UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 AND 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to ________
Commission File Number 0-16130
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NORTHLAND CRANBERRIES, INC.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1583759
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2930 Industrial Street
P.O. Box 8020
Wisconsin Rapids, Wisconsin 54495-8020
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code (715) 424-4444
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date:
Class A Common Stock July 15, 2003 91,548,580
1
NORTHLAND CRANBERRIES, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements...................................... 3
Condensed Consolidated Balance Sheets..................... 3
Condensed Consolidated Statements of Operations........... 4
Condensed Consolidated Statements of Cash Flows........... 5
Condensed Consolidated Statement of Shareholders' Equity.. 6
Notes to Condensed Consolidated Financial Statements...... 7 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 17 - 23
Item 3. Quantitative and Qualitative Disclosure About
Market Risk........................................... 24
Item 4. Controls and Procedures................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 25
Item 2. Changes in Securities and Use of Proceeds................. 25
Item 3. Defaults Upon Senior Securities........................... 26
Item 4. Submission of Matters to a Vote of Security Holders....... 26
Item 6. Exhibits and Reports on Form 8-K.......................... 26
SIGNATURE................................................. 27
Certifications............................................ 28 - 29
Exhibit Index............................................. 30
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
May 31, August 31,
2003 2002
ASSETS
Current assets:
Cash and cash equivalents $ 7,249 $ 264
Accounts receivable - net 5,985 7,498
Current portion of note receivable and accounts receivable - other 196 10,190
Inventories 20,099 18,273
Prepaid expenses and other current assets 948 606
Assets held for sale 2,612 3,100
-------- -------
Total current assets 37,089 39,931
Note receivable, less current portion 0 18,500
Property and equipment - net 61,397 63,836
Other assets 491 825
Debt issuance cost - net 2,750 3,793
-------- -------
Total assets $ 101,727 $ 126,885
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit facility $ 0 $ 560
Accounts payable 8,747 7,905
Accrued liabilities 6,118 9,028
Current maturities of long-term debt:
Outstanding principal payments 8,574 14,876
Future interest payments from debt restructuring 355 692
-------- -------
Current maturities of long-term debt 8,929 15,568
-------- -------
Total current liabilities 23,794 33,061
Long-term debt:
Outstanding principal payments 29,648 47,661
Interest capitalized in debt restructuring 6,407 6,871
-------- -------
Long-term debt 36,055 54,532
-------- -------
Total liabilities 59,849 87,593
-------- -------
Shareholders' equity:
Common stock - Class A, $.01 par value, 91,548,580 shares
issued and outstanding 915 915
Redeemable preferred stock - Series B, $.01 par value, 100 shares issued
and outstanding 0 0
Additional paid-in capital 154,902 154,902
Accumulated deficit (113,939) (116,525)
-------- -------
Total shareholders' equity 41,878 39,292
-------- -------
Total liabilities and shareholders' equity $ 101,727 $ 126,885
======== =======
See notes to condensed consolidated financial statements.
3
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
May 31, May 31, May 31, May 31,
2003 2002 2003 2002
--------- --------- --------- --------
Net revenues $ 22,649 $ 24,231 $ 69,234 $ 78,522
Cost of sales (15,977) (16,094) (47,692) (53,503)
------- ------- ------- -------
Gross profit 6,672 8,137 21,542 25,019
Selling, general and administrative expenses (5,089) (6,043) (19,148) (18,515)
Gain on disposal of property & equipment 17 0 17 0
Other income (Note 4) 89 0 1,589 0
------- ------- ------- -------
Income from operations 1,689 2,094 4,000 6,504
Interest expense (944) (1,119) (3,020) (5,399)
Interest income 490 630 1,606 1,909
Gain on forgiveness of indebtedness 0 0 0 83,299
------- ------- ------- -------
Income before income taxes 1,235 1,605 2,586 86,313
Income tax benefit (expense) 0 339 0 (32,461)
------- ------- ------- -------
Net income $ 1,235 $ 1,944 $ 2,586 $ 53,852
========= ========= ========= =========
Net income per common share:
Basic: $ 0.01 $ 0.02 $ 0.03 $ 0.95
Diluted: $ 0.01 $ 0.02 $ 0.03 $ 0.69
Shares used in computing net income per share:
Basic 91,548,580 91,548,580 91,548,580 56,573,978
Diluted 101,020,905 101,132,502 101,065,728 77,649,987
See notes to condensed consolidated financial statements.
