10-K/A 1 sdc81a.txt 10-K/A AMEND NO. 1 TO ANNUAL RPT - NORTHLAND CRAN SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 0-16130 Northland Cranberries, Inc. (Exact name of registrant as specified in its charter) Wisconsin 39-1583759 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 First Avenue South P. O. Box 8020 Wisconsin Rapids, Wisconsin 54495-8020 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (715) 424-4444 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates of the registrant as of November 30, 2001: $3,313,344 Number of shares issued and outstanding of each of the registrant's classes of common stock as of November 30, 2001: Class A Common Stock, $.01 par value: 49,826,455 shares PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE: Proxy Statement for 2002 annual meeting of shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the registrant's fiscal year and, upon such filing, to be incorporated by reference into Part III, to the extent indicated therein). We adopted Emerging Issues Task Force ("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products," effective in the fourth quarter of fiscal 2001. Under these new accounting standards, sales incentives provided to retailers (which we refer to as "trade spending and slotting") and consumer coupons are reported as a reduction in net revenues. Prior to adoption of these new accounting standards, we reported these costs as selling, general and administrative expenses. We reclassified our prior year consolidated financial statements to conform to these new requirements. In the section of Item 7 of our Annual Report on Form 10-K for the year ended August 31, 2001 titled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results," we presented a table to show the amounts reclassified as a reduction in net revenues from selling, general and administrative expenses to reflect the accounting changes described in the preceding paragraph. We subsequently determined that the amounts reclassified for each quarter of fiscal 2001 were inaccurate. The reclassification error had no effect on the amount of income (loss) before taxes or net income (loss) for any quarter. The reclassification error only impacted the unaudited fiscal 2001 quarterly information for net revenue, gross profit (loss) and selling, general and administrative expenses and did not impact the amounts we reported in our consolidated statement of operations for the year ended August 31, 2001. As a result, Item 7 of our Annual Report on form 10-K for the year ended August 31, 2001 is amended to present in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results," the corrected amounts and to include quarterly selling, general and administrative expense amounts for fiscal 2001 and 2000, not previously provided. Item 7. Management's Discussion and Analysis of Financial Condition and ------------------------------------------------------------------------- Results of Operations. ---------------------- Results of Operations General During fiscal 2001, we continued to experience substantial difficulty generating sufficient cash flow to meet our obligations on a timely basis. We failed to make certain scheduled monthly interest payments under our revolving credit facility, and were not in compliance with several provisions of our former revolving credit agreement and other long-term debt agreements as of the end of the fiscal year. We were often delinquent on various payments to third party trade creditors and others. The industry-wide cranberry oversupply continued to negatively affect cranberry prices. Continued heavy price and promotional discounting by Ocean Spray and other regional branded competitors throughout fiscal 2001, combined with our inability to fund a meaningful marketing campaign, resulted in lost distribution and decreased market share of our products in various markets. We had reached the maximum in our line of credit and were not able to obtain any additional financing. As a result of these and other factors, we incurred a large net loss for fiscal 2001. Some of these other factors included: o An oversupply of cranberries resulting from three consecutive nationwide bumper crops culminating with the 1999 harvest, followed by what we believe was an inadequate volume regulation under the USDA cranberry marketing order for the 2000 crop year, resulted in continued large levels of excess cranberry inventories held by us and other industry participants. As a result, the per barrel price for cranberries continued to decline through the first quarter of fiscal 2001 and, while the per barrel price has subsequently increased, it has not recovered to the extent we anticipated. As a result of these factors, our cost to grow the fall 2001 crop and the cost of on-hand inventories, including costs to be incurred, were in excess of market value, and we determined that it was necessary to write down the carrying value of our cranberry inventory by approximately $17.6 million in the fourth quarter of fiscal 2001. See "--Fiscal 2001 compared to Fiscal 2000-Cost of Sales." o We sold our private label sauce business and a related manufacturing facility to Clement Pappas in June 2001 in a cash transaction. Our private label sauce business and co-packing sold from the 2 facility generated net revenues of approximately $7.8 million, $14.1 million and $9.0 million in fiscal 2001, 2000 and 1999, respectively. See "--Fiscal 2001 Compared to 2000-Revenues." o In the fourth quarter of fiscal 2001, as a result of the deterioration in the long-term prospects for the cranberry growing and processing industry over the summer due, in part, to the implementation of what we believe was another inadequate volume regulation under a USDA cranberry marketing order for the 2001 calendar year crop, continued large levels of excess cranberry inventories held by us and other industry participants, forecasted future cranberry market prices