incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K dated November 21, 2001.]
-66-
21 Subsidiaries of the Company. [Incorporated by reference to Exhibit 21
to the Company's Form 10-K for the fiscal year ended August 31, 1999.]
23 Consent of Deloitte & Touche LLP.
99.1 Certification of John Swendrowski, Chairman and Chief Executive
Officer of Northland Cranberries, Inc., pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Nigel Cooper, Vice President - Finance of Northland
Cranberries, Inc., pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Definitive Proxy Statement for the Company's 2003 annual meeting of
shareholders (which will be filed with the Commission under Regulation
14A within 120 days after the end of the Company's fiscal year and
which is incorporated by reference herein to extent indicated in this
Form 10-K).
* This exhibit is a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of
Form 10-K.
-67-