SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 2000
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 or 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 24, 2000:
$15,480,721
Number of shares issued and outstanding of each of the registrant's classes of
common stock as of November 24, 2000:
Class A Common Stock, $.01 par value: 19,702,221 shares
Class B Common Stock, $.01 par value: 636,202 shares
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE:
Proxy Statement for 2001 annual meeting of shareholders scheduled to be held
January 30, 2001 (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).
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PART I
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Special Note Regarding Forward-Looking Statements
We make certain "forward-looking statements" in this Form 10-K, such
as statements about our future plans, goals and other events which have not yet
occurred. We intend that these statements will qualify for the safe harbors from
liability provided by the Private Securities Litigation Reform Act of 1995. You
can generally identify these forward-looking statements because we use words
such as we "believe," "anticipate," "expect" or similar words when we make them.
Whether or not these forward-looking statements will be accurate in the future
will depend on certain risks and factors including, without limitation, risks
associated with (i) the development, market share growth and continued consumer
acceptance of our branded juice products, including consumer acceptance of our
new 27% Solution; (ii) the disposition of certain litigation related to the sale
of the net assets of our private label juice business; (iii) the implementation
of the marketing order of the Cranberry Marketing Committee of the United States
Department of Agriculture and the cranberry purchase program adopted by the
United States Congress; (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 amended credit
facility, with respect to which we are currently in default of certain covenants
as well as certain principal and interest payment provisions; (vi) our ability
to secure additional financing and/or generate sufficient cash from operations
as may be necessary to fund working capital requirements and continue as a going
concern; (vii) the results of our previously announced exploration of strategic
alternatives; (viii) the results of our internal organizational restructuring
described in this Form 10-K, including, without limitation, the results of the
restructuring of certain of our sales and marketing functions through our
agreement with Crossmark, Inc.; (ix) our ability to manage our trade payables;
and (x) our ability to continue to meet the listing requirements of The Nasdaq
National Market, including, without limitation, the requirement that our Class A
Common Stock maintain a minimum bid price above $1.00 per share. You should
consider these risks and factors and the impact they may have when you evaluate
our forward-looking statements. We make these statements based only on our
knowledge and expectations on the date of this Form 10-K. We will not
necessarily update these statements or other information in this Form 10-K based
on future events or circumstances. Please read this entire Form 10-K to better
understand our business and the risks associated with our operations.
Specifically, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of our current financial
condition.
Item 1. Business.
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General
We are a grower, processor and marketer of cranberries, branded
cranberry products and fruit beverages. Our products include:
o Northland brand 100% juice cranberry blends (including our newly
introduced 27% Solution cranberry blends with 27% cranberry juice), which we
sell through supermarkets, drug store chains, mass merchandisers, club stores,
foodservice outlets and convenience stores;
o Seneca and TreeSweet bottled and canned fruit beverages, including
apple, grape, cranberry and orange juice products, and frozen juice concentrate
products, including apple, grape and cranberry juice products;
o Northland brand fresh cranberries, which we sell to retail and
wholesale customers;
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o private label cranberry sauce, which we sell to wholesale and retail
customers for sale under their own labels;
o Awake frozen orange-flavored concentrate; and
o cranberry juice concentrate, single-strength cranberry juice,
sweetened dried cranberries and frozen and whole sliced cranberries, which we
sell to industrial and ingredient customers.
We began our business in 1987 as a cranberry grower and member of the
Ocean Spray Cranberries, Inc. marketing cooperative. In 1993, we left Ocean
Spray and introduced Northland brand fresh cranberries. In October 1995, we
introduced our family of Northland 100% juice cranberry blends. By June 1997, we
had successfully achieved national distribution. In fiscal 1999, we acquired the
eastern juice division of Seneca Foods Corporation, including the right to
produce and sell nationwide Seneca brand products, Seneca's TreeSweet and Awake
brand names, as well as additional processing, distribution and receiving
facilities. In fiscal 2000, we sold our private label juice business, which we
acquired in July 1998 from Minot Food Packers, Inc., to Cliffstar Corporation.
As of September 10, 2000, our Northland branded juice products were available in
all 50 states and in approximately 92% of supermarkets nationwide according to
data compiled by Information Resources, Inc. ("IRI").
Fiscal 2000 was a difficult year. The industry's fall 1999 cranberry
harvest represented the third consecutive nationwide bumper crop, adding more
raw fruit to an already oversupplied industry. As a result, the per barrel price
of cranberries continued to drop. Primarily due to our supply of cranberries in
inventory at historically higher cost (not only because of our internal costs to
grow cranberries, but also our historical fixed price cranberry crop purchase
contracts with other growers that locked in higher prices to growers who
delivered their cranberries to us), we were required under generally accepted
accounting principles to write-down the value of our cranberry inventory by
approximately $57.4 million during the fiscal year. In addition, heavy price and
promotional discounting by Ocean Spray and others throughout the fiscal year
made it necessary for us to continue our relatively high levels of marketing and
promotional spending in order to maintain sales levels and market share in the
shelf-stable bottled cranberry beverage category. Compounding our problems in
fiscal 2000 were unanticipated difficulties associated with a planned conversion
of our internal information systems, made necessary by our rapid growth over the
preceding three fiscal years, which required substantial time and effort from
our senior level management to oversee and implement (generally without the
assistance of our Chief Financial Officer who became seriously ill in fiscal
2000), and diverted additional company resources. Also, in fiscal 2000 we
undertook a process of exploring strategic alternatives, including a potential
strategic alliance with an industry partner or a sale of all or a part of the
company. While we have entered into a strategic marketing alliance with
Crossmark, Inc. ("Crossmark"), discussed below, we have not entered into any
other strategic industry alliance and/or a sale of the company.
In fiscal 2000, we sold our private label juice business to Cliffstar
Corporation. The sale of this business did not include any buildings or
property. In connection with the sale, we received from Cliffstar an unsecured,
subordinated promissory note for $28 million, as well as approximately $6.8
million in cash related to inventory we transferred to Cliffstar on the closing
date. In addition to the sale, we entered into certain agreements with Cliffstar
by which Cliffstar would purchase cranberries from us and utilize our contract
manufacturing services. Subsequent to the sale, on July 7, 2000, Cliffstar filed
suit against us in the United States District Court, Western District of New
York, alleging, among other things, that we breached certain representations and
warranties in our asset purchase agreement. That lawsuit was subsequently
dismissed, and we filed suit against Cliffstar on July 31, 2000 alleging breach
of contractual obligations and fiduciary duties. As a result of this litigation,
(i) our co-packing revenues are less than anticipated because we believe that
Cliffstar failed to comply with the terms of our co-packing agreement, which has
increased our average manufacturing costs and reduced our cash flow; and (ii)
Cliffstar has failed to pay us for certain cranberry concentrate inventory and
cranberry sauce we transferred to Cliffstar, and
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has also failed to pay us for certain co-packing services we performed. See
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations," Note 2 to Notes to Consolidated Financial Statements,
and "Item 3 - Legal Proceedings" for further discussion of the Cliffstar
lawsuit.