for the next several years, as well as continued reductions in our anticipated cranberry and cranberry concentrate usage requirements related to our recent decline in revenues and market share, we decided to restructure our operations and identify various long-lived assets to be disposed of, and we concluded that the estimated future cash flows of our long-lived assets were below the carrying value of such assets. Accordingly, during the quarter, we recorded an impairment charge of approximately $80.1 million related to writedowns to assets held for sale, property and equipment held for use, and goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." See "--Fiscal 2001 Compared to 2000--Writedown of Long-Lived Assets Held for Sale." Although we were successful in retaining distribution in many markets, the lack of sufficient working capital limited our ability to promote our products. We reached the point where we felt it was imperative to reach an agreement with our then-current bank group and to refinance our bank debt, or else we believed we were faced with liquidating or reorganizing the company in a bankruptcy proceeding in which our creditors would have likely received substantially less value than we felt they could receive in a restructuring transaction and our shareholders would have likely been left holding shares with no value. On November 6, 2001, we consummated the Restructuring. Generally speaking, in the Restructuring, Sun Northland entered into certain Assignment, Assumption and Release Agreements with members of our then-current bank group which gave Sun Northland, or its assignee, the right to acquire our indebtedness held by members of our then-current bank group in exchange for a total of approximately $38.4 million in cash, as well as our issuance of a promissory note in the principal amount of approximately $25.7 million and 7,618,987 Class A shares to certain bank group members which decided to continue as our lenders after the Restructuring. Sun Northland did not provide the foregoing consideration to our former bank group; instead, Sun Northland entered into the Purchase Agreement with us, pursuant to which Sun Northland assigned its rights to those Assignment, Assumption and Release Agreements to us and gave us $7.0 million in cash, in exchange for (i) 37,122,695 Class A shares, (ii) 1,668,885 Series A Preferred shares (each of which will convert automatically into 25 Class A shares upon adoption of an amendment to our articles of incorporation increasing our authorized Class A shares, and each of which currently has 25 votes), and (iii) 100 shares of our newly created Series B Preferred Stock. which were subsequently transferred to a limited liability company controlled by our Chief Executive Officer. Using funding provided by our new secured lenders and Sun Northland, we acquired a substantial portion of our outstanding indebtedness from the members of our then-current bank group (under the terms of the Assignment, Assumption and Release Agreements that were assigned to us by Sun Northland) in exchange for the consideration noted above, which resulted in the forgiveness of approximately $81.5 million (for financial reporting purposes) of our outstanding indebtedness (or approximately $89.0 million of the aggregate principal and interest due the then-current bank group as of the date of the Restructuring). We also issued warrants to acquire an aggregate of 5,086,106 Class A shares to Foothill Capital Corporation and Ableco Finance LLC, which warrants are immediately exercisable and have an exercise price of $.01 per share. As a result of the Restructuring, Sun Northland controls approximately 94.4% of our total voting power through (i) the Class A shares and Series A Preferred shares we issued to Sun Northland, and (ii) the additional 7,618,987 Class A shares over which Sun Northland exercises voting control pursuant to a Stockholders' Agreement that we entered into with Sun Northland and other shareholders in connection with the Restructuring. Assuming conversion of the Series A Preferred shares and full vesting over time of the 3 options to acquire Class A shares that we issued to key employees in the Restructuring, Sun Northland owns approximately 77.5% of our fully-diluted Class A shares. We believe that the Restructuring will provide us with sufficient working capital and new borrowing capacity to once again aggressively market and support the sale of our Northland and Seneca brand juice products in fiscal 2002. Additionally, we adopted Emerging Issues Task Force ("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products," effective in the fourth quarter of fiscal 2001. Under these new accounting standards, the cost of sales incentives provided to retailers (which we refer to as "trade spending and slotting") and consumer coupons are reported as a reduction in net revenues. We previously reported these costs as selling, general and administrative expenses. We reclassified prior year consolidated financial statements to conform to the new requirements, and as a result, approximately $59.2 million and $35.6 million of amounts previously reported as selling, general and administrative expenses during the years ended August 31, 2000 and 1999, respectively, have been reclassified and reported as a reduction of net revenues. With our new debt and equity capital structure following the Restructuring, we feel we are in a position to build on the operational improvements we put in place in fiscal 2001. Our focus for fiscal 2002 is on improving our cash position and results of operations through a balanced marketing approach with an emphasis on profitable growth. Fiscal 2001 Compared to Fiscal 2000 Net Revenues. Our total net revenues decreased 39.2% to $125.8 million in fiscal 2001 from $207.0 million in fiscal 2000. The decrease resulted primarily from (i) reduced sales of Northland and Seneca branded products, which we