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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)

For the quarterly period ended    February 29, 2004

OR

For the transition period from ________to ________

Commission File Number 0-16130

Registrant’s telephone number, including area code    (715) 424-4444

        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 

        Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

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NORTHLAND CRANBERRIES, INC.
FORM 10-Q INDEX

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PART I – FINANCIAL INFORMATION

NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)

See notes to condensed consolidated financial statements.

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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)

See notes to condensed consolidated financial statements.

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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)

See notes to condensed consolidated financial statements.

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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
SIX MONTHS ENDED FEBRUARY 29, 2004
(DOLLARS IN THOUSANDS)
(Unaudited)

See notes to condensed consolidated financial statements.

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NORTHLAND CRANBERRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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GENERAL

During the six months ended February 29, 2004, net income was $8.9 million, which was an improvement of $7.5 million compared to the six months ended February 28, 2003. Also in the six months ended February 29, 2004 we reduced our long-term and short-term debt by a total of $16.9 million. Shareholders equity also improved by $8.9 million during the first half of fiscal 2004 to $54.8 million.

Total net revenues decreased by 16.1% during the six months ended February 29, 2004 compared to the six months ended February 28, 2003. This decrease resulted primarily from a reduction in sales of cranberry concentrate to industrial ingredient customers which we believe is attributable to (i) an increase in competition during the period which resulted in lower sales volume and prices and (ii) a decrease in sales of branded products which we believe is attributable to an overall increase in trade spending by competitors and an overall decrease in sales throughout the shelf stable juice category due to recent publicity concerning diets low in carbohydrates.

During the remainder of fiscal 2004, we intend to continue to focus our marketing efforts on educating consumers about the health benefits and generally higher cranberry content of our Northland brand 100% juice products. We also intend to continue to focus on profitable growth while striving to reduce debt.

On November 19, 2003, we announced that we retained Stephens Inc. of Little Rock, Arkansas, to serve as our financial advisor and assist us in evaluating various strategic alternatives, including, without limitation, potential acquisitions, mergers, joint ventures, licensing arrangements or investments in or potential sale of the company, as well as remaining an independent public company. We are working with Stephens Inc. to evaluate the means through which we can build on our financial performance, continue to grow the Northland brand and maximize shareholder value.

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, assets held for sale and income taxes. 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 when actual participation in these programs differs from historical experience. There have been no significant changes in estimates for such reserves during the six months ended February 29, 2004.

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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 $5.2 million, net of doubtful accounts of $0.4 million, and $8.5 million, net of doubtful accounts of $0.4 million as of February 29, 2004 and August 31, 2003, 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.

Assets Held for Sale

From time to time, in connection with our management’s ongoing efforts to maximize operating effectiveness, decisions are made to exit certain production or distribution facilities. At the time that our management commits to a decision to exit existing facilities and initiates an active plan to dispose of the facility, an assessment of the recoverability of the carrying value of the long-lived assets of the facility to be closed is made by our management. This assessment requires our management to estimate the fair value of the assets to be disposed of and the estimated cost to sell such assets. To the extent that the carrying value of the assets to be disposed of exceeds the estimated fair value of those assets less their estimated cost to sell, impairment in the value of the assets is recognized.

Estimates of the fair value of the assets to be disposed of are generally based on a discounted cash flow analysis or substantive purchase offers from viable potential buyers. Estimates of the value are impacted by a variety of relevant factors, including, but not limited to, alternative future uses of such assets, the availability of potential buyers, general economic conditions, current legal restrictions, if any, on the use of the assets, and any relevant legal issues. Our management continues to evaluate all available evidence of the fair value of the assets to be disposed of and makes any necessary adjustments at the time that additional information becomes available. During the quarter ended February 29, 2004, we recorded an additional impairment writedown of $0.6 million related to a closed facility that is held for sale.

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Realization of Deferred Tax Assets

We have net deferred tax assets of $35.8 million and a valuation allowance against these assets of $35.8 million resulting in a no deferred income tax assets being recorded on our consolidated balance sheet or other financial statements. Of this amount, $31.2 million of the deferred tax assets relate to tax loss carryforwards.

As of August 31, 2003, we had, for federal and state income tax purposes, net operating loss carryforwards of approximately $79.5 million, which expire in 2021 and 2022, available to offset future federal taxable income. In addition, as of August 31, 2003, we had approximately $2.0 million 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.