Since we sold our private label juice business and Cliffstar withdrew
scheduled co-packing business, our various plants have not been utilized to
capacity. As a result, our costs to manufacture branded products increased
significantly in fiscal 2000. In order to reduce those costs, (i) we
discontinued production at our facility in Bridgeton, New Jersey effective as of
November 22, 2000; (ii) we downsized our staff as a result of our restructuring
plan; and (iii) we terminated the supply program of Concord grapes with the
Westfield Maid Growers Coop (we anticipate that future supply of Concord grape
concentrate will be handled through purchase programs in the market based solely
on required demand), including the sale of our grape receiving station in
Portland, New York. We incurred an $8.3 million charge in the fourth quarter of
fiscal 2000 associated with writing down the book value of the Bridgeton
facility and related plant closing costs and employee termination benefits.
As a result of these and other factors, in fiscal 2000, (i) we
recognized a significant loss from operations; (ii) we reached our borrowing
capacity under our revolving credit facility; (iii) we were in default as of
August 31, 2000 on certain covenants under our loan documents with our bank
group and other third parties; and (iv) we are currently delinquent on various
payments to third party trade creditors and others. Additionally, we failed to
make scheduled monthly interest payments under our revolving credit facility due
in fiscal 2001 and do not expect to make a $5 million principal payment and
scheduled interest payment due November 30, 2000. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations," Notes
to Consolidated Financial Statements, and the Independent Auditors' Report
(which contains an explanatory paragraph relating to substantial doubt about our
ability to continue as a going concern) elsewhere in this Form 10-K for further
information regarding our current cash position and annual results of
operations. Our continuation as a going concern is dependent upon our ability to
generate sufficient cash flow to meet our obligations on a timely basis, to
comply with the terms and covenants of our financing agreements, to obtain
additional financing or refinancing as may be required, and ultimately to attain
successful operations. We are continuing our efforts to obtain additional funds
through additional equity and debt financing, to reduce costs and related
near-term working capital requirements and to explore various strategic
alternatives related to the sale of all or a portion of our assets or common
stock, so we can meet our obligations and sustain our operations.
While we have recently encountered these and other operational
difficulties, we intend to continue operating our business in the next fiscal
year by focusing on returning to profitable operations instead of solely
increasing revenues and market share. We have undertaken efforts to date to
achieve that goal, including:
o scaling back our manufacturing operations through the closing of our
Bridgeton facility and transferring current volume to our remaining production
facilities;
o terminating the receiving and processing of grapes at our Dundee,
New York facility;
o consolidating our warehouse storage programs throughout the
distribution network with the intent to reduce costs and improve profitability,
including:
- discontinuing the Eau Claire, Michigan frozen and dry storage
programs;
- eliminating the storage and distribution of frozen concentrates
at our Dundee, New York facility; and
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- eliminating multiple outside warehouse storage and distribution
programs at facilities throughout the country;
o transferring the production of our frozen concentrated juice
products from the Dundee, New York facility to our Mountain Home, North Carolina
facility for the purpose of consolidating volume and thereby improving
manufacturing costs through purchasing and manufacturing synergies;
o entering into a strategic alliance with Crossmark, a national food
broker, which outsources much of our sales and marketing efforts to, and
coordinates our pricing and promotional strategies and further consolidates our
food broker network with, Crossmark;
o converting $1.6 million in outstanding payables to a vendor into a
promissory note convertible into convertible preferred stock (and pursuing
similar arrangements with certain other significant trade creditors), as well as
undertaking efforts to renegotiate payment terms with our trade creditors;
o increasing production volumes on a full range of fruit products at
our Cornelius, Oregon facility;
o reducing total personnel in all areas in an effort to reflect the
current needs of our business (see "-Employees");
o completing the conversion of our internal information systems in an
effort to assist management in obtaining more detailed financial information in
a more efficient manner; and
o restructuring our internal organization and administration to
promote more efficient operation and oversight, including the promotion of
Robert E. Hawk to President and Chief Operating Officer.
In addition, we have taken several steps that we believe will allow us
to remain competitive in the marketplace in fiscal 2001. We recently announced a
significant enhancement in our Northland branded juice products, which we call
our "27% Solution." While our Northland branded juice products have always
contained 100% fruit juice (as opposed to our many of our competitors' products
which generally contain a lesser percentage of fruit juice sweetened by fructose
or corn syrup), most have historically contained only approximately 15%
cranberry juice. We have reformulated our Northland blends to not only contain
100% fruit juice, but also to include 27% cranberry juice in response to
increasing evidence of the potential health benefits associated with drinking
cranberry products containing the equivalent of 27% cranberry juice.
Additionally, we entered into the sweetened dried cranberry market in fiscal
2000 through a joint manufacturing and sales program with a strategic partner, a
product we intend to sell to industrial and ingredient customers on a domestic
and worldwide basis. We intend to continue our efforts to pursue alternative
sales channels for our products, such as club stores and foodservice providers
like restaurants, hospitals and schools. Additionally, we intend to focus on
controlled spending (i) in connection with Crossmark, in all aspects of our
marketing and sales programs on a national basis in an effort to maximize return
on a customer by customer basis, and (ii) through maintenance of corporate
administrative support personnel at levels that reflect business at hand versus
our expected level of business in the future.
We expect that these efforts and other continuing restructuring
efforts will result in (i) an increase in gross margin in fiscal 2001 due to
lower cranberry cost (partially offset by an increase in the usage of
cranberries due to the 27% Solution) and reduction in overhead; (ii) lower
operating expenses; (iii) more predictable cash flows and fewer trade discounts
due to the change in our promotional and pricing strategies; and (iv) more
efficient sales and marketing operations through our alliance with Crossmark.
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In fiscal 2000, we had revenues from one customer, Nestle USA, of
approximately $45.9 million, or 17.2% of our total revenues. In fiscal 1999 and
1998, we did not have revenues from any one customer that exceeded 10% of our
total revenues.
In addition to producing and selling cranberry and other fruit
products, we are the world's largest cranberry grower, with 24 cranberry
producing marshes and 2,524 planted acres owned or operated in Wisconsin and
Massachusetts as of November 24, 2000. As of that date, we also maintained
multi-year crop purchase contracts with 47 independent cranberry growers to
purchase all of the cranberries harvested from an aggregate of 1,755 planted
acres. We are currently in default under the terms of the grower contracts. See
Note 14 to Notes to Consolidated Financial Statements for further discussion of
these contracts and our defaults thereunder.
Branded Products
Products
Our family of Northland 100% juice cranberry blends is our primary
branded product. We introduced Northland 100% juice cranberry blends in late
1995 and achieved national distribution in the summer of 1997. In early fiscal
2001, we introduced our 27% Solution. As of September 10, 2000, our Northland
100% juice cranberry blends were available in all 50 states and in about 92% of
supermarkets nationwide. We currently produce and sell eight flavors, including
traditional cranberry, cranberry apple, cranberry raspberry, cranberry grape,
cranberry peach, cranberry cherry, cranberry blackberry and cranberry orange. We
have five bottle sizes, all in plastic, available in the general distribution,
including 12, 46, 64, 96 and 128 ounce sizes. The 96 ounce size was developed
specifically for the club and mass merchandise channels.