believe resulted primarily from our change in promotional and pricing strategies and reduced marketing spending; (ii) reduced co-packing revenue from a major customer that during the first quarter of fiscal 2001 switched from an arrangement where we purchased substantially all of the ingredients and sold the customer finished product to a fee for services performed arrangement; (iii) the sale of our private label juice business in March 2000; and (iv) the sale of our cranberry sauce business and a manufacturing facility in June 2001, which reduced co-packing revenue and revenue from cranberry sauce sales. Trade spending, slotting and consumer coupons, which is reported as a reduction of net revenues instead of as a selling, general and administrative expense (see "--General," above), was down 72.0% to $16.6 million in fiscal 2001 from $59.2 million in fiscal 2000. Industry data indicated that, for the 12-week period ended September 9, 2001, our Northland brand 100% juice products achieved a 6.0% market share of the supermarket shelf-stable cranberry beverage category on a national basis, down from a 10.9% market share for the 12-week period ended September 10, 2000. Market share of our Seneca brand cranberry juice product line for the same period decreased from approximately 2.7% to approximately 0.4%, resulting in a total combined market share of supermarket shelf-stable cranberry beverages for our Northland and Seneca branded product lines of approximately 6.4% for the 12-week period ended September 9, 2001, down from approximately 13.6% for the 12-week period ended September 10, 2000. We anticipate our sales and market share in the first quarter of fiscal 2002 will continue to reflect decreases from the prior year. However, with the equity capital we received in the Restructuring, we plan to increase advertising spending in the remaining quarters of fiscal 2002, and we anticipate our new spending levels will help to reverse the declining sales and market share trends for our Northland and Seneca brands in fiscal 2002. Cost of Sales. Our cost of sales for fiscal 2001 was $115.5 million compared to $253.4 million in fiscal 2000, resulting in gross margins of 8.2% and (22.4)%, respectively. The decrease in cost of sales resulted primarily from reduced sales of Northland and Seneca branded products, the elimination of costs 4 associated with production of private label juice products and reduced costs for reduced sauce and co-packing revenues. Additionally, the decrease resulted from the change during the first quarter of fiscal 2001 in our arrangement with a significant co-packing customer from an arrangement where we purchased substantially all of the ingredients and sold the customer finished product to a fee for services performed arrangement. The improved margins in fiscal 2001 were also favorably impacted by improved manufacturing efficiencies and cost controls. We continue to participate in a highly competitive industry characterized by aggressive pricing policies, changing demand patterns and downward pressures on gross margins resulting from an excess supply of raw cranberries and cranberry concentrate, which has resulted in prices paid to growers which are generally less than production costs. Because our cost to grow the fall 2001 crop and the cost of on-hand inventories, including costs to be incurred, was in excess of market value, we wrote down the carrying value of our cranberry inventory by approximately $17.6 million in the fourth quarter of fiscal 2001, and by approximately $57.4 million in fiscal 2000. These charges were also based on management's best estimates of future product sale prices and consumer demand patterns. In fiscal 2000, we also recognized a restructuring charge of $1.9 million related to costs associated with closing our Bridgeton, New Jersey plant and associated employee termination related costs. Our gross profit without taking into account the effects of these items would have been $27.9 million and $12.9 million in fiscal 2001 and fiscal 2000, respectively, which would have resulted in gross margins of 22.2% in fiscal 2001 and 6.2% in fiscal 2000. Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $25.5 million, or 20.3% of net revenues, in fiscal 2001, compared to $53.7 million, or 25.9% of net revenues, in fiscal 2000. The $28.2 million reduction in our selling, general and administrative expenses in fiscal 2001 was primarily due to (i) a general lack of available cash to fund a meaningful advertising campaign, which resulted in significant reductions in advertising and other marketing and sales promotion expenses compared to fiscal 2000 (in which we incurred greater marketing and promotional expenses to support the Seneca brand and the launch of a new Seneca line of cranberry juice products, as well as undertook an aggressive marketing campaign to support development and growth of our Northland brand products); (ii) significant revisions to our trade promotional practices to reflect our new focus away from growing sales and market share and toward more profitable operations; (iii) a reduction in personnel costs resulting from our restructuring efforts; and (iv) a reduction in personnel costs and selling commissions resulting from our alliance with Crossmark. The decrease in our selling, general and administrative expenses was partially offset by increases in outside professional fees incurred in connection with developing a "turnaround" plan for our operations, negotiating the terms of our credit facilities with our lenders, related covenant defaults and forbearance agreements, and continuing efforts to seek additional or alternative debt and equity financing. We expect that selling, general and administrative expenses will increase in fiscal 2002 primarily as a result of increased advertising as well as fees for financial advisory services under our new management services agreement with an affiliate of Sun Northland, partially offset by further planned reductions in expenses related to our continuing internal restructuring efforts. Writedown of Long-Lived Assets and Assets Held for Sale. We periodically evaluate the carrying value of property and equipment and intangible assets in accordance with SFAS No. 121. