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

(Mark One)

For the quarterly period ended November 30, 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:

NORTHLAND CRANBERRIES, INC.
FORM 10-Q INDEX

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PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS.

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 INCOME
(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
THREE MONTHS ENDED NOVEMBER 30, 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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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OCEAN SPRAY TRANSACTION

On September 23, 2004, we entered into agreements with Ocean Spray pursuant to which: (i) we sold our processing plant, storage facility and certain offices located in Wisconsin Rapids, Wisconsin to Ocean Spray for approximately $28 million, subject to certain adjustments and including a $2.5 million escrow; (ii) Ocean Spray paid us a non-refundable (but creditable) $5 million cash fee in exchange for the option to purchase up to 14 of our 17 cranberry marshes at prices that aggregate to $47.5 million (before the option fee); (iii) we agreed to, for a period of ten years, deliver all of the cranberries harvested from our currently-owned marshes and our contract growers’ marshes to Ocean Spray, which Ocean Spray will receive, clean, bin, store and process into juice concentrate for a fixed fee; (iv) Ocean Spray agreed to, for a period of ten years, purchase cranberry concentrate not otherwise used by us in our branded products; and (v) we agreed to dismiss with prejudice our antitrust lawsuit against Ocean Spray (the “Ocean Spray Transaction”).

GENERAL

Total net revenues increased by 3.3% during the three months ended November 30, 2004 compared to the three months ended November 30, 2003. This increase resulted primarily from an increase in sales of cranberry concentrate pursuant to our new agreement to sell cranberry concentrate to Ocean Spray. This increase was partly offset by a decrease in sales of branded products which we believe is attributable to an overall increase in trade spending by competitors in the cranberry beverage category in specific markets, as well as our decreased trade spending during the first quarter of fiscal 2005.

During the three months ended November 30, 2004, we realized net income of $4.5 million, which was an increase of $2.2 million compared to the three months ended November 30, 2003. In the month of November, we entered into an Amended and Restated Loan and Security Agreement with two of our lenders pursuant to which, among other things, the commitment under the existing revolving credit facility was reduced to an aggregate principal amount of $11.0 million and an additional term loan facility in the aggregate principal amount of $15.0 million was provided. We used the proceeds from our refinancing arrangements to (i) reduce our long-term debt with another lender by $5.0 million during the first quarter of fiscal 2005 and (ii) also, with proceeds from the Ocean Spray Transaction, to pay a special dividend during the second quarter of fiscal 2005.

During the first quarter of fiscal 2005, we declared a $0.33 per share special dividend payable on December 1, 2004 to shareholders of record as of November 26, 2004. As a result, we recorded a dividend payable on our November 30, 2004 balance sheet in the amount of $31.9 million. This dividend was paid on December 1, 2004 and reduced shareholders equity from approximately $63.9 million as of August 31, 2004 to approximately $36.5 million as of November 30, 2004.

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 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.

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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 three months ended November 30, 2004.

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 receivable 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 $8.2 million, net of doubtful accounts of $0.3 million, and $4.4 million, net of doubtful accounts of $0.3 million as of November 30, 2004 and August 31, 2004, 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.

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Realization of Deferred Tax Assets

We have recorded a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. We considered our recent history of profitable operations adjusting for nonrecurring items, the sale of certain assets to Ocean Spray and projected future operations in reaching our conclusion.

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 our 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.

RESULTS OF OPERATIONS

Total net revenues for the three months ended November 30, 2004 were $23.1 million, an increase of 3.3% from net revenues of $22.4 million in the prior year’s first quarter. The increase resulted primarily from an increase in sales of cranberry concentrate pursuant to our agreement to sell cranberry concentrate to Ocean Spray. Trade industry data for our Northland brand 100% juice products for the 12-week period ended November 28, 2004 showed that we achieved a 5.2% market share of the supermarket shelf-stable cranberry beverage category on a national basis, down from a 5.8% market share for the 12-week period ended November 30, 2003. We believe the reduction in market share is primarily attributable to a reduction in trade spending programs with customers during the first quarter of fiscal 2005. As of November 28, 2004, our Northland 100% juice cranberry products were available in supermarkets nationwide that account for approximately 71.3% of total grocery sales, down from approximately 73.9% as of November 30, 2003. We believe this loss in distribution is primarily attributable to trade accounts allocating shelf space to popular new low calorie products, as well as our reduced level of trade spending during the quarter.

Cost of sales for the three months ended November 30, 2004 was $16.8 million compared to $15.4 million for the first quarter of fiscal 2004, resulting in gross margins of 27.2% and 31.2% in each respective period. The increase in cost of sales was primarily due to an increase in cranberry concentrate sales. The decrease in gross margin percentage was primarily the result of lower selling prices for cranberry concentrate and frozen processed cranberries over the same periods in fiscal 2004.

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Selling, general and administrative expenses were $5.7 million, or 24.6% of net revenues, for the three months ended November 30, 2004 compared to $4.0 million, or 17.9% of net revenues, for the first quarter of fiscal 2004. The increase was primarily the result of recording a $1.2 million charge for management bonuses paid following the Ocean Spray Transaction and a $0.7 million increase in media advertising spending, from $0.8 million in the first quarter of fiscal 2004 to $1.5 million in the first quarter of fiscal 2005. Other administrative expenses decreased by $0.1 million.