We also produce and sell several varieties of Seneca, TreeSweet and
Awake brand products. In fiscal year 2000 we completed the national rollout of
the original four Seneca brand calcium fortified cranberry juice drinks,
including cranberry cocktail, cranberry apple, cranberry raspberry and cranberry
grape. The rollout began in the fourth quarter of fiscal 1999. A fifth flavor,
cranberry ruby red grapefruit, was added to the line in the fourth quarter of
fiscal 2000. At fiscal year end, our Seneca cranberry drink product line was
available in supermarkets nationwide that account for approximately half of all
groceries sold, according to IRI data. The Seneca cranberry products were
designed to compete against other non-premium cranberry drink brands and to
complement the Northland brand of 100% juice products.
Additionally, Seneca 100% apple juice frozen concentrate is the number
one selling frozen apple juice brand in the nation and is available in
approximately 80% of the nation's supermarkets as of our fiscal year end.
We also sell citrus juice products under the TreeSweet label. The
TreeSweet label is now focused on 64 ounce orange juice, converted from glass to
PET plastic in fiscal 2000, and 5.5 ounce and 46 ounce tin sizes. We
discontinued all other products and container sizes of TweeSweet products in
fiscal 2000 due to poor movement. We also sell frozen orange-flavored
concentrate under the Awake label.
We further established our foodservice business in fiscal 2000 by
expanding on the established foodservice customer base we acquired in the Seneca
acquisition. Our foodservice business manufactures and markets juice and
cranberry sauce products in industry-specific packaging to businesses and public
institutions such as restaurants, hotels, airlines, schools and hospitals. We
offer our foodservice products in a variety of sizes and package them under our
own Meadow Valley label or under our other brand labels such as Northland,
Seneca or TreeSweet.
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In addition to Northland 100% juice cranberry blends and our Seneca,
TreeSweet and Awake branded products, we also grow and package Northland brand
fresh cranberries and sell them in 12-ounce plastic bags mainly to food
retailers and wholesalers during the fall. We also currently sell sweetened
dried cranberries to industrial and independent customers at this time, with
retail sales opportunities being considered for fiscal 2001.
Marketing
Our principal consumer marketing strategy for our family of Northland
100% juice cranberry blends has been to highlight the differences in flavor and
juice content between Northland brand 100% juice cranberry blends and many of
the competing products of Ocean Spray and others which have less than 100%
juice. In fiscal 2001, in addition to continuing to highlight the benefits of
100% juice, we intend for our marketing efforts to focus on the recently
announced reformulation of our Northland brand juice products, known as our 27%
Solution, which now include not only 100% fruit juice, but also 27% cranberry
juice. Currently Northland is the only 100% juice brand to contain 27% cranberry
juice in every product sold. We intend to highlight this fact in our marketing
efforts, as well as highlighting the potential health benefits of our newly
reformulated products through reference to studies that have used the equivalent
of 27% cranberry juice to research the health benefits of cranberries.
Our marketing strategy generally includes:
o media advertising
- we used a national television advertising campaign in fiscal 2000
designed to appeal to and be seen by our target audience and to gain their
awareness of our product, its 100% juice content, and the lesser juice
content of many of our competitors' products. We will continue advertising
on television in fiscal 200l, with a media buy currently scheduled to be
made for the second half of the fiscal year. In the second and third
quarters we currently intend to utilize a new national magazine advertising
campaign designed to educate consumers about the 27% Solution and the
potential health benefits of drinks containing the equivalent of 27%
cranberry juice. We spent approximately $4.4 million on these types of
media advertising in fiscal 2000 and intend to spend approximately $8.5
million on these types of media advertising in fiscal 2001.
o sales promotion
- we offer purchase incentives to attract first-time buyers and prompt
people who already drink Northland 100% juice cranberry blends to purchase
more of our products. These incentives are done through both "cents off
"coupons and mail-in rebate offers. In fiscal 2001, we anticipate that our
fiscal sales promotion spending will be less than fiscal 2000 levels, since
we currently intend to allocate more funds toward publicizing the 27%
Solution message through media advertising.
o packaging/labeling
- In fiscal 2000, we introduced a more user friendly, easy-grip bottle
to our family of 100% juice products. We also changed the look of our
Seneca bottled juice and juice drinks line by updating label graphics. The
positioning of the Seneca brand was perceived to be too close to that of
the Northland brand, and was thus given what we believe is a more
contemporary look. We have also revised our labeling for fiscal 2001 to
focus on the 27% Solution and to highlight the 27% juice content of all of
our Northland branded products, as well as the 100% juice content.
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In addition to the above, with the strategic alliance with Crossmark
effective in fiscal 2001, our internal marketing structure will change
significantly. At the end of fiscal 2000, our sales and marketing department was
reduced in size in consideration of the expanded role Crossmark will play in our
sales and marketing functions. As part of the agreement with Crossmark, we will
receive support from the marketing arm of Crossmark, called the Markatec
organization. Specifically, Markatec will assist us in preparing and
implementing marketing plans and strategies, as well as compiling and analyzing
market performance results. We expect this alliance with Crossmark will allow us
to be closer to the customer's needs, further allowing us to react quickly and
efficiently to changing market dynamics.
Additionally, our internal creative services department was reduced at
the end of fiscal 2000 from a staff of four to one senior creative director. The
in-house efforts are supplemented with the services of an advertising agency,
which also helps us develop our marketing strategies.
Sales
Industry-wide dollar sales of shelf-stable cranberry beverages
continued to increase in our fiscal 2000, up approximately 5% over our fiscal
1999. We anticipate that industry-wide sales will continue to increase in fiscal
2001. We expect to realize increased sales of our branded juice products by:
o continuing to expand sales of our Northland and Seneca brand
products into alternative distribution channels such as convenience stores,
supercenters, mass merchandisers, club stores and drug stores
- in fiscal 2000, we made progress in introducing our brands into new
distribution channels. Late in fiscal 2000, we introduced a new 12-ounce
single serve bottle into approximately 2,300 convenience stores,
approximately 400 supercenters and other distribution channels. We expect
to increase distribution in these channels in fiscal 2001.
o continuing our trade promotion plan
- on a periodic basis, we offer discounts on our products and other
trade incentives to retailers and wholesalers to temporarily reduce the
price of our products to consumers and to obtain store display features and
retail advertisements. These efforts help to increase our product
visibility and offer the consumer savings on our products. We anticipate
that we will continue these trade promotion activities in fiscal 2001.
However, we intend to more closely control trade spending levels in
conjunction with Crossmark to help ensure that those levels are appropriate
and produce more predictable and expected sales results. As a result, we
currently expect trade spending in fiscal 2001 to be less than fiscal 2000.
We anticipate that our agreement with Crossmark will help improve
broker network management in channels of retail sales in fiscal 2001. Under our
agreement, Crossmark will act as broker for Northland and Seneca brands in over
90% of the country, as well as provide additional sales and marketing support.