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the assets' carrying values may not be recoverable. In the fourth quarter of fiscal 2001, for the reasons discussed above under "--General," we restructured our operations and identified certain long-lived assets to be held for sale. We also concluded that the estimated future cash flows of our long-lived assets were below the carrying value of such assets. Accordingly, during the fourth quarter of fiscal 2001 and in accordance with SFAS No. 121, we recorded an impairment charge of approximately $80.1 million related to writedowns to assets held for sale, property and equipment held for use, and goodwill and other intangible assets. During the year ended August 31, 2000, we recorded an impairment writedown of $6.0 million related to a closed facility that is held for sale (see Notes 6 and 7 of Notes to Consolidated Financial Statements). 5 Gain (Loss) on Disposal of Property and Equipment. In fiscal 2001, we recognized a $2.1 million gain associated with the sale of the net assets of our private label sauce business and a manufacturing facility in Mountain Home, North Carolina, as well as certain property and equipment. In fiscal 2000, we recorded a $2.2 million gain associated with the sale of the net assets of our private label juice business and certain property and equipment. Interest Expense. Our interest expense was $18.9 million for fiscal 2001, compared to $14.6 million in fiscal 2000. The increase in our interest expense was due to increased debt levels between periods and higher interest rates during 2001 due in part to revised terms of our revolving credit facility as a result of our defaults thereunder. The weighted average interest rate on our borrowings for fiscal 2001 was approximately 10.6%. See "Financial Condition" below. We expect that, as a result of significant debt forgiveness in the Restructuring as well as the generally more favorable terms of our new secured debt arrangements, interest expense will decline in fiscal 2002. Interest Income. Our interest income was $2.7 million in fiscal 2001 and $1.4 million in fiscal 2000. Interest income was recognized primarily as a result of an unsecured, subordinated promissory note we received in connection with the sale of our private label juice business in March 2000. Income Tax Benefit (Expense). In 2001 we recognized income tax benefits of $34.9 million. Of this amount, $2.1 million resulted from certain refunds received in 2001 related to farm loss carrybacks. The balance resulted from the recognition of a tax benefit of $32.8 million for certain net operating loss carryforwards expected to be utilized for financial reporting purposes during the first quarter of fiscal 2002 related to forgiveness of certain indebtedness (see Notes 9 and 14 of Notes to Consolidated Financial Statements). In fiscal 2000, we recorded a tax benefit of $12.0 million. Future deferred income tax benefits of approximately $38.4 million have not been recognized at August 31, 2001 because of concerns with respect to realization of those benefits. The "change of ownership" provisions of the Tax Reform Act of 1986 will significantly restrict the utilization of all net operating loss and tax credit carryforwards that remain after the debt and equity restructuring. See Note 11 of Notes to Consolidated Financial Statements. Fiscal 2000 Compared to Fiscal 1999 Net Revenues. Our total net revenues for fiscal 2000 increased 2.8% to $207.0 million from $201.3 million during fiscal 1999. The private label juice business, which we sold to Cliffstar, had revenues of approximately $23.6 million and $40.3 million for the years ended August 31, 2000 and 1999, respectively. The increased revenues for fiscal 2000 were primarily due to the effects of a full year of sales of our Seneca branded products, which we acquired on December 30, 1998, as well as increases over the prior year period in our co-packing sales and sales to the foodservice channels, all offset by the loss of revenue related to the private label juice business that we sold. Industry data indicated that, for the 12-week period ended September 10, 2000, our Northland brand 100% juice products achieved a 10.9% market share of the supermarket shelf-stable cranberry beverage category on a national basis, down from a 12.8% market share for the 12-week period ended September 12, 1999. Market share of our Seneca brand cranberry juice product line for the same period increased from approximately 0.6% to approximately 2.7%, resulting in a total combined market share of supermarket shelf-stable cranberry beverages for our Northland and Seneca branded product lines of approximately 13.6% for the 12-week period ended September 10, 2000, up from approximately 13.4% for the 12-week period ended September 12, 1999. During fiscal 2000, sales of concentrate and bulk frozen fruit decreased primarily due to continued intense price competition resulting from the recent industry-wide record cranberry harvests. Co-packing sales increased in fiscal 2000 primarily as a result of increasing volume with established customers. Trade spending, slotting and consumer coupons, which are deducted from net revenues, increased from $35.6 million in 1999 to $59.2 million in 2000. 