The effective income tax rate of 40% is higher than the statutory rate of 34% due to state income taxes.

We recognized a net gain of $7.7 million in the three months ended November 30, 2004 as a result of the Ocean Spray Transaction (see Note 3.).

Interest expense was $0.9 million for the three months ended November 30, 2004 compared to $0.6 million in the prior year’s first quarter. Interest expense has increased as result of increased debt levels.

Net income for the three months ended November 30, 2004, was $4.5 million, or $0.04 per diluted share, compared to net income of $2.3 million, or $0.02 per diluted share, for the three months ended November 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $7.5 million in the first three months of fiscal 2005 compared to $4.1 million in the same period of fiscal 2004. Receivables, prepaid expenses and other current assets increased $4.9 million in the first three months of fiscal 2005 compared to a decrease of $0.8 million for the same period in fiscal 2004. This increase was primarily due to increased cranberry concentrate sales to Ocean Spray pursuant to our agreement to sell to Ocean Spray cranberry concentrate not otherwise used by us in our branded products. Inventories increased $5.3 million in the first three months of fiscal 2005 compared to $9.9 million in the first three months of fiscal 2004. The increase in inventories was due primarily as a result of the fall 2004 cranberry harvest and the purchase of cranberries from our contract growers. Accounts payable and accrued liabilities increased by $16.5 million in the first three months of fiscal 2005 compared to an increase of $9.5 million in the first three months of fiscal 2004. The increase in accounts payable was attributable primarily to installment payments due our contract growers for fruit received during the quarter. The increase in accruals was primarily due to the recording of a $5.0 million deposit related to the fee Ocean Spray paid us for the option to purchase certain of our cranberry marshes, which is creditable against the purchase price to be paid by Ocean Spray in the event it exercises its option.

Working capital was $6.0 million at November 30, 2004 compared to $26.6 million at August 31, 2004. Our current ratio decreased to 1.1 to 1.0 at November 30, 2004, compared to 3.6 to 1.0 at August 31, 2004.

Net cash provided by investing activities in the first three months of fiscal 2005 was $12.1 million from the sale of our receiving, freezing and concentrate-processing plant and an adjacent office in Wisconsin Rapids to Ocean Spray. Net cash provided by investing activities in first quarter of fiscal 2004 was $0.6 million, which primarily resulted from the sale of our former bottling facility in Bridgeton, New Jersey.

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Our net cash provided by financing activities was $12.0 million in the first three months of fiscal 2005 compared to net cash used of $2.1 million in the same period of the prior year. In the first three months of fiscal 2005, we made principal payments on long-term debt and other obligations of $8.0 million as required under our restructured debt agreements compared to $2.1 million in the same period of fiscal 2004. Net borrowing under the revolving line of credit facility amounted to $5.0 million in the first three months of fiscal 2005. Also, in the first three months of fiscal 2005, we had additional borrowings of $15.0 million under our term loan facility. We used the proceeds from these borrowings to reduce other long-term debt by $5.0 million during the first quarter of fiscal 2005 and, with proceeds from the Ocean Spray Transaction, to pay a special dividend during the second quarter of fiscal 2005. In both fiscal 2005 and fiscal 2004, monthly principal payments were made on other obligations and additional payments were made as required under our restructured and restated debt agreements.

The following schedule sets forth our contractual obligations as of November 30, 2004 (in thousands):

As of November 30, 2004, we had outstanding borrowings of $5.0 million under our $11.0 million revolving credit facility with Wells Fargo and Ableco. We had $3.5 million of unused borrowing availability under the facility.

We believe we will be able to fund our ongoing operational needs for fiscal 2005 through (i) cash generated from operations and (ii) financing available under our revolving credit facility with Wells Fargo 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 November 30, 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 maintain our Northland and Seneca brand names, distribution capabilities and branded products market share; (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) agricultural factors affecting our crop and the crop of other North American growers; (v) our ability to comply with the terms and conditions of, and to satisfy our responsibilities under, our credit facilities and other debt agreements; and (vi) 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, including our revised debt structure.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We do not enter into any material futures, forwards, swaps, options or other derivative financial instruments for trading or other purposes. Our primary exposure to market risk is related to changes in interest rates and the effects those changes may have on our earnings as a result of our long-term financing arrangements. We manage our exposure to this market risk by monitoring interest rates and possible alternative means of financing. Our earnings 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 November 30, 2004, an increase of 1.0% in market interest rates would increase annual interest expense by approximately $155,000.

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ITEM 4.    CONTROLS AND PROCEDURES.

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

ITEM 1.    LEGAL PROCEEDINGS.

On November 11, 2002, we filed an antitrust lawsuit against Ocean Spray alleging that it engaged in anticompetitive tactics and unlawfully monopolized the cranberry products industry to the detriment of its competitors and customers. We dismissed the lawsuit with prejudice upon the consummation of the Ocean Spray Transaction on September 23, 2004.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 6.    EXHIBITS.

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

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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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