Crossmark employs over 10,000 people on a nationwide basis. Its access to state
of the art management systems will allow for greater focus on and implementation
of Northland promotional programs than we have been able to achieve to date. In
addition, as a result of our agreement, Crossmark will focus on the Northland
and Seneca brands in the areas of sales management, field sales, sales
information and marketing. Crossmark personnel, along with our current sales
personnel, have combined to create a new sales organization, which we have
termed "NorthMark." We expect that NorthMark will be fully implemented in early
fiscal 2001, and we expect to realize cost savings in fiscal 2001 as a result of
consolidating our sales and marketing operations into NorthMark.
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Our branded juice sales in fiscal 2000 were coordinated by our Vice
President-Sales. In fiscal 2001, branded juice sales will be coordinated by the
NorthMark sales and marketing team. In addition to their experience with our
branded products to date, many of our sales staff personnel have prior sales
experience working for companies such as ConAgra, Inc., H.J. Heinz Company,
Campbell's Soup Company, Sara Lee, Smithkline Beecham and Ralston Purina. The
NorthMark staff has current or past experience with nearly every major branded
grocery manufacturer in the country. Our sales staff directs distribution and
sale of our branded juice products through Crossmark and other independent food
brokers throughout the United States.
Competition
The consumer cranberry product market is very price competitive. Based
on industry data, retail supermarket bottled shelf-stable cranberry beverage
sales were approximately $840 million for the 52-weeks ended September 10, 2000.
The shelf-stable cranberry beverage market is significantly larger if you
include all sales channels as opposed to just supermarkets. Most of the markets
in which we compete are dominated by Ocean Spray. Ocean Spray is an agricultural
marketing cooperative which has certain protections under federal antitrust
laws. Ocean Spray has over 700 member-growers, accounting for approximately 70%
of all cranberries grown in North America.
Northland 100% juice cranberry blends compete with:
o Ocean Spray's branded cranberry juice products;
o branded cranberry juice products of other producers; and
o private label cranberry juice products.
Our Northland branded juice products are 100% juice cranberry blends
which, beginning in fiscal 2001, will also contain 27% cranberry juice across
the line (known as our 27% Solution; previously, only our traditional cranberry
flavor contained 27% cranberry juice, and the rest of our blends generally
contained only up to 15% cranberry juice). Many of our competitors' products are
made up of much less than 100% juice. For example, many of Ocean Spray's
cranberry juice blends contain only up to 27% juice with the remainder being
water and high fructose corn syrup. Like Ocean Spray, many other competitors'
juices use sugar or corn syrup additives as sweeteners. We believe that we have
an advantage over many of our competitors due to the perceived benefits of our
100% juice products. We also believe that we have an advantage because we are
currently the only major manufacturer of 100% juice blends with an entire
product line that contains 27% cranberry juice, a formulation that recent
medical studies suggest is beneficial to human health. The success of our
branded juice products will continue to depend on whether consumers will think
highly of its quality and taste compared to that of our competitors' products.
Northland 100% juice cranberry blends are premium-priced products. Our
products compete mainly with other premium-priced branded cranberry beverages,
but also with private label products which are usually lower priced.
We expect that Ocean Spray will continue to compete aggressively
against our 100% juice cranberry blend products, possibly by increasing
advertising of its 100% juice product line, reducing product pricing, responding
to our 27% Solution, increasing its trade promotions or other actions. Ocean
Spray has significantly more experience in the fruit juice markets than we do,
as well as greater brand name recognition and greater marketing and distribution
resources. We cannot be certain that we will be successful in competing against
Ocean Spray.
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We also compete in the markets for frozen juice concentrate and
shelf-stable canned fruit juices and drinks. Our principal competitors in the
frozen juice concentrate market include several established brand names such as
Welch's, TreeTop and Tropicana. Our principal competitors in the market for
shelf-stable canned fruit juices and drinks include Mott's and Minute Maid. Many
of these competitors have greater brand name recognition and greater marketing
and distribution resources than we do. We cannot be certain that we will be
successful in competing against these competitors. Ocean Spray does not compete
in either the frozen juice concentrate market or the shelf-stable canned fruit
juice market.
Non-Branded Products; Private Label Sale
Private Label Business
In July 1998, we acquired the private label business of Minot Food
Packers, Inc. We use the term "private label" to refer to products which we
manufacture and sell to customers who sell those products to consumers under
their own non-branded labels. In fiscal 2000, we operated the juice portion of
our private label business for approximately six months prior to selling it to
Cliffstar. Prior to that sale, the major non-branded products we manufactured
included:
o private label and foodservice cranberry juice cocktail and
blended cranberry juice products;
o private label and foodservice apple, orange, pineapple, grape,
grapefruit and lemon juice;
o industrial cranberry concentrate;
o jellied and whole cranberry sauce;
o frozen and whole sliced cranberries;
o single-strength cranberry juice;
o sports drinks; and
o ready-to-drink teas.
After the sale to Cliffstar, our only private label product is
cranberry sauce. However, we continue to offer other non-branded products, such
as frozen cranberries, single-strength cranberry juice, cranberry concentrate,
fruit purees and other juice concentrates, to industrial/ingredients customers.
In addition to sales of non-branded products we described above, we also offer
certain services to our customers through our non-branded operations. The most
significant of those services in fiscal 2000 was co-packing. We use the term
"co-packing" to refer to the manufacture of products for other marketing
companies for eventual distribution and sale under those entities' labels. Our
current manufacturing facilities and customer base, which we acquired in the
Seneca acquisition, allowed us to recognize increased revenues from providing
co-packing services to customers in fiscal 2000. Continued growth of our
co-packing services represents a key element in our overall business strategy.
The majority of our non-branded revenues resulted from sales of
private label products in the first half of fiscal 2000 and increased co-packing
revenues in the second half of fiscal 2000. We also recognized revenues from the
sale of private label cranberry sauce. Sales of other non-branded products, such
as single-strength cranberry juice and frozen cranberries, did not have a
material impact on our
-10-
<PAGE>
revenues in fiscal 2000. We intend to continue to pursue sales opportunities for
our non-branded products in the foodservice and industrial/ingredients markets
in fiscal 2001.
Competition
We compete for the sale of cranberry concentrate, single-strength
cranberry juice and frozen whole and sliced cranberries to industrial customers,
such as food processors and foodservice companies. In fiscal 2000, cranberry
concentrate was our principal industrial product in terms of sales volume.
Expanded production volume of other fruit concentrates, purees and single
strength juices from our Cornelius, Oregon facility further supported our
industrial business. Our industrial customer base includes several major food
processing firms. We believe our ability to grow and internally process
cranberries allows us to offer a reliable supply of high quality, competitively
priced cranberry products to our industrial customers.
Manufacturing
Receiving and Processing
An important part of our business strategy is our ability to process
our grown and purchased cranberries. We utilize our entire network of
manufacturing locations in the various stages of the processing of cranberries.