6 Cost of Sales. Our cost of sales for fiscal 2000 was $253.4 million compared to $152.5 million in fiscal 1999, with gross margins of (22.4)% and 24.2%, respectively. The increase was primarily the result of a pre-tax lower of cost or market inventory adjustment of $57.4 million and a $1.9 million pre-tax restructuring charge, consisting primarily of plant closing and employee termination related costs at our Bridgeton, New Jersey manufacturing facility. The closing was intended to improve profitability by eliminating overcapacity and streamlining production operations. Cost of sales without taking into account the effects of these items would have been $194.1 million for the year ended August 31, 2000, which would have resulted in a gross margin of 6.2%. In addition to these charges, cost of sales increased primarily as a result of (i) charges for inventory obsolescence as a result of the introduction of new products including our 27% Solution; (ii) expenses associated with the operation of marshes on which management decided, as a result of the federal marketing order, not to grow cranberries in fiscal 2000; (iii) the inclusion of a full year of sales of Seneca brand products; and (iv) changing product mix, including increased lower margin co-packing sales. The decrease in our gross margin for fiscal 2000 was primarily due to the lower of cost or market inventory adjustment, the restructuring charge and industry pricing pressure. Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $53.7 million, or 25.9%, of net revenues for fiscal 2000, compared to $31.0 million, or 15.4% of net revenues, during the prior fiscal year. The increase in our selling, general and administrative expenses was attributable primarily to (i) continued aggressive promotional and marketing strategies intended to support the development and growth of our Northland brand 100% juice products and our Seneca brand products in an increasingly competitive marketplace; (ii) costs associated with problems encountered in the conversion of our internal information systems; (iii) expenses associated with the process of exploring strategic alternatives and preparing a turnaround plan for our operations; and (iv) expenses associated with the national introduction of our new easy grip bottle. Fiscal 2000 advertising expenses in support of our branded products totaled $14.1 million compared to $10.6 million in fiscal 1999. In addition, in the fourth quarter of fiscal 2000, we also took a $0.4 million restructuring charge related to employee termination benefits in connection with the restructuring of our sales organization as a result of our agreement with Crossmark. Gain (Loss) on Disposals of Business and Property and Equipment. In fiscal 2000, we recognized a $2.2 million gain associated with the sale of the net assets of our private label juice business and certain property and equipment. Interest Expense. Interest expense was $14.6 million for fiscal 2000 compared to $8.6 million during fiscal 1999. The increase in our interest expense was due to increased debt levels during most of the year, which resulted from funding previous acquisitions and increased working capital needs, as well as certain costs related to, and increased interest rates on, our revolving credit facility following renegotiation of the terms of the facility in the third quarter. We also utilized our revolving credit facility to fund increased levels of inventory, accounts receivable and operating losses, as well as seasonal operating activities. Interest Income. In fiscal 2000, we recognized $1.4 million in interest income associated with a $28 million unsecured, subordinated promissory note we received in connection with the sale of our private label juice business. Income Tax Benefit (Expense). Due to our net loss, we realized a $12 million income tax benefit in fiscal 2000. We also provided for a valuation allowance of $30.8 million for deferred income tax assets, as it was more likely that not that such assets would not be realized. In fiscal 1999, we recorded income tax expense of $3.6 million. Financial Condition Fiscal 2001. In fiscal 2001 (prior to the Restructuring), net cash provided by operating activities was $4.7 million, compared to net cash used in operating activities in fiscal 2000 of $30.9. The $74.5 million net loss for 2001 included non-cash charges of (i) $80.1 million for writedowns of long-lived 7 assets; (ii) $17.6 million of inventory lower of cost or market adjustments; and (iii) $9.7 million in depreciation and amortization. Receivables, prepaid expenses and other current assets decreased $10.3 million from August 31, 2000 as a result of declining revenue levels, which provided us additional cash to pay down accounts payable and accrued liabilities. Inventory decreased $5.6 million, net of the $17.6 million non-cash lower of cost or market adjustment, due primarily to reduced raw materials and finished goods inventories caused by fewer distribution centers and improved inventory management. Working capital increased $173.1 million to $31.6 million at August 31, 2001 from a deficiency of $(141.5) million at August 31, 2000. This improvement was due primarily to the classification at fiscal year end of amounts outstanding under our debt arrangements as long-term in accordance with our new financing arrangements secured on November 6, 2001 and certain obligations which were subsequently forgiven or exchanged for common stock. In addition, we recognized a $32.8 million current deferred income tax asset that is expected to be realized during the first quarter of fiscal 2002. Our current ratio exclusive of the current deferred income tax asset increased to 1.0 to 1.0 at August 31, 2001 from 0.4 to 1.0 at August 31, 2000. At August 31, 2000 and throughout fiscal year 2001, we were in default under our loan agreements, had no borrowing capacity under our revolving credit facility, operated under forbearance agreements with our major secured lenders and generally experienced an extremely difficult cash flow situation. Additionally, we are currently in default under the terms of our grower contracts (see Note 13 of notes to Consolidated Financial Statements). In September 2000, we were unable to make certain payments due to the growers under the terms of the contracts