Deferred Gain on Forgiveness of Indebtedness

On November 6, 2001 we completed the restructuring of our then-outstanding debt obligations. The modified debt included provisions for a variable interest rate based on a premium above the lender’s prime borrowing rate, the critical assumption made at the time of the restructuring was the interest rate to be incurred over the life of the debt. For purposes of the determination of the gain from the restructuring, the interest rate used for the debt was the rate in effect at the date of the restructuring. Since the debt restructuring in November 2001, general economic conditions and other factors have resulted in a reduction of interest rates. Accordingly, interest paid has been less than previously estimated. Interest rates in effect at February 29, 2004 were 6.5%, therefore, we recognize a gain of approximately $5.3 million upon final payment of the principal outstanding.

OFF-BALANCE SHEET ARRANGEMENTS

We do not typically engage in off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships with unconsolidated entities or other persons that may have a material current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. We do not materially rely on off-balance sheet arrangements for liquidity, capital resources, market risk support, credit risk support or other benefits.

We have outstanding 100 shares of our 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 our capital stock upon the sale of substantially all our 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. We cannot be certain if or when the Series B Preferred Stock may be redeemed, nor can we be certain of the redemption price in the event of such a redemption.

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RESULTS OF OPERATIONS

Total net revenues for the three months ended February 29, 2004 were $16.7 million, a decrease of 32.8% from net revenues of $24.8 million in the prior year’s second quarter. The decrease resulted primarily from (i) a 23.4% decrease in sales of cranberry concentrates and frozen cranberries, (ii) an 8.5% decrease in sales of Northland brand juice products and (iii) a 6.5% decrease in sales of Seneca brand juice products. Partly offsetting these sales declines were lower trade incentives for the quarter of $1.6 million or 6.5%. Net revenues for the six months ended February 29, 2004 were $39.1 million, a decrease of 16.1% from net revenues of $46.6 million in the corresponding period for the prior year. The decrease resulted primarily from (i) a decrease in sales of cranberry concentrates of 7.7%, (ii) a decrease in co-packing revenues 2.8% due to the closure of our Jackson, Wisconsin bottling facility, (iii) a decrease in sales of Northland brand juice products of 2.8% and (iv) a decrease in sales of Seneca brand juice products of 6.7%. Partly offsetting these decreases in sales from last year were sales of fresh and frozen cranberries, which increased by 2.1%, and a decrease in trade incentives of $0.9 million or 1.9%.

Trade industry data for the 12-week period ended February 22, 2004 showed that our Northland brand 100% juice products achieved a 5.3% market share of the supermarket shelf-stable cranberry beverage category on a national basis, down from a 5.6% market share for the 12-week period ended February 28, 2003. We believe this decrease is attributable in part to an increase in publicity related to “low carb” diets, as well as an increase in trade spending by our competitors. Nonetheless, we continue to gain distribution with our Northland brand juice products in the retail grocery channel. As of February 22, 2004, our Northland 100% juice cranberry products were available in supermarkets nationwide that account for approximately 74.3% of total grocery sales, up from 66.8% as of February 22, 2003.

Cost of sales for the three months ended February 29, 2004 was $10.9 million compared to $16.6 million for the second quarter of fiscal 2003, resulting in gross margins of 34.7% and 33.4% in each respective period. The increase in gross margin percentage resulted primarily from higher margins on sales of our branded juice products as a result of a decrease in trade spending for the quarter and lower manufacturing costs. This improvement in margins was partly offset by an increase in the cost of cranberry concentrate due to higher prices paid to our contract growers for cranberries. Cost of sales for the six months ended February 29, 2004 was $26.3 million compared to $31.7 million for the same period of fiscal 2003, resulting in gross margins of 32.7% and 31.9% in each respective period. The increase in gross margin percentage in the six months ended February 29, 2004 was primarily the result of higher selling prices for cranberry concentrate and frozen processed cranberries over the same period in fiscal 2003.

Selling, general and administrative expenses were $6.1 million, or 36.5% of net revenues, for the three months ended February 29, 2004 compared to $7.5 million, or 30.0% of net revenues, for the second quarter of fiscal 2003. The increase in expenses as a percentage of net revenues was primarily due to lower sales volume for the quarter and certain nonrecurring expenses primarily related to the closure of our Jackson, Wisconsin facility. Overall, there was a $1.4 million decrease in selling, general and administrative expenses in the three months ended February 29, 2004 which was primarily the result of a $2.0 million decrease in media advertising spending, from $4.0 million in the second quarter of fiscal 2003 to $2.0 million in the second quarter of fiscal 2004. For the six months ended February 29, 2004, selling, general and administrative expenses were $10.1 million, or 25.9% of net revenues, compared to $14.1 million, or 30.2% of net revenues, for the first six months of fiscal 2003. This decrease was primarily the result of a $4.8 million decrease in advertising media expenses. Partly offsetting this decrease was a $0.8 million increase in expenses related to the closure of our Jackson facility.