4
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
For the Nine Months Ended
May 31, May 31,
2003 2002
-------- --------
Operating activities:
Net income $ 2,586 $ 53,852
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 2,693 2,941
Amortization of debt issuance costs and debt discount 1,244 1,143
Gain on disposal of property and equipment (17) 0
Gain on forgiveness of indebtedness (net of income taxes
of $32,800) 0 (50,499)
Changes in assets and liabilities:
Receivables, prepaid expenses and other current assets 7,033 4,373
Inventories (1,826) 3,980
Accounts payable and accrued liabilities (2,300) (1,341)
-------- --------
Net cash provided by operating activities 9,413 14,449
-------- --------
Investing activities:
Collections on note receivable 23,000 2,000
Property and equipment purchases (550) (286)
Proceeds from disposals of assets held for sale and of
property and equipment 767 2,115
-------- --------
Net cash provided by investing activities 23,217 3,829
-------- --------
Financing activities:
Net (payments) borrowings under revolving line of credit facility (560) 2,889
Proceeds from issuance of long-term debt 0 20,000
Payments on long-term debt and other obligations (25,085) (6,944)
Net payment in settlement of revolving credit facility 0 (39,773)
Payments for debt issuance costs 0 (1,259)
Proceeds from issuance of preferred stock 0 2,942
Proceeds from issuance of common stock 0 2,618
-------- --------
Net cash used in financing activities (25,645) (19,527)
-------- --------
Net increase (decrease) in cash and cash equivalents 6,985 (1,249)
Cash and cash equivalents, beginning of period 264 1,487
-------- --------
Cash and cash equivalents, end of period $ 7,249 $ 238
======== ========
See notes to condensed consolidated financial statements.
5
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED MAY 31, 2003
(DOLLARS IN THOUSANDS)
(Unaudited)
Total
Common Stock - Additional Accumulated Shareholders'
Class A Paid-in Capital Deficit Equity
BALANCE, AUGUST 31, 2002 $ 915 $ 154,902 $ (116,525) $ 39,292
Net income 0 0 2,586 2,586
-------- --------- ---------- --------
BALANCE, MAY 31, 2003 $ 915 $ 154,902 $ (113,939) $ 41,878
======== ========= ========== ========
See notes to condensed consolidated financial statements.
6
NORTHLAND CRANBERRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by Northland Cranberries, Inc. (collectively with its
subsidiaries, the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect normal and recurring
adjustments, which are, in the opinion of the Company, considered necessary
to present fairly the financial position of the Company as of May 31, 2003
and August 31, 2002 and its related results of operations for the three
month and nine month periods ended May 31, 2003 and 2002, respectively, and
cash flows for the nine months ended May 31, 2003 and 2002, respectively.
As permitted by these regulations, these condensed consolidated financial
statements do not include all information required by accounting principles
generally accepted in the United States of America to be included in an
annual set of financial statements, however, the Company believes that the
disclosures are adequate to make the information presented not misleading.
The Company's condensed consolidated balance sheet as of August 31, 2002
was derived from the Company's latest audited consolidated financial
statements. It is suggested that the accompanying condensed consolidated
financial statements be read in conjunction with the latest audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended August 31,
2002.
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.
On November 6, 2001, as described in Note 2, the Company completed a debt
and equity restructuring. Management believes, as a result of the
restructuring, the Company's debt facilities and expected cash flows from
operations will be sufficient to support the Company's liquidity
requirements for the remainder of the year ending August 31, 2003, and the
foreseeable future.
Net Income Per Common Share - Net income per common share is calculated in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." Basic net income per common share is computed by
dividing net income by the weighted average number of common shares
outstanding. Diluted net income per common share is computed by dividing
net income by the weighted average number of common shares outstanding
increased by the number of dilutive potential common shares based on the
treasury stock method.
The weighted average shares outstanding used in calculating net income per
common share for the three month and nine month periods ended May 31, 2003
and 2002 consisted of the following:
7
Three Months Ended Nine Months Ended
May 31, May 31,
2003 2002 2003 2002
Basic:
Shares outstanding
beginning of period 91,548,580 91,548,580 91,548,580 5,084,606
Issuance of fractional shares
due to reverse stock split 167
Issuance of new shares 51,489,205
---------------------------- ----------------------------
Total 91,548,580 91,548,580 91,548,580 56,573,978
Effect of dilution:
Convertible preferred stock - - - 13,866,621
Warrants 5,021,725 5,033,168 5,026,321 3,795,621
Options 4,450,600 4,550,754 4,490,827 3,413,767
---------------------------- ----------------------------
Diluted 101,020,905 101,132,502 101,065,728 77,649,987
---------------------------- ----------------------------
The shares outstanding used to compute the diluted earnings per share for
the three months and nine months ended May 31, 2003 exclude outstanding
options to purchase 613,575 and 645,525 shares of Class A Common Stock,
respectively. Those 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.
New Accounting Standards - Effective within the nine month period ended May
31, 2003 the Company adopted the following Statements of Financial
Accounting Standards ("SFAS"): (i) SFAS No. 143, "Accounting For Asset
Retirement Obligations," (ii) SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," (iii) SFAS No. 145, "Rescission of
Financial Accounting Standards Board ("FASB") Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," and (iv)
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." The Company also adopted the disclosure requirements of FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
SFAS No. 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS No. 143
requires entities to record the fair value of a liability for an asset
retirement obligation in the period the asset is acquired. When the
liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over time,
the liability is accreted to its present value each period and the
capitalized cost is depreciated over the estimated useful life of the
related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss. The
adoption of SFAS No. 143 did not have a material impact on the consolidated
financial statements.