and we notified the growers of our intention to defer payments required under the contracts for the 2000 calendar year crop. The contracted growers did, however, harvest and deliver their 2000 and 2001 calendar year crops to us and we made all the rescheduled payments required by the contracts through August 31, 2001. We are in process of pursuing amended payment terms under the contracts and are seeking waivers from the growers. Net cash provided by investing activities was $14.8 million in fiscal 2001 compared to $4.0 million in fiscal 2000. Collections on the note receivable from Cliffstar were $1.8 million in fiscal 2001 versus $0.3 million in fiscal 2000. Property and equipment purchases decreased from $5.4 million in fiscal 2000 to $0.4 million in fiscal 2001. Proceeds from disposals of businesses, property and equipment and assets held for sale was $13.4 million in fiscal 2001 compared to $8.7 million in fiscal 2000, and consisted primarily of the sale of the private label sauce business and Mountain Home, North Carolina manufacturing facility in fiscal 2001, and the sale of our private label juice business in fiscal 2000. Our net cash used in financing activities was $18.2 million in fiscal 2001 compared to net cash provided by financing activities of $26.3 million in fiscal 2000. We repaid $15.7 million of principal on our revolving credit facility in 2001, primarily from proceeds from disposals of the private label sauce business and related property and equipment. In fiscal 2000, we borrowed an additional $31.0 million on this bank revolving credit facility which brought us up to the maximum available credit limit. In fiscal 2000 we paid dividends on our common stock of $2.4 million; however, we suspended dividend payments on our common stock indefinitely following the third quarter dividend payment in fiscal 2000. Subsequent to the Restructuring. As part of the Restructuring, we entered into an Amended and Restated Credit Agreement with certain members of our former bank group which evidences, among other things, our obligation to repay the revised term loan of approximately $25.7 million that we issued to those creditors in the Restructuring. Payments on the revised term loan are due monthly based on the prime interest rate, as defined, plus 1% (6% as of November 6, 2001) applied against the outstanding stated principal balance, with an additional $1.7 million payable on November 6, 2002 and additional monthly payments of approximately $133,000 due commencing on December 1, 2003 and continuing to through October 1, 2006, with a final payment of approximately $19.3 million due on November 1, 2006. The revised term loan is collateralized by specific assets, and we are required to make certain mandatory prepayments to the extent of any net proceeds received from the sale of such assets or to the extent that a note received in connection with the sale of such assets, or assets previously sold, is collected. The future cash payments required under the Restructured Bank Note are to be applied against the adjusted carrying value of the Restructured Note, with 8 generally no interest expense recognized for financial reporting purposes, in accordance with SFAS No. 15, as long as we make the scheduled payments in accordance with the Restructured Bank Note and there are no changes to the interest rate. Additionally, we entered into a Loan and Security Agreement on November 6, 2001 with Foothill Capital Corporation and Ableco Finance LLC. Under this loan agreement, Foothill and Ableco provided us with two term loans, each in the principal amount of $10 million, and a new $30 million revolving credit facility. The term loans and the credit facility mature and/or expire on November 6, 2006, and interest accrues on the outstanding principal balance thereunder at the greater of 7.0% or the prime rate, as defined, plus 1%. Quarterly principal payments of $625,000, plus additional principal payments equal to (i) the quarterly principal payments received on Cliffstar's promissory note in excess of $625,000 and (ii) all earnout payments received under the asset purchase agreement between us and Cliffstar, are due on the first term loan. Monthly principal payments of $166,667 are due on the second term loan. The debt is collateralized by specific assets. In addition to the Restructuring, we also restructured and modified the terms of approximately $20.7 million in outstanding borrowings under two term loans with an insurance company, consolidating those two term loans into one new note with a stated principal amount of approximately $19.1 and a stated interest rate of 5% for the first two years of the note, increasing by 1% annually thereafter, with a maximum interest rate of 9% in the sixth and final year. The note is payable in monthly installments of approximately $186,000 commencing December 1, 2001, adjusted periodically as the stated interest rate increases, with a final payment of approximately $11.6 million due November 1, 2007. The effective interest rate to be recognized for financial reporting purposes will approximate 4.5%. The note is collateralized by specific assets. We also renegotiated the terms of our unsecured debt arrangements with certain of our larger unsecured creditors, resulting in the cancellation of approximately $3.5 million of additional indebtedness previously owing to those creditors that will be recognized as an extraordinary gain, net of legal fees, other direct costs and income taxes, in the first quarter of fiscal 2002. We also issued fee notes to Foothill and Ableco in the aggregate principal amount of $5 million, which are payable in full on November 6, 2006. The fee notes will be discounted for financial reporting purposes and charged to operations as additional interest expense over the terms of the related debt. As also required by the Purchase Agreement, we entered into a Management Services Agreement with Sun Capital