For example:
o raw cranberries are brought to our receiving stations. We own a
150,000 square foot receiving station and fresh fruit packaging facility in
Wisconsin Rapids, Wisconsin and a 49,000 square foot receiving station in
Massachusetts. These receiving stations, along with contract receiving
facilities in Wisconsin and Oregon, clean and sort raw cranberries;
o after sorting, the cranberries we sell as fresh fruit during
the fall are stored in temperature-controlled facilities until they are
packaged and distributed for sale. Cranberries we use to make our juice and
other cranberry products are cleaned, sorted and stored in our freezer
facilities around the country, including our 65,000 square foot freezer
facility in Wisconsin Rapids or at independent freezer facilities, until
they are sent to one of our processing plants; and
o frozen raw cranberries are pressed and concentrated at one of
our processing plants in Wisconsin Rapids, Wisconsin, Cornelius, Oregon or
Mountain Home, North Carolina. The resulting concentrated cranberry juice
is stored frozen and then shipped either to bulk ingredient customers or to
a Northland owned or contracted bottling facility. These multiple pressing
and concentrating locations allow the processing of cranberries in all of
the key growing areas around the country.
Packaging and Bottling
In addition to our ability to receive and process our grown and
purchased cranberries, another important part of our business strategy is our
ability to bottle and package our branded products in strategically located
areas to reduce freight and other distribution costs associated with shipping
finished goods to our national customers. We own and operate three bottling and
packaging facilities strategically located to service the Southeast, Northeast,
and Midwest.
o In Mountain Home, North Carolina, we own a bottling and
packaging facility totaling 222,000 square feet, including 50,000 square
feet of production area, 126,000 square feet of dry warehouse, 19,000
square feet of freezer, and 23,000 square feet of cooler and bulk tank
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<PAGE>
storage area. This plant is capable of a producing all sizes of PET bottles
including 12 ounce single serve, a full range of glass sizes, and 46 ounce
tin and frozen composite cans;
o In Dundee, New York, we own a bottling and packaging facility
totaling 139,000 square feet, including 40,000 square feet of production
area, 53,000 square feet of dry warehouse, 17,200 square feet of freezer,
and 21,000 square feet of cooler and bulk tank storage area. This plant is
capable of producing all sizes of PET bottles, a full range of glass sizes,
and 46 ounce tin cans.
o In Jackson, Wisconsin, we own a bottling and packaging facility
totaling 136,000 square feet, including 55,000 square feet of production
area, 70,000 square feet of dry warehouse and 5,000 square feet of cooler
and bulk tank storage area. This plant is capable of producing all sizes of
PET bottles (except 12 ounce), and two sizes of tin cans (5.5 ounce and 46
ounce).
In addition to these owned facilities, we utilize two third party
contract packaging providers to service the West Coast markets. One is located
in Fullerton, California, which produces PET bottled products, and the second is
located in Ventura, California, which produces frozen composite canned products.
Both facilities are strategically located in high volume markets to minimize
freight costs and maximize service levels.
As a part of our business strategy we have aggressively sold excess
line time at our owned facilities to improve facility utilization and reduce
production costs. These contract packaging arrangements are an integral part of
our production at our owned facilities. We are an attractive contract packager
for third party beverage manufacturers, primarily because:
o we have developed a solid production and quality program in
conjunction with our own branded products which can be adapted to the
demands of other national brands; and
o our plants are strategically located to reduce costs associated
with accessing certain high volume consumer markets.
Distribution
For the majority of fiscal 2000, we utilized a number of distribution
centers owned or under contract, including our distribution center in Bridgeton,
New Jersey, as well the processing plants in Jackson, Dundee and Mountain Home
that we acquired through the Seneca acquisition which also act as distribution
centers. We also utilized owned and contracted warehouse facilities at strategic
locations throughout the country. While we believe that our distribution centers
and warehouse locations contributed in fiscal 2000 to lower average freight
costs, we also believe such a widespread network contributes to higher average
production costs (excluding freight) when capacity at our production facilities
is not maximized, and can result in potential inefficiencies. As a result of
this and other factors, we have closed our Bridgeton facility and revised our
distribution strategy for fiscal 2001. Our primary distribution strategy for
fiscal 2001 is to maximize distribution from the production locations and to
minimize distribution centers that are not associated with a production
facility. While certain distribution locations are important in the distribution
scheme due to distance from a production location or a large strategic customer,
we intend to aggressively consolidate distribution locations in fiscal 2001 to
improve overall production costs and manage inventory.
We have an internal transportation department that contracts with
independent carriers to distribute our products to grocery and other channel
customers. We believe that the strategic locations of our owned production
facilities and the contract packaging plants, along with our distribution
strategy and
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<PAGE>
our in-house transportation department, will lower our overall costs as well as
continue to provide timely response to customer demands.
Agricultural Operations
We are the world's largest cranberry grower, with 24 owned or operated
properties and approximately 2,524 planted acres in Wisconsin and Massachusetts
as of November 15, 2000. In the fall of 1999 (i.e., fiscal 2000), we harvested
approximately 525,000 barrels from 2,444 acres, the largest harvest in our
history. The large harvest was due in part to the maturation of hybrid
high-yield cranberry vines which we planted in our expansion program in prior
years and favorable growing conditions.
We also contract with other cranberry growers in Wisconsin and Oregon
to purchase their crop. In fiscal 2000, we bought approximately 298,000 barrels
of cranberries from other growers and acquired additional barrels through the
acquisitions that we completed during the fiscal year. As of November 15, 2000,
we maintain multi-year crop purchase contracts with 47 independent cranberry
growers to purchase all of the cranberries harvested from an aggregate of 1,755
planted acres. The contracts generally last for seven years, starting with the
1999 calendar year crop, and pay the growers at a market rate, as defined in the
contracts. We are currently in default under the terms of the grower contracts.
See Note 14 to Notes to Consolidated Financial Statements for further discussion
of these contracts and our defaults thereunder. The ability to harvest our own
fruit in both Wisconsin and Massachusetts, combined with the contracted acreage,
provides us with geographical diversity in our crop and spreads our agricultural
risk.
Due to the recent cranberry oversupply and in anticipation of
compliance with the federal marketing order recently adopted by the United
States Department of Agriculture (see "Regulation," below), we reduced our
growing efforts at several locations and did not grow cranberries at two
locations in the 2000 growing season (i.e., fiscal 2001 harvest). As a result of
these actions, and growing conditions generally prevailing during the season,
our fall 2000 harvest decreased to approximately 270,000 barrels. We also
purchased approximately 220,000 barrels from the fall 2000 harvest of our
contracted growers. We also expect the industry wide cranberry harvest for the
fall of 2000 to decrease significantly. We expect that the decreased harvest
will help alleviate some of the recent downward pricing pressure on barrels of
cranberries. We cannot be certain, however, that it will have such an impact in
light of the current oversupply of cranberries in inventory.
While we have increased our planted acreage over time mainly through
marsh acquisitions and our own internal planting program, we do not anticipate
adding additional acreage in the foreseeable future. Additionally, since we have
determined that it is no longer economically feasible to operate our Nantucket
marshes, we have entered into negotiations to terminate the lease for those
marshes in fiscal 2001.