SFAS No. 144 was issued in October 2001 and 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
8
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 adoption of SFAS No. 144 did not have a material
impact on the consolidated financial statements.
SFAS No. 145 requires that 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. The Company, in adopting this standard, has now
classified the gain on debt forgiveness in fiscal 2002 as a component of
income before income taxes.
SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation as originally provided by SFAS No. 123, "Accounting for
Stock-Based Compensation." Additionally, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both the
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported
results. The transitional requirements of SFAS No. 148 are effective for
all financial statements for fiscal years ending after December 15, 2002.
The disclosure requirements are effective for interim periods beginning
after December 31, 2002. The Company accounts for stock-based compensation
in accordance with Accounting Principle Board Opinion No. 25, "Accounting
for Stock Issued to Employees," as allowed by SFAS No. 123, "Accounting for
Stock-Based Compensation." Stock options are granted at prices equal to the
fair market value of the Company's common stock on the grant dates;
therefore no compensation expense is recognized in connection with stock
options granted to employees. The following table illustrates the effect on
net income and net income per share as if the fair value-based method
provided by SFAS No. 123 had been applied for all outstanding and unvested
awards in each period:
9
For the For the
Three Months Ended Nine Months Ended
(Dollars in thousands except per share amounts)
May 31, May 31, May 31, May 31,
2003 2002 2003 2002
Net income $ 1,235 $ 1,944 $ 2,586 $ 53,852
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effect ($ 112) ($ 118) ($ 336) ($ 352)
------- ------- ------- --------
Pro forma net income $ 1,123 $ 1,826 $ 2,250 $ 53,500
======= ======= ======= ========
Historical and pro forma net
income per common share:
Basic: $ 0.01 $ 0.02 $ 0.03 $ 0.95
Diluted: $ 0.01 $ 0.02 $ 0.03 $ 0.69
In May 2003 the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No.
150 improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new standard
requires that those instruments be classified as liabilities in statements
of financial position. The disclosure requirements are effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of
SFAS No. 150 will have a material impact on the consolidated financial
statements.
On November 25, 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on the disclosures
to be made by a guarantor about its obligations under certain guarantees
issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Interpretation expands on the
accounting guidance of SFAS No. 5, "Accounting for Contingencies," SFAS No.
57, "Related-Party Disclosures," and SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." The Interpretation also incorporates,
without change, the provisions of FASB Interpretation No. 34, "Disclosure
of Indirect Guarantees of Indebtedness of Others," which it supersedes. The
Interpretation identifies several situations where the recognition of a
liability at inception for a guarantor's obligation is not required. The
initial recognition and
10
measurement provisions of Interpretation 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002, regardless of the
guarantor's fiscal year end. The disclosures are effective for financial
statements of interim and annual periods ending after December 15, 2002.
The adoption of the disclosure requirements of this interpretation did not
have a material impact on the consolidated financial statements.
Reclassifications - Certain amounts previously reported have been
reclassified to conform to the current presentation.
2. DEBT AND EQUITY RESTRUCTURING
On November 6, 2001 (during the first quarter of fiscal 2002), the Company
completed a debt and equity restructuring. The debt restructuring 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 which represented
approximately 7.5% of the Company's then 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 represented
approximately 77.5% of the Company's then 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.
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.
As part of the debt restructuring certain future undiscounted cash payments
required under the restructured bank note and insurance company term loans
were applied against the Company's adjusted carrying value of the
restructured bank note and insurance company term loans, with generally no
interest expense recognized for financial reporting purposes, in accordance
with SFAS No. 15, as long as the
11
Company made the scheduled payments in accordance with the restructured
bank note and insurance company term loans and there were no changes to the
interest rate. The amounts remaining as future interest payments as of
May 31, 2003 and August 31, 2002 were $6,800,000 and $7,600,000
respectively.
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. 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 then 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. 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. In
connection with the sale, the Company received from Cliffstar an unsecured,
subordinated promissory note for $28,000,000 (non-cash investing activity)
payable over six years and bearing interest at a rate of 10% per annum, as
well as approximately $6,800,000 in cash. Cliffstar is obligated under the
Asset Purchase Agreement 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.
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 alleging that Cliffstar breached various
provisions of the Asset Purchase Agreement, an interim cranberry sauce
purchase agreement between the two companies, the promissory note issued by
Cliffstar in the transaction, and a co-packing agreement entered into in
connection with the sale. Cliffstar asserted various counterclaims against
the Company alleging among other things that the Company fraudulently
induced Cliffstar to enter into the Asset Purchase Agreement and that the
Company breached various provisions of the Asset Purchase Agreement, the
co-packing agreement and a transition agreement between the parties.
Disagreements between the Company and Cliffstar over the valuation of
finished goods, work-in-process and raw material inventory purchased by
Cliffstar were submitted to arbitration for resolution.