Partners Management, LLC, an affiliate of Sun Northland, pursuant to which Sun Capital Partners Management, LLC will provide various financial and management consulting services to us in exchange for an annual fee (which is paid in quarterly installments) equal to the greater of $400,000 or 6% of our EBITDA (as defined therein), provided that the fee may not exceed $1 million a year unless approved by a majority of our directors who are not affiliates of Sun Capital Partners Management, LLC. This agreement terminates on the earlier of November 6, 2008 or the date on which Sun Northland and its affiliates no longer own at least 50% of our voting power. We anticipate that we will recognize an extraordinary gain on the forgiveness of indebtedness of approximately $83.5 million during the first quarter of fiscal 2002, net of our best estimate of the amount of legal fees and other direct costs incurred and the estimated fair value of the Class A shares issued to the banks in the Restructuring. For financial reporting purposes, the $83.5 million anticipated gain on the forgiveness of indebtedness will be reported net of income taxes, which are estimated to approximate $32.8 million, resulting in a net extraordinary gain of approximately $50.7 million. Such estimated amounts are expected to be known and finalized by the date we report our consolidated operating results for the first quarter of fiscal 2002. The extraordinary gain, combined with the additional equity contributed by Sun Capital, the common stock issued to the participating banks and the warrants issued to Foothill and Abelco is estimated to provide us with approximately $57.4 million of additional stockholders' equity which was received during the first quarter of our fiscal 2002. 9 As of November 30, 2001, we had outstanding borrowings of $9.9 million under our $30 million revolving credit facility with Foothill and Ableco. We believe that we will be able to fund our ongoing operational needs for the remainder of fiscal 2002, and the foreseeable future through (i) cash generated from operations; (ii) financing available under our revolving credit facility with Foothill and Ableco; (iii) intended actions to reduce our near-term working capital requirements; and (iv) additional measures to reduce costs and improve cash flow from operations. As of November 30, 2001, we were in compliance with all of our new debt arrangements. Pro-Forma Financial Position. We have set forth below an unaudited, pro-forma condensed consolidated balance sheet which reflects our pro-forma financial position on August 31, 2001 as if the Restructuring occurred on that date. The information in the table does not represent historical data and is not presented in conformity with accounting principles generally accepted in the United States of America. Rather, it is intended solely to provide a brief summary of what our financial position would have been on August 31, 2001 had the Restructuring occurred on that date. You should not rely on this information as indicative of what our actual financial position will be at any future date. Pro-Forma Condensed Consolidated Balance Sheet (unaudited) Assets: August 31, 2001 Current Assets $ 51,300 Long-Term Assets 101,100 ----------- Total Assets $ 152,400 =========== Liabilities and Shareholders' Equity: Current Liabilities $ 52,930 Long-Term Debt 65,570 ----------- Total Liabilities 118,500 Shareholders' Equity 33,900 ----------- Total Liabilities and Shareholders' Equity $ 152,400 =========== After giving effect to the Restructuring, our pro-forma condensed consolidated balance sheet as of August 31, 2001 reflects total debt (including the current portion) of $97.1 million for a total debt to equity ratio on a pro-forma basis of 2.9 to 1.0 compared to total debt of $181.0 million and debt to equity ratio of 3.4 to 1.0 at August 31, 2000. Our current ratio on a pro-forma basis decreased to 1.0 to 1.0 from 1.6 to 1.0 at August 31, 2001 based on our actual financial position. We arrived at the information reflected in the pro-forma condensed consolidated balance sheet presented above by reflecting various adjustments resulting from the Restructuring as if the Restructuring had occurred on August 31, 2001. These adjustments included (i) our new financing with Foothill and Ableco; (ii) the restructuring of our former bank debt; (iii) the equity investment by Sun Northland; (iv) the restructuring of our debt with an insurance company; and (v) settlements of various other vendor obligations. In addition, we reflected all transaction costs incurred in the Restructuring and the tax impacts of the Restructuring. Finally, we revised the current and long-term portion of debt to the amounts that would have existed had the Restructuring occurred on August 31, 2001. Depending upon our future sales levels and relative sales mix of products during fiscal 2002, we expect our working capital requirements to fluctuate periodically during fiscal 2002. 10 Quarterly Results Our quarterly results in fiscal 2001 varied significantly from comparative quarters in the prior fiscal year and from quarter to quarter during fiscal 2001: Net revenues continued to decline in fiscal 2001. This trend was directly related to our actions to refocus our trade promotional strategies to emphasize profitability, as opposed to generating revenue growth, and our lack of media advertising due to our cash position. Our significant losses before income taxes in the fourth quarter of fiscal 2001 resulted from a $17.6 million lower of cost or market inventory adjustment and an $80.1 million charge for impairment of long-lived assets and assets held for sale. The second quarter of fiscal 2000 included a $27.0 million lower of cost or market inventory adjustment, and the fourth quarter of fiscal 2000 included a $30.4 million lower of cost or market inventory adjustment and additional charges, including an $8.3 million charge associated