The quality and quantity of cranberries produced in any given year is
dependent upon certain factors which we have little control over. For example,
extremes in temperature, rainfall levels, storms and hail, or crop infestations
can all adversely impact the production in any crop year. While we make efforts
to reduce the potential adverse effects that these factors may have on our
internal crop, our cranberry production remains subject to these agricultural
factors.
We also purchase insurance coverage for most of our marshes which is
subsidized by the federal government. These policies help insure against bad
weather and other contingencies which may affect our crop. They generally insure
us for at least 50% of the average crop yield on each marsh over the past 10
years.
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<PAGE>
Regulation
Cranberry Products Regulation
The production, packaging, labeling, marketing and distribution of our
fresh cranberries and cranberry juice products are subject to the rules and
regulations of various federal, state and local food and health agencies,
including the United States Food and Drug Administration, the United States
Department of Agriculture, the Federal Trade Commission and the Environmental
Protection Agency. We believe we have complied, and will be able to comply, in
all material respects with such rules, regulations and laws.
The Cranberry Marketing Committee ("CMC") of the United States
Department of Agriculture ("USDA") has the authority to recommend that the
Secretary of the USDA impose harvest restrictions on cranberry growers if the
CMC believes there will be an oversupply of cranberries for the coming crop
year. During fiscal 2000, the Secretary of the USDA, at the request and based on
the recommendation of the CMC, invoked a volume regulation to restrict the
industry-wide harvest of cranberries for the harvest occurring in the fall of
2000. The restriction generally limited cranberry growers to selling only up to
85% of their historic production levels. In response to this federal volume
regulation, we temporarily removed some of our Massachusetts acreage from
production during the 2000 growing season and altered certain historical growing
activities and practices. As a result of this decision, as well as growing
conditions in 2000, we experienced a reduced harvest in the fall of 2000, and we
believe that the harvest industry wide is down significantly as well. We believe
that part of the reduced fall 2000 harvest is attributable to growers like us
engaging in practices designed to comply with the volume regulation, including
removing acreage from production, limiting or eliminating fertilizing and other
growth-enhancing practices, or failing to harvest certain acreage.
In addition to the volume regulation and in response to requests from
the grower community, the United States Congress approved a $50 million
federally funded assistance program in October 2000. Under this plan, the
federal government will make direct cash subsidies totaling $20 million to
growers, or approximately $4.00 per barrel for growers' 1999 crop. Of this, we
expect to receive approximately $1.1 million before the end of fiscal 2001. In
addition, $30 million will be used by the federal government to purchase
cranberry products containing the equivalent of approximately one million
barrels of cranberries from the industry on a "bid" basis. This purchase will be
used in school lunch and other federal programs directed to the needy and
disadvantaged. We have not yet determined whether we will participate in the
"bid" portion of this program.
Environmental and Other Governmental Regulation
It can be difficult under federal laws for cranberry growers and other
developers to obtain permits to create new cranberry marshes in wetlands in the
United States. To do so, such growers must generally observe a "no net loss" of
wetlands policy. That is, they must show that the proposed development activity
will not result in a loss of wetland acreage, or they must restore the
functional value of acreage they propose to disturb. Given this strict
requirement, as well as strict water quality legislation in Wisconsin and
Massachusetts, we believe it is currently unlikely that we, or other cranberry
growers or developers in North America, will be able to secure permits for
cranberry marsh development or expansion in wetland acreage. However, we and
other growers or developers may renovate existing wetland acreage from time to
time and replant older cranberry vine varieties with higher-yielding vine
varieties. Also, certain developers have begun to create upland cranberry
marshes, which are marshes that are not on wetland acreage. We do not know
whether upland marshes, if successful, will increase the available supply of
cranberries in the future.
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<PAGE>
Pursuant to permits previously received, in the past several years
certain growers have planted, cultivated, and developed new cranberry-producing
acreage in several states and abroad, particularly in Canada. Many of these
previously planted acres have recently become productive or should become
productive in the near future.
We are currently taking steps to clean up certain contamination caused
by underground storage tanks at one of our marshes in Wisconsin, one in
Massachusetts and at our plant site in Cornelius, Orgeon. We have removed the
tanks, or in the case of the Cornelius plant, the tank had already been removed
prior to our purchase of the property. All of the sites have been reported to
the appropriate state regulatory agencies. Our clean-up activities are subject
to state supervision. Based on information available as of August 31, 2000, we
believe most of the costs of such activities will be covered by state
reimbursement funds (except in the case of the Massachusetts property), or
claims against the prior owners of the properties. We do not expect to incur
material liabilities as a result of these activities.
The Wisconsin Department of Natural Resources approved regulations
which became effective in May 1998 and which amended parts of the Wisconsin
Administrative Code to make it easier to obtain the DNR's approval to maintain
existing cranberry marshes and to obtain state water quality certification to
conduct activities in wetlands under a federal permit. However, as a result of
the continued federal restrictions on wetland development and the long lead-time
associated with the planting and maturation of cranberry vines, we do not expect
the regulations to materially affect the supply of cranberries in Wisconsin in
the near term.
We don't expect environmental or other governmental legislation or
regulation to have a material effect on our capital expenditures, results of
operations or competitive position, other than as we have described above.
Seasonality
Before fiscal 1997, our business was very seasonal because we sold
most of our crop to cranberry processors. Now that we have evolved from a
cranberry grower to a consumer products company, we expect to reduce the
seasonality of our business because we will offer our products for sale
throughout the entire year. We do expect, however, that our results of
operations will continue to fluctuate from quarter to quarter depending mainly
upon the level of media advertising and other promotional expenditures in any
given quarter, as well as seasonal sales of fresh fruit and cranberry sauce.
Materials and Supplies
We buy bottles, caps, flavorings, juices and packaging from
independent third parties. We get most of the materials and supplies necessary
for growing and cultivating cranberries, including water and sand, from our own
marshes. We purchase and expect to continue purchasing most of our fertilizer
and pesticides from our subsidiary, Wildhawk, Inc. We purchase the rest of the
raw materials and supplies, including the materials used to package our fresh
fruit, from various sources.
If necessary, we believe we would be able to find other sources for
raw materials and supplies without a material delay or adverse effect on our
business.
Trademarks and Formulae
We own the Northland, TreeSweet, and Awake trademarks, which are
registered in the United States Patent and Trademark Office. We have also
entered into a 99-year license agreement with Seneca which allows us to market
and sell Seneca brand juice and concentrate. Additionally, we are in the process
of applying for trademark protection for "27% Solution." The Northland and
Seneca trademarks are important in the sale of our branded cranberry juice and
other fruit juice and fruit products.
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<PAGE>
We use proprietary flavor formulations to make our cranberry blends.
We protect the confidentiality of these formulations by requiring co-packers to
enter into confidentiality agreements with us.