12
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
judgment in the Company's favor and against Cliffstar in the amount of
$6,674,450. Following post trial motions, final judgment was entered in
favor of the Company in the amount of $8,210,459 and in favor of Cliffstar
in the amount of $459,050. On January 21, 2003, Cliffstar filed a Notice of
Appeal with the United States Court of Appeals for the Seventh Circuit.
The Company and Cliffstar entered into a Confidential Settlement Agreement
effective February 27, 2003 and a Supplemental Agreement to Confidential
Settlement Agreement dated April 3, 2003 (collectively referred to as the
"Settlement Agreement") pursuant to which the parties agreed to settle and
resolve all disputes between them, except those relating to the annual
earn-out payments required to be made by Cliffstar to the Company under the
Asset Purchase Agreement. Pursuant to the Settlement Agreement, Cliffstar
has among other things satisfied the judgment entered in its favor in the
case, released all claims it may have against the Company and paid the
Company the sum of $28.75 million, $1.0 million of which was paid on
February 28, 2003, $8.35 million of which was paid on April 9, 2003, and
$19.40 million of which was paid on May 28, 2003. Pursuant to the
Settlement Agreement, the Company has among other things cancelled the
promissory note issued by Cliffstar in the private label sale transaction,
satisfied the judgment entered in its favor in the case and released all
claims it may have against Cliffstar, except those relating to the annual
earn-out payments under the Asset Purchase Agreement. As of February 28,
2003, the principal balance due under the promissory note was $21.0
million.
On May 13, 2002, the Company received Cliffstar's earn-out calculation for
2000. The Company believes Cliffstar's earn-out calculation was not
prepared in accordance with the Asset Purchase Agreement. The Company has
since received an estimate of the earn-out calculation from Cliffstar in
the amount of $1,177,621 for 2001 and $0 for 2002. To date, however,
Cliffstar has not provided the Company with audited earn-out calculations
for 2001 or 2002 in accordance with the Asset Purchase Agreement. The
Company believes that the estimates provided by Cliffstar for 2001 and 2002
significantly understate the earn-out payments due under the Asset Purchase
Agreement.
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 remains in its early
stages and the resolution cannot be predicted with certainty.
On November 11, 2002, the Company together with Clermont, Inc, filed an
antitrust lawsuit against Ocean Spray Cranberries, Inc. ("Ocean Spray").
The lawsuit, which is pending in the United Stated District Court for the
District of Massachusetts,
13
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.
4. OTHER INCOME
As a result of the Cliffstar settlement (see Note 3) the Company has
recognized a gain of $ 89,000 in the three months ended May 31, 2003.
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
received cash proceeds in the amount of $1,500,000, as well as $200,000 in
credits toward storage fees over the next four years. Based on the terms of
the settlement and release agreement, the Company has recognized income of
$1,500,000 for the nine months ended May 31, 2003.
5. INVENTORIES
Inventories as of May 31, 2003 and August 31, 2002 consisted of the
following (in thousands):
May 31, 2003 August 31, 2002
Raw materials $ 11,793 $ 8,396
Finished goods 3,986 3,189
Deferred crop costs 4,320 6,688
------- -------
Total inventories $ 20,099 $ 18,273
======== ========
6. LONG-TERM DEBT
Long-term debt as of May 31, 2003 and August 31, 2002 consisted of the following
(in thousands):
14
May 31, August 31,
2003 2002
Term loans payable $ 5,353 $ 15,461
Fee note payable 3,939 3,738
Bank notes 14,885 28,297
Insurance company note 18,715 19,689
Other obligations 2,092 2,915
------ ------
Total 44,984 70,100
Less current maturities of long-term debt 8,929 15,568
------- -------
Long-term debt $ 36,055 $ 54,532
========= =========
As of May 31, 2003 and August 31, 2002 the Company was in compliance with
its various financial covenants contained in its agreements covering its
long-term debt obligations.
The restructuring of the Company's debt on November 6, 2001 (see Note 2)
resulted in a gain of $83,299,046 during fiscal 2002.
7. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which generally requires the recognition of deferred income tax assets and
liabilities based on the expected future income tax consequences of events
that have previously been recognized in the Company's financial statements
or tax returns. In addition, a valuation allowance is recognized if it is
more likely than not that some or all of the deferred income tax assets
will not be realized.
There was no income tax expense recognized, for financial reporting
purposes, for either the three or nine month periods ended May 31, 2003 due
to the utilization of certain net operating loss carryforwards for which no
benefit had been previously provided. As a result of a tax law change
regarding the use of net operating loss carrybacks, we were able to carry
back additional losses and recognized a tax benefit of approximately
$339,000 in the three months ended May 31, 2002.