with certain internal restructuring efforts, which included an impairment charge of $6.0 million. Our quarterly results will likely continue to fluctuate in fiscal 2002 and will likely cause comparisons with prior quarters to be unmeaningful, largely because (i) while we anticipate significant increases in marketing and trade promotional spending during future quarterly periods, such spending may vary based on then current market and competitive conditions and other factors; (ii) we anticipate revenues to increase even as we focus our promotional strategies on returning to profitable operations; and (iii) we expect to continue to realize cost savings from our internal restructuring efforts. The following table contains unaudited selected historical quarterly information, which includes adjustments, consisting only of normal recurring adjustments (except for (i) during the quarter ended August 31, 2001, we recorded an inventory lower of cost or market adjustment of $17.6 million to cost of sales and an $80.1 million charge for impairment of long-lived assets and assets held for sale; (ii) during the quarter ended February 29, 2000, we recorded an inventory lower of cost or market adjustment of $27.0 million to cost of sales; (iii) during the quarter ended August 31, 2000, we recorded a lower of cost or market inventory adjustment of $30.4 million, a $6.0 million charge for impairment of long-lived assets and assets held for sale, and a restructuring charge of $1.9 million to cost of sales and $0.4 million to selling, general and administrative expenses; (iv) during the quarters ended August 31, 2001 and May 31, 2000, we recognized gains on the disposals of certain private label businesses and related property and equipment of $1.7 million and $2.1 million, respectively; and (v) during the quarter ended August 31, 2001, we recorded an income tax benefit of $32.8 million related to certain net operating loss carryforwards which will be utilized to offset debt forgiveness income as a result of the Restructuring), that we considered necessary for a fair presentation: 11
Fiscal Quarters Ended (In thousands, except per share data) Fiscal 2001 Fiscal 2000 --------------------------------------------- --------------------------------------------- Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 29, Nov. 30, 2001 2001 2001 2000 2000 2000 2000 1999 --------- --------- --------- --------- --------- --------- --------- --------- Net revenues (1) $ 27,378 $ 27,333 $ 29,405 $ 41,710 $ 33,997 $ 52,675 $ 58,703 $ 61,645 Gross profit (loss) (1) (13,341) 6,498 7,327 9,846 (55,482) 13,353 (14,338) 10,090 Selling, general and administrative expenses $ (7,629) $ (5,178) $ (6,638) $ (6,077) $(13,664) $(16,683) $(16,682) $ (6,625) Writedowns of long-lived assets and assets held for sale (1) (80,125) (6,000) (Loss) income before taxes (103,742) (2,406) (3,445) 188 (78,602) (4,410) (34,512) 553 Net (loss) income $(70,942) $ (2,406) $ (1,353) $ 188 $(79,846) $ (4,410) $(21,036) $ 321 Net income per share-diluted: (2) Weighted average shares outstanding 5,085 5,085 5,085 5,085 5,085 5,085 5,085 5,076 Net (loss) income per share $ (13.95) $ (0.47) $ (0.27) $ 0.04 $ (15.70) $ (0.87) $ (4.14) $ 0.06 Cash dividends per share: (2) Per Class A share 0.160 0.160 0.160 Per Class B share 0.145 0.145 0.145 (1) Amounts previously reported have been reclassified to conform with the new accounting standards adopted in the fourth quarter with respect to accounting for sales incentives provided to retailers (which we refer to as trade spending and slotting) and consumer coupons as described in Note 1 of Notes to Consolidated Financial Statements. The cost of such items, which were previously reported as selling, general and administrative expenses, have been reclassified and reported as reductions in net revenues. Certain other amounts previously reported have been reclassified to conform to the current presentation. (2) All share and per share data has been restated to give effect to our November 5, 2001 one-for-four reverse stock split. Effective following the third quarter dividend payment in fiscal 2000, we indefinitely suspended dividend payments on our common stock. Certain amounts previously reported have been reclassified as discussed in footnote (1) to the table above. The following table sets forth a reconciliation of such previously reported amounts. Fiscal Quarters Ended (In thousands) Fiscal 2001 Fiscal 2000 --------------------------------------------- --------------------------------------------- Aug. 31, May 31, Feb. 28, Nov. 30, Aug. 31, May 31, Feb. 29, Nov. 30, 2001 2001 2001 2000 2000 2000 2000 1999 --------- --------- --------- --------- --------- --------- --------- --------- Net revenues as previously reported $ 30,281 $ 32,447 $ 44,762 $ 61,206 $ 61,417 $ 68,621 $ 74,967 Reclassification adjustments (2,948) (3,042) (3,052) (27,209) (8,742) (9,918) (13,322) Net revenues as reported $ 27,378 $ 27,333 $ 29,405 $ 41,710 $ 33,997 $ 52,675 $ 58,703 $ 61,645 Gross profit (loss) as previously reported $ 10,599 $ 11,960 $ 14,603 $(34,273) $ 22,095 $ (4,420) $ 23,412 Reclassification adjustments (4,101) (4,633) (4,757) (21,209) (8,742) (9,918) (13,322) Gross profit (loss) as reported $(13,341) $ 6,498 $ 7,327 $ 9,846 $(55,482) $ 13,353 $(14,338) $ 10,090 Selling, general and administrative expenses $ (9,279) $(11,271) $(10,834) $(40,873) $(25,425) $(26,600) $(19,947) Reclassification adjustments 4,101 4,633 4,757 27,209 8,742 9,918 13,322 Selling, general and administrative expenses as reported $ (7,629) $ (5,178) $ (6,638) $ (6,077) $(13,664) $(16,683) $(16,682) $(6,625)
12 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this amendment to report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHLAND CRANBERRIES, INC. Date: January 23, 2002 By: /s/ John Swendrowski ------------------------------------ John Swendrowski Chairman of the Board and Chief Executive Officer 13