Employees
As of August 31, 2000, we had 783 full-time employees, as compared to
942 as of August 31, 1999. As of November 28, 2000, we had approximately 570
full-time employees. In addition to our full-time employees, we hired:
o approximately 11 seasonal workers during the 2000 crop cultivation
season;
o approximately 213 seasonal workers to harvest our crop;
o approximately 228 seasonal employees to operate the cranberry
processing facility in Wisconsin Rapids during fiscal 2000; and
o approximately 28 seasonal employees to operate the Cornelius, Oregon
fruit processing facility during fiscal 2000.
As a result of our continuing efforts to reduce costs, either through
attrition or permanent layoffs, our workforce was reduced by approximately 160
employees in fiscal 2000. During the first quarter of fiscal 2001, an additional
210 employees were released as a result of the Bridgeton, New Jersey plant
closing and other administration downsizing.
We entered into collective bargaining agreements with unions
representing the former Minot employees in New Jersey. Those agreements expire
on May 14, 2001. With the closure of the Bridgeton, New Jersey facility in
November, 2000, we have provided to the employees through the unions a
description of the benefits to be provided. We have met our obligations under
the union contracts in this regard and have negotiated the effects of the plant
closure. We anticipate a smooth completion of these labor issues.
We have also entered into a collective bargaining agreement with a
union representing the former Seneca employees in Jackson, Wisconsin. That
agreement covers about 102 employees and expires on December 28, 2001. We
believe our current relationships with our employees, both union and non-union,
are good.
Item 2. Properties
--------------------
In Wisconsin Rapids, Wisconsin we own three office buildings,
including our corporate headquarters, an office building near our processing
plant and our West Grand office. As a result of overall reduction in personnel,
we are currently in the process of consolidating our office facilities into the
corporate headquarters and the West Grand office. We anticipate closing our
office facility near the processing plant in January 2001, and will seek to sell
or lease the facility to a third party.
We also own a 150,000 square foot receiving station and fresh fruit
packaging facility located on 40 acres in Wisconsin Rapids, which we use to
clean and store processed and fresh cranberries. This building also includes a
16,000 square foot juice concentrating facility.
In Bridgeton, New Jersey, we own a 299,000 square foot facility that
includes 81,000 square feet of production area and dry warehousing of 137,000
square feet. We shut that facility down effective November 22, 2000, and will
consider third party purchase offers.
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In Dundee, New York, we own a bottling and packaging plant totaling
139,000 square feet, including 40,000 square feet of production area, 53,000
square feet of dry warehouse, 17,200 square feet of freezer space and 21,000
square feet of cooler and bulk tank storage area.
Our bottling and packaging facility in Mountain Home, North Carolina
totals 222,000 square feet, including 50,000 square feet of production area,
126,000 square feet of dry warehouse, 19,000 square feet of freezer space and
23,000 square feet of cooler and bulk storage area.
In Jackson, Wisconsin, we own a bottling facility totaling 136,000
square feet including 55,000 square feet of production area, 70,000 square feet
of dry warehouse and 5,000 square feet of cooler and bulk storage area.
We own a 46,000 square foot pressing and juice concentrating facility
and dry warehouse in Cornelius, Oregon.
In Eau Claire, Michigan, we own a 79,000 square foot storage facility
and distribution center.
We also own a 49,000 square foot receiving station located on a
seven-acre parcel of land adjacent to the Hanson Division bogs in Massachusetts.
In addition to our facilities, we own 21 cranberry marshes and lease
another three (see Note 13 to Notes to Consolidated Financial Statements for
information about potential termination of certain of these leases). We have set
forth in the following table information about each of our 24 cranberry marshes
as of November 24, 2000. We own all of these marshes in fee simple (or we lease
them, in either case as indicated below), subject to mortgages. All of our
marshes have storage buildings and repair shops for machinery, trucks and
harvest and irrigation equipment. Each also has a house on site or close to the
site which serves as the marsh manager's residence. Many of our marshes also
have residences for assistant marsh managers. We believe that all of our
facilities are suitable and adequate for our existing needs.
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<TABLE>
<CAPTION>
Marsh Division Name and Location November 24, 2000 Calendar Year
-------------------------------- -------------------------
Approximate Approximate Acquired
Marsh Acres Planted Acres or Leased
----------- ------------- ---------
<S> <C> <C> <C>
Associates Division (two marshes), Jackson County, Wisconsin..... 4,198 159 1983/1996
Meadow Valley Division, Jackson County, Wisconsin................ 2,150 77 1984
Fifield Division, Price County, Wisconsin........................ 2,460 196 1985
Three Lakes Division, Oneida County, Wisconsin................... 1,542 82 1985
Chittamo Division, Douglas and Washburn Counties, Wisconsin...... 620 55 1985
Biron Division, Wood County, Wisconsin........................... 473 212 1987
Warrens Division, Monroe County, Wisconsin....................... 160 63 1987
Trego Division, Washburn County, Wisconsin....................... 1,715 96 1988
Gordon Division, Douglas County, Wisconsin....................... 880 149 1988
Mather Division, Juneau County, Wisconsin........................ 2,500 148 1989
Nekoosa Division (two marshes), Wood County, Wisconsin........... 569 85 1989
Nantucket Division (two marshes), Nantucket County,
Massachusetts (leased) (1)..................................... 737 211 1990
Crawford Creek Division (two marshes), Jackson County,
Wisconsin...................................................... 304 135 1991
Hills Division, Jackson County, Wisconsin (leased) (1)........... 465 70 1991
Hanson Division, Plymouth County, Massachusetts.................. 2,025 297 1993
Yellow River (two marshes), Juneau County, Wisconsin............. 1,714 252 1994
Dandy Creek, Monroe County, Wisconsin............................ 350 55 1996
Manitowish Waters (two marshes), Vilas County, Wisconsin......... 345 182 1996
--- ---
Total......................................................... 23,207 2,524
====== =====
(1) See Note 13 to Notes to Consolidated Financial Statements
</TABLE>
Item 3. Legal Proceedings.
---------------------------
On March 8, 2000, we sold the net assets of our private label juice
business to Cliffstar. The private label juice business assets sold consisted
primarily of finished goods and work-in-process inventories, raw materials
inventories consisting of labels and ingredients that relate to customers of the
private label juice business (other than cranberry juice and cranberry juice
concentrates), certain trademarks and goodwill, contracts relating to the
purchase of raw materials inventory and the sale of products, and 135,000
gallons of cranberry juice concentrate. No plants or equipment were included in
the sale. Cliffstar also assumed certain obligations under purchased contracts.
In connection with the sale, we received from Cliffstar an unsecured,
subordinated promissory note for $28 million which will be amortized over six
years and which bears interest at a rate of 10% per annum (currently 12% per
annum since it is in default), as well as approximately $6.8 million in cash
(subject to potential post-closing adjustments) related to inventory transferred
to Cliffstar on the closing date.
Additionally, Cliffstar is contractually obligated to make certain
annual earn-out payments to us for a period of six years from the closing date
based generally on operating profit from Cliffstar's sale of cranberry juice
products. We also entered into certain related agreements with Cliffstar,
including
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among them a co-packing agreement pursuant to which Cliffstar contracted for
specified quantities of Cliffstar juice products to be packed by us ("co-packing
agreement") during each year of the period in which Cliffstar is making earn-out
payments to us.