As described in Note 2, the Company completed a debt and equity
restructuring on November 6, 2001. The income tax effect of the
restructuring resulted in the recognition of an income tax benefit of
approximately $32,800,000 for financial reporting purposes as of August 31,
2001 and a charge to income taxes of a like amount for the nine month
period ended May 31, 2002. The "change of ownership" provisions of the Tax
Reform Act of 1986 significantly restrict the utilization for income tax
reporting purposes of all net operating losses and tax credit carryforwards
remaining after the debt and equity restructuring.
15
8. 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 May 31, 2003 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.
When the Company completed its Restructuring on November 6, 2001, the
future undiscounted cash payments required under the Restructured Bank Note
were applied against the Company's adjusted carrying value of the
Restructured Bank Note, with generally no interest expense recognized for
financial reporting purposes, in accordance with SFAS No. 15, as long as
the Company made the scheduled payments in accordance with the Restructured
Bank Note and there were no changes to the interest rate. The Company has
made all scheduled payments and certain other mandatory prepayments using
the net proceeds received from the sale of such collateralized assets and
the receipt of the proceeds of the settlement of the note receivable from
Cliffstar (see Note 3). Interest rates have declined from 6% as of the date
of the restructuring to 5.25% as of May 31, 2003. The combination of the
prepayments and the decline in interest rates has resulted in a contingent
gain of approximately $ 4.2 million, which is included within long term
debt: future interest payments from restructuring, in accordance with SFAS
No. 5. This contingent gain may change dependent on future potential
prepayments or future changes in interest rates.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ---------------------------------------------------------
CONDITION AND 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. On November 6, 2001, we consummated the
transactions that we refer to as the Restructuring. See Note 2 of Notes to
Condensed Consolidated 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 2003 we have focused our efforts on regaining market share
through a balanced marketing approach of advertising, trade spending,
slotting and consumer coupons.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles (GAAP) in the United States of
America requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosures. On an on-going basis, we evaluate our estimates, including
those related to product shipments and returns, bad debts, inventories,
income taxes, contingencies and litigation. We base these estimates on
historical experience and various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Specifically, we believe that the following accounting policies and
estimates are most important to the portrayal of our financial condition
and operating results and require management's most difficult judgments:
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists,
product is delivered, collectibility is reasonably assured and title passes
to the customer. Estimated reserves for discounts, coupons, product returns
and trade allowances are established based on an analysis of historical
trends and experience, as well as the trade allowances offered by us at the
time products are delivered. The estimated reserves are charged against
revenues in the same period that corresponding sales are recorded. We
periodically evaluate such reserves and make necessary adjustments
17
when actual participation in these programs differs from historical
experience. There have been no significant changes in estimates for such
reserves during fiscal 2003.
Inventory
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 costs for the periods
during which the cranberries are grown and the cranberries and cranberry
related products are expected to be sold. The market estimates are
dependent upon several factors including, but not limited to, price,
product mix, demand, costs and the period of time it takes to sell the
inventory.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We determine
the level of our allowance based on historical experience, the aging of our
accounts receivables and the creditworthiness of individual customers. If
the financial condition of our customers were to deteriorate, resulting in
impairment of their ability to make payments, additional allowances may be
required. Our accounts receivable balance was $6.0 million, net of doubtful
accounts of $0.3 million, and $7.5 million, net of doubtful accounts of
$0.4 million, as of May 31, 2003 and August 31, 2002, respectively.
Recoverability of Long-Lived Assets
We state the value of our long-lived assets (property and equipment) at
cost less depreciation and amortization. We periodically evaluate this
carrying value. Our estimates of the expected future undiscounted cash
flows related to the recoverability of these assets may change from actual
cash flows due to, among other things, changes in technology and economic
conditions.
RESULTS OF OPERATIONS
Total net revenues for the three months ended May 31, 2003 were $22.6
million, a decrease of 6.5% from net revenues of $24.2 million in the prior
year's third quarter. The decrease resulted from (i) a reduction in
co-packing revenue primarily due to the loss of a major customer who
transferred substantially all production of its bottled juice beverages to
our principal competitor, Ocean Spray Cranberries, Inc.; and (ii) a
decrease in sales of our Seneca brand juice product. This decrease in
revenue was partially offset by increased revenue from sales of cranberry
concentrate. Trade industry data for the 12-week period ended May 18, 2003
showed that our Northland brand 100% juice products achieved a 5.1% market
share of the supermarket shelf-stable cranberry beverage category on a
national basis, down from a 5.2% market share for the 12-week period ended
May 19, 2002. Net revenues for the nine months ended May 31, 2003 were
$69.2 million, a decrease of 11.8% from net revenues of $78.5 million in
the corresponding period for the prior year. The decrease resulted
18
primarily from (i) reduced co-packing revenue; (ii) reduced sales of our
Seneca Brand juice product; and (iii) increased trade promotions for our
Northland 100% juice products. The decrease in revenue was partially offset
by increased sales of our Northland 100% juice products, which we believe
resulted from our balanced marketing approach combining media advertising
with trade promotions. The decrease in revenue was also partially offset by
an increase in revenue from sales of cranberry concentrate.