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There was a net loss on the disposal of property and equipment of $0.3 million in the three months and six months ended February 29, 2004 related to the sale of equipment in connection with the closure of our Jackson facility. Partly offsetting this loss was a gain of $1.5 million attributable to payments made under our insurance policy in connection with losses experienced as a result of a fire at our former warehouse facility in Eau Claire, Michigan and upon the subsequent sale of that facility.

There was a write down of assets held for sale in the three months and six months ended February 29, 2004 in the amount of $0.6 million related to our closed Dundee, New York facility. As a result of ongoing efforts to sell this facility, recent purchase offers indicated an additional impairment charge related to the value of the property was appropriate.

Other income was $3.0 million for the six months ended February 29, 2004 as a result of the settlement of the dispute with Cliffstar Corporation related to earn-out payments due under an Asset Purchase Agreement entered into in connection with the sale of our private label juice business to Cliffstar. Other income for the six months ended February 28, 2003 was $1.5 million due to the recognition of a gain from the settlement of claims made by the Company against a third party storage facility for improper handling of the Company’s inventory following delivery. Interest expense was $0.6 million for the three months ended February 29, 2004 compared to $1.0 million in the prior year’s second quarter. Interest expense for the six months ended February 29, 2004 was $1.3 million compared to $2.1 million during the same period in fiscal 2003. Interest expense in the respective periods was lower as result of reduced debt levels.

A gain of $5.3 million was recognized in the three months ended February 29, 2004 as a result of the prepayment in full of the term note held by one of our lenders. This gain is the recognition of the future interest payments, as previously established in accordance with SFAS No.15, “Accounting for Debtors and Creditors for Troubled Debt Restructurings,” from the restructuring of the Company’s debt in November 2001.

Interest income was less than $0.1 million for the three and six months periods ended February 29, 2004 compared to $0.5 million and $1.1 in the comparable periods of fiscal 2003. The interest income in fiscal 2003 was associated with an unsecured, subordinated promissory note receivable from Cliffstar Corporation, which was paid in full during fiscal 2003.

In the six months ended February 29, 2004, there were no federal income taxes on operating income due to the utilization of certain net operating loss carryforwards for which no benefit had been previously provided. There was $20,000 of state income taxes expensed in the three and six months ended February 29, 2004.

Net income for the three months ended February 29, 2004, increased by 1,840% to $6.5 million, or $0.06 per diluted share, compared to net income of $0.3 million, or $0.00 per diluted share, for the second quarter of fiscal 2003. Net income for the six months ended February 29, 2004 increased by 558% to $8.9 million, or $0.09 per diluted share, compared to $1.4 million, or $0.01 per diluted share, of net income for the first six months of fiscal 2003.

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LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $3.2 million in the first six months of fiscal 2004 compared to $1.4 million in the same period of fiscal 2003. Receivables, prepaid expenses and other current assets decreased $3.9 million in the first six months of fiscal 2004 compared to a decrease of $1.4 million for the same period in fiscal 2003. This decrease was due to lower sales levels during the first six months ended February 29, 2004 than for the first six months ended February 28, 2003. Inventories increased $10.0 million in the first six months of fiscal 2004 compared to $4.6 million in the first six months of fiscal 2003. Inventories increased by $5.4 million more in the first six months of fiscal 2004 than for the same period in fiscal 2003 due to the combination of lower sales volumes and higher prices paid to our contract growers for cranberries. Accounts payable and accrued liabilities increased by $2.6 million in the first six months of fiscal 2004 compared to $0.6 million in the first six months of fiscal 2003. The increase in accounts payable was primarily due to higher prices paid to our contract growers for cranberries.

Working capital was $16.2 million at February 29, 2004 compared to $16.4 million at August 31, 2003. Our current ratio was 1.9 to 1.0 at February 29, 2004, compared to 1.8 to 1.0 at August 31, 2003.