On July 7, 2000, Cliffstar filed suit against us in the United States
District Court, Western District of New York, alleging, among other things, that
we breached certain representations and warranties in our asset purchase
agreement. That lawsuit was subsequently dismissed, and on July 31, 2000, we
filed a lawsuit against Cliffstar in the Northern District of Illinois, which
was later amended on October 10, 2000. The lawsuit arises out of the sale of the
net assets of our private label juice business to Cliffstar in the asset
purchase agreement transaction that closed on March 8, 2000. We claim that (1)
Cliffstar breached the asset purchase agreement by failing to make the required
payments for cranberry concentrate; (2) Cliffstar breached the asset purchase
agreement by failing to negotiate in good faith concerning a cranberry sauce
purchase agreement; (3) Cliffstar breached an interim cranberry sauce purchase
agreement between the two companies by failing to solicit customers, telling
customers and potential customers that it was unable to fill orders, declining
orders without informing us and failing to pay us the agreed-upon amounts for
the cases that it did sell; (4) Cliffstar breached its fiduciary duty to us
based on the same (or similar) conduct; (5) Cliffstar breached the promissory
note by failing to make its payments in a timely manner and failing to pay all
of the interest due; and (6) Cliffstar breached a co-packing agreement, dated
March 8, 2000, between us and Cliffstar by failing to make the required payments
and other misconduct. We seek compensatory damages in an amount in excess of $5
million, plus punitive damages for Cliffstar's breaches of its fiduciary duties
and attorneys' fees. Cliffstar's answer to our amended complaint was received on
November 15, 2000.
Cliffstar has asserted counterclaims against us, alleging that (1) we
fraudulently induced Cliffstar to enter into the asset purchase agreement; (2)
we have breached the asset purchase agreement by failing to negotiate in good
faith a cranberry sauce purchase agreement, by failing to provide Cliffstar with
sufficient quantities of cranberry concentrate meeting Cliffstar's
"specifications," by selling inventory that did not have a commercial value at
least equal to the value shown on our balance sheet, by failing to notify
Cliffstar that we intended to write-down our cranberry inventory, by not
providing Cliffstar its selling prices, by decreasing its level of service to
customers after the parties signed the asset purchase agreement, and by refusing
to turn over certain labels, films and plates relating to the private label
juice business to Cliffstar; (3) we breached the co-packing agreement by
prematurely terminating that agreement; (4) we converted the labels, films and
plates relating to the private label juice business; and (5) we intentionally
interfered with Cliffstar's contractual relations, or reasonable expectations of
entering into business relations, with the printers who hold the labels, films
and plates. Cliffstar seeks compensatory damages in an amount not stated in the
counterclaims, punitive damages for the alleged fraudulent inducement in
connection with the purchase of the business and intentional interference with
contract claims, and attorneys' fees. The complaint does not seek rescission of
the agreement, although Cliffstar reserves the right to seek recovery of
rescission-type damages (among other damages) without seeking to unwind the
transaction. We have denied the allegations of Cliffstar's counterclaims in all
material respects.
As of August 31, 2000, we had a note receivable from Cliffstar with an
outstanding balance of $27.8 million and outstanding accounts receivable of $6.0
million. We believe that the aforementioned note receivable and accounts
receivable are collectible, we have strong defenses to the aforementioned
counterclaims and we intend to vigorously defend against them and to pursue all
of the claims we may have against Cliffstar, including any actions to collect
the amounts outstanding.
The outcome of the Cliffstar litigation cannot be predicted with
certainty at this time.
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Item 4. Submission of Matters to a Vote of Shareholders.
---------------------------------------------------------
We did not submit any matters to a vote of our shareholders during the
fourth quarter of fiscal 2000.
Executive Officers
------------------
As of November 24, 2000, each of our executive officers is identified
below together with information about each officer's age, current position with
us and employment history for at least the past five years:
Name Age Current Position
---- --- ----------------
John Swendrowski 52 Chairman of the Board and
Chief Executive Officer
Robert E. Hawk 45 President and Chief Operating Officer
Ricke A. Kress 49 Non-Branded Group President
David J. Lukas 58 Senior Vice President - Administration,
Secretary and Corporate Counsel
William J. Haddow, Sr. 52 Vice President - Purchasing and
Logistics
Steven E. Klus 54 Manufacturing Division President
John B. Stauner 38 Agricultural Operations Division President
Robert M. Wilson 44 Industrial/Ingredients Division President
Our executive officers are generally elected annually by the Board of
Directors after the annual meeting of shareholders. While the titles listed
above were the executive officers' titles as of November 24, 2000, we underwent
an internal organizational restructuring in August 2000 pursuant to which
management recommended to the Board of Directors that several of our officers'
titles be changed. The Board of Directors will consider those recommendations at
its meeting in January 2001. Each executive officer holds office until his
successor has been duly qualified and elected or until his earlier death,
resignation or removal.
John Swendrowski originally founded Northland in 1987 and has served
as our Chief Executive Officer since that time. Since our Chief Financial
Officer fell seriously ill in fiscal 2000, Mr. Swendrowski is also currently
acting as our interim Chief Financial Officer.
Robert E. Hawk was appointed President and Chief Operating Officer in
August 2000. Previously he served as our Group President-Non-Branded Divisions
since August 1998. Before that, he served as our Executive Vice President since
October 1996; Vice President - Sales, Marketing and Special Projects since
January 1993; and Vice President - Operations since January 1989.
Ricke Kress was appointed Private Label Division President in November
1998. Prior to that time, he held several positions with Seneca Foods
Corporation, including serving as its Senior Vice President - Technical Services
since June 1997, President-Juice Division since October 1995 and Senior Vice
President-Operations since June 1994. Management has recommended that the Board
of Directors approve Mr. Kress as our Executive Vice President in January 2001.
David J. Lukas has been with us since April 1992 when he joined us as
Vice President of Human Resources and Corporate Counsel. In May 1995 he was
promoted to Secretary and in August 1996 to Vice President-Administration. In
September 1998, he was promoted to Senior Vice President-Administration,
Secretary and Corporate Counsel. Before joining us, he practiced law in
Wisconsin Rapids for over 20 years.
Bill Haddow was named Vice President - Purchasing and Logistics in
September 1998. Before that, he served as Vice President-Purchasing,
Transportation and Budget since October 1996; Vice
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<PAGE>
President-Purchasing and Transportation from May 1993; and Assistant Vice
President-Purchasing from 1989.
Steve Klus has served as our Manufacturing Division President since
September 1998. He joined us in April 1996 as the Director of Strategic Product
Planning. He was appointed Vice President-Manufacturing in October 1996. Before
that, he served as President-Eastern Division of Seneca Foods Corporation in New
York from May 1990. Management has recommended that the Board of Directors
approve Mr. Klus as our Vice President-Manufacturing in January 2001.
John Stauner became our Agricultural Operations Division President in
September 1998. Before that, he was our