Cost of sales for the three months ended May 31, 2003 was $16.0 million
compared to $16.1 million for the third quarter of fiscal 2002, resulting
in gross margins of 29.5% and 33.6% in each respective period. The decrease
in gross margin percentage resulted primarily from (i) an increase in the
cost of cranberries purchased from independent growers and (ii) higher
production costs for our branded products attributable to excess capacity
at our bottling facility due to reduced co-packing business. The decrease
in gross margin percentage was partially offset by higher margins on sales
of cranberry concentrate. Cost of sales for the nine months ended May 31,
2003 was $47.7 million compared to $53.5 million for the same period in
fiscal 2002, resulting in gross margins of 31.1% and 31.9% in each
respective period. The decrease in gross margin percentage in the nine
months ended May 31, 2003 was primarily the result of (i) an increase in
the cost of cranberries purchased from independent growers, (ii) higher
production costs for our branded products attributable to excess capacity
at our bottling facility due to reduced co-packing business and (iii)
increased trade promotions for our Northland 100% juice products. This
decrease in gross margin percentage was partially offset by higher margins
on sales of cranberry concentrate.
Selling, general and administrative expenses were $5.1 million, or 22.5% of
net revenues, for the three months ended May 31, 2003 compared to $6.0
million, or 24.9% of net revenues, for the third quarter of fiscal 2002.
The decrease in selling, general and administrative expenses in the three
months ended May 31, 2003 was primarily the result of a $0.8 million
decrease in media advertising spending, from $2.5 million in the third
quarter of fiscal 2002 to $1.7 million in the third quarter of fiscal 2003.
This decrease also resulted in part from a reduction in consulting expenses
and depreciation. For the nine months ended May 31, 2003, selling, general
and administrative expenses were $19.1 million compared to $18.5 million
for the same period in fiscal 2002. Included in the fiscal 2002 amount were
approximately $1.3 million of charges relating to our restructuring. Media
advertising spending in fiscal 2003 increased by $2.6 million offset by a
decrease in consulting expenses and depreciation.
For the three months ended May 31, 2003 we recognized a gain of $0.1
million attributable to payments made by Cliffstar under the Settlement
Agreement (see Note 3 and 4 of Notes to Condensed Consolidated Financial
Statements). Other income for the nine month period ended May 31, 2003 also
includes $1.5 million from the settlement of a claim against a third party
storage facility (see Note 4 of Notes to Condensed Consolidated Financial
Statements).
19
Interest expense was $1.0 million for the three month period ended May 31,
2003 compared to $1.1 million in the prior year's third quarter. This
decrease was the result of reduced debt levels. Interest expense for the
nine month period ended May 31, 2003 was $3.0 million compared to $5.4
million during the same period of fiscal 2002. The decrease resulted
primarily from reduced debt levels and lower interest rates following our
restructuring.
Interest income of $0.5 million and $1.6 million for the three and nine
month periods ended May 31, 2003 and $0.6 million and $1.9 million in the
comparable period of fiscal 2002 is associated with an unsecured,
subordinated promissory note receivable from Cliffstar Corporation. We
expect interest income will decrease in future periods as a result of the
cancellation of the note pursuant to the Settlement Agreement (see Note 3
of Notes to Condensed Consolidated Financial Statements).
In the nine month period ended May 31, 2002, we realized a gain on
forgiveness of indebtedness in connection with the restructuring of
approximately $83.3 million, net of legal fees and other direct costs
incurred and the estimated fair value of the shares of Class A Common Stock
issued to the participating banks. This gain was further reduced by $32.8
million of income taxes resulting in a net gain on forgiveness of
indebtedness of $50.5 million, or $0.89 and $0.65 per basic and diluted
share, respectively.
In the three and nine month periods ended May 31, 2003 there were no income
taxes on operating income due to the utilization of certain net operating
loss carryforwards for which no benefit had been previously provided. The
income tax benefit of $339,000 recognized in the three months ended May 31,
2002 related to additional loss carrybacks as a result of a change in tax
law regarding the use of net operating loss carrybacks.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $9.4 million in the first
nine months of fiscal 2003 compared to net cash provided of $14.4 million
in the same period of fiscal 2002. Receivables, prepaid expenses and other
current assets decreased $7.0 million in the first nine months of fiscal
2003 ($5.0 million of which resulted from payments made by Cliffstar under
the Settlement Agreement, see Note 3 of Notes to Condensed Consolidated
Financial Statements) compared to a decrease of $4.4 million in the first
nine months of fiscal 2002. Inventories increased $1.8 million in the first
nine months of fiscal 2003. This increase resulted from the quantity of raw
materials in the form of frozen cranberries in inventory at May 31, 2003
being higher than at August 31, 2002 offset by a reduction in cranberry
concentrate inventory (as we continue to manage our inventories and sell
cranberry concentrate). In the first nine months of fiscal 2002, we had a
decline in inventory of $4.0 million as a result of sales of cranberry
concentrate inventory. Accounts payable and accrued liabilities declined by
$2.3 million in the first nine months of fiscal 2003 primarily as a result
of elimination of the reserve related to the Cliffstar litigation and a
reduction in accruals for trade promotions.