Net cash provided by investing activities was $2.5 million in the first six months of fiscal 2004 compared to $2.4 million in the same period of fiscal 2003. In the first six months of fiscal 2004, proceeds from disposals of property and equipment, primarily as a result of the sale of the Bridgeton and Eau Claire facilities and Jackson equipment auction, provided $4.0 million. In fiscal 2003, proceeds from disposals of property and equipment provided $0.8 million, primarily as a result of the auction of equipment held at our closed facility in Dundee, New York. Purchases of property and equipment were $0.7 million in fiscal 2004 and $0.4 million in fiscal 2003. In the first six months of fiscal 2004, we also loaned $0.8 million to one of our independent contract growers (see Note 8).

Our net cash used in financing activities was $12.1 million in the first six months of fiscal 2004 compared to $3.7 million in the same period of the prior year. In the first six months of fiscal 2004, we made principal payments on long-term debt and other obligations of $12.2 million as required under our restructured debt agreements compared to $8.7 million in the same period of fiscal 2003. The $12.2 million in principal payments was primarily comprised of $8.8 million in payments to US Bank resulting in the elimination of the bank note to US Bank and principal payments to Wells Fargo Foothill Inc. totaling $2.3 million. Principal payments were made on other long-term debt totaling $1.1 million. In both fiscal 2004 and fiscal 2003, monthly principal payments were made on other obligations and additional payments were made as required under our restructured debt agreements.

The following schedule sets forth our contractual long-term debt obligations as of February 29, 2004 (dollars in thousands):

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As of February 29, 2004, we had no outstanding borrowings under our $30.0 million revolving credit facility with Wells Fargo Foothill and Ableco. As of February 29, 2004, we had approximately $11.4 million of unused borrowing availability under the facility. Proceeds of $1.3 million from the sale of equipment at our Jackson, Wisconsin facility were used to reduce our Wells Fargo Foothill long-term debt. We intend to pay the remaining balance of our long-term debt to Wells Fargo Foothill of approximately $2.6 million upon the closing of the sale of our Jackson facility (see Note 4).

We believe we will be able to fund our ongoing operational needs for fiscal 2004 through (i) cash generated from operations and (ii) financing available under our revolving credit facility with Wells Fargo 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 February 29, 2004, we were in compliance with all of our debt arrangements.

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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, 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; (vi) our ability to comply with the terms and conditions of, and to satisfy our responsibilities under, our credit facilities and other debt agreements; and (vii) our ability to identify, evaluate and successfully execute any strategic alternatives. You should consider these risks and factors and the impact they may have when you evaluate our forward-looking statements. We make these statements based only on our knowledge and expectations on the date of this Form 10-Q. We disclaim any duty to update these statements or other information in this Form 10-Q based on future events or circumstances. Please read this entire Form 10-Q to better understand our business and the risks associated with our operations. Specifically, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our current financial condition.

We do not enter into any material futures, forwards, swaps, options or other derivative financial instruments for trading or other purposes. Our primary exposure to market risk is related to changes in interest rates and the effects those changes may have on our earnings as a result of our long-term financing arrangements. We manage our exposure to this market risk by monitoring interest rates and possible alternative means of financing. Our earnings may be affected by changes in short-term interest rates under our revolving line of credit facility and certain term loans, pursuant to which our borrowings bear interest at a variable rate, subject to minimum interest rates payable on certain loans. Based upon the debt outstanding under our revolving line of credit facility and certain term loans as of February 29, 2004, an increase of 1.0% in market interest rates would increase annual interest expense by approximately $6,000.

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Our Chief Executive Officer and our Vice President – Finance, as of the end of the period covered by this Quarterly Report on Form 10-Q, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e). 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 changes in our internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

There have been no material developments in the legal proceedings described in our Quarterly Report on Form 10-Q for the three months ended November 30, 2003.

On December 9, 2003, Wells Fargo Foothill Inc. f/k/a Foothill Capital Corporation purchased 2,543,053 shares of Class A Common Stock for a purchase price $25,430.53 pursuant to the terms and conditions of Northland Cranberries, Inc. Common Stock Purchase Warrant No. W-1 dated November 6, 2001. The shares sold are exempt from registration pursuant to Section 4 (2) of the Securities Act of 1933 because they were sold by the issuer in a transaction not involving any public offering.

None.

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At our annual meeting of shareholders held on January 7, 2004, the following nine individuals, who constitute our entire board of directors, were elected to serve as directors of the Company to hold office until the next annual meeting of our shareholders and until their successors are duly qualified and elected:

Exhibits filed with this Form 10-Q report are incorporated herein by reference to the Exhibit Index accompanying this report.

No Current Reports on Form 8-K were filed during the second quarter of fiscal 2004.

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SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

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