20
Working capital was $13.3 million at May 31, 2003 compared to $6.9 million
at August 31, 2002. Our current ratio was 1.6 to 1.0 at May 31, 2003,
compared to 1.2 to 1.0 at August 31, 2002. This current ratio improved as a
result of the receipt of funds from the Cliffstar settlement which allowed
us to pay the outstanding balance on our revolving line of credit and
reduce debt.
Net cash provided by investing activities was $23.2 million in the first
nine months of fiscal 2003 compared to $3.8 million in the same period of
fiscal 2002. The increase resulted from payments made by Cliffstar pursuant
to the Settlement Agreement. Payments on our note receivable from Cliffstar
Corporation, prior to the cancellation of the note, contributed toward the
positive cash flow in both periods. In fiscal 2003, proceeds from disposals
of miscellaneous property and equipment, primarily as a result of the
auction held at our closed facility in Dundee, New York, provided $0.8
million. In fiscal 2002, proceeds from disposals of property and equipment
provided $2.1 million ($1.3 million of which was attributable to the sale
of an office facility in Wisconsin Rapids). Purchases of property and
equipment were $0.6 million in fiscal 2003 and $0.3 million in fiscal 2002.
Our net cash used in financing activities was $25.6 million in the first
nine months of fiscal 2003 compared to $19.5 million in the first nine
months of the prior year. In the first nine months of fiscal 2003 we made
payments on long-term debt and other obligations of $25.1 million compared
to $6.9 million in the same period of fiscal 2002. In fiscal 2002, in order
to accomplish the restructuring, we obtained proceeds from our new
revolving credit facility and two term loans, along with proceeds, net of
legal and other costs, from the issuance of Class A Common Stock and Series
A Preferred Stock. These proceeds were used to pay various banks in
settlement of our previous revolving credit facility (see Note 2 of Notes
to Condensed Consolidated Financial Statements) and to pay various debt
issuance costs. In both periods, monthly principal payments were made on
other obligations, and in the first nine months of fiscal 2003 additional
payments were made as required under our restructured debt agreements.
The following schedule sets forth our contractual long-term debt
obligations as of May 31, 2003 (in thousands):
Payments Due by Period
----------------------
0-1 2-3 4-5 After 5
Total year years years years
----- ---- ----- ----- -----
Long-Term Debt $44,984 $8,929 $5,151 $8,409 $22,495
As of May 31, 2003, we had no outstanding borrowings under our $30.0
million revolving credit facility with Foothill and Ableco. As of May 31,
2003, we had approximately $6.8 million of unused borrowing availability
under the facility.
21
As described in Note 3 to Condensed Consolidated Financial Statements, we
received payments of $8.35 million on April 9, 2003 and $19.4 million on
May 28, 2003 from Cliffstar pursuant to the Settlement Agreement. We
applied the payment against our outstanding borrowings under the revolving
credit facility with Foothill and Ableco. We also applied approximately
$14.5 million against our contractual debt obligations with (i) Foothill
and Ableco and (ii) the bank group. The balance is being held as cash to
fund our short term liquidity requirements.
We believe that we will be able to fund our ongoing operational needs for
fiscal 2003 through (i) cash generated from operations; (ii) cash received
from the Cliffstar settlement; and (iii) financing available under our
revolving credit facility with Foothill and Ableco. 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 May 31, 2003, we were in compliance with all of our debt
arrangements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
-------------------------------------------------
We make certain "forward-looking statements" in this Form 10-Q, such as
statements about our future plans, goals and other events which have not
yet occurred. We intend that these statements will qualify for the safe
harbors from liability provided by the Private Securities Litigation Reform
Act of 1995. You can generally identify these forward-looking statements
because we use words such as we "believe," "anticipate," "expect" or
similar words when we make them. Forward-looking statements include, among
others, statements about actions by our competitors, sufficiency of our
working capital, potential operational improvements and our efforts to
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 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-Q. We
22
disclaim any duty to update these statements or other information in this
Form 10-Q based on future events or circumstances. Please read this entire
Form 10-Q to better understand our business and the risks associated with
our operations. Specifically, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion
of our current financial condition.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
-------------------------------------------------------------------
We do not enter into any material futures, forwards, swaps, options or
other derivative financial instruments for trading or other purposes. Our
primary exposure to market risk is related to changes in interest rates and
the effects those changes may have on our earnings as a result of our
long-term financing arrangements. We manage our exposure to this market
risk by monitoring interest rates and possible alternative means of
financing. Our earnings may be affected by changes in short-term interest
rates under our revolving line of credit facility and certain term loans,
pursuant to which our borrowings bear interest at a variable rate, subject
to minimum interest rates payable on certain loans. Based upon the debt
outstanding under our revolving line of credit facility and certain term
loans as of May 31, 2003, an increase of 1.0% in market interest rates
would increase annual interest expense by approximately $0.2 million.
ITEM 4. CONTROLS AND PROCEDURES
---------------------------------
(a) Evaluation of disclosure controls and procedures. In accordance with
Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"),
within 90 days prior to the filing date of this Quarterly Report on Form
10-Q, an evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and
Vice President-Finance, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-14(c) under
the Exchange Act). Based upon their evaluation of these disclosure controls
and procedures, the Chief Executive Officer and Vice President-Finance
concluded that the disclosure controls and procedures were effective as of
the date of such evaluation to ensure that material information relating to
us, including our consolidated subsidiaries, was made known to them by
others within those entities, particularly during the period in which this
Quarterly Report on Form 10-Q was being prepared.
(b) Changes in internal controls. There were no significant changes in our
internal controls or other factors that could significantly affect those
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
On March 8, 2000, we sold the net assets of our private label juice
business to Cliffstar pursuant to an asset purchase agreement dated January
4, 2000. In connection with the sale, we received from Cliffstar an
unsecured, subordinated promissory note for $28,000,000. 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. 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 alleging that Cliffstar breached various provisions of
the asset purchase agreement, an interim cranberry sauce purchase
agreement, the promissory note issued by Cliffstar in the transaction, and
a co-packing agreement entered into in connection with the sale. On October
23, 2002, after a trial to a jury on the remaining claims, the District
Court entered judgment in our favor and against Cliffstar in the amount of
$6,674,450. Following post trial motions, final judgment was entered in our
favor in the amount of $8,210,459 and in favor of Cliffstar in the amount
of $459,050. On January 21, 2003, Cliffstar filed a Notice of Appeal with
the United States Court of Appeals for the Seventh Circuit.
We entered into a Confidential Settlement Agreement effective February 27,
2003 and a Supplemental Agreement to Confidential Settlement Agreement
dated April 3, 2003 (collectively referred to as the "Settlement
Agreement") pursuant to which the parties agreed to settle and resolve all
disputes between them, except those relating to the annual earn-out
payments required to be made by Cliffstar to the Company under the Asset
Purchase Agreement. Pursuant to the Settlement Agreement, Cliffstar has
among other things satisfied the judgment entered in its favor in the case,
released all claims it may have against the Company and paid the Company
the sum of $28.75 million, $1.0 million of which was paid on February 28,
2003, $8.35 million of which was paid on April 9, 2003, and $19.40 million
of which was paid on May 28, 2003. Pursuant to the Settlement Agreement,
the Company has among other things cancelled the promissory note issued by
Cliffstar in the private label sale transaction, satisfied the judgment
entered in its favor in the case and released all claims it may have
against Cliffstar, except those relating to the annual earn-out payments
under the Asset Purchase Agreement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ---------------------------------------------------
None.
25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- -----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------------------------------------------
A. Exhibits
Exhibits filed with this Form 10-Q report are incorporated herein by
reference to the Exhibit Index accompanying this report.
B. Form 8-K
No current reports on Form 8-K were filed during the third quarter of
fiscal 2003.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHLAND CRANBERRIES, INC.
DATE: July 15, 2003 By: /s/ Nigel J. Cooper
----------------------------------------
Nigel J. Cooper
Vice President - Finance
27
CERTIFICATIONS
I, John Swendrowski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northland
Cranberries, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 officer 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
quarterly 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 July 15, 2003
--------------------------------
/s/ John Swendrowski
--------------------------------
John Swendrowski
Chairman of the Board,
Chief Executive Officer and Director
28
I, Nigel J. Cooper, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northland
Cranberries, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 officer 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) 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
quarterly 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 July 15, 2003
--------------------------------
/s/ Nigel J. Cooper
--------------------------------
Nigel J. Cooper
Vice President - Finance
29
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- -------- -----------
4.1 First Amendment to Loan and Security Agreement, dated as of April 29,
2003, by and among the Company, Foothill Capital Corporation and
Ableco Finance LLC, as lenders, and Foothill Capital Corporation, as
administrative agent.
4.2 First Amendment to Amended and Restated Credit Agreement, dated March
27, 2003, by and among the Company, U.S. Bank National Association,
St. Francis Bank, F.S.B. and ARK CLO 2000-1 Limited, as lenders, and
U.S. Bank National Association, as agent.
4.3 Second Amendment to Amended and Restated Credit Agreement, dated May
22, 2003, by and among the Company, U.S. Bank National Association,
St. Francis Bank, F.S.B. and ARK CLO 2000-1 Limited, as lenders, and
U.S. Bank National Association, as agent.
4.4 Third Amendment to Amended and Restated Credit Agreement, dated May
30, 2003, by and among the Company, U.S. Bank National Association,
St. Francis Bank, F.S.B. and ARK CLO 2000-1 Limited, as lenders, and
U.S. Bank National Association, as agent.
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 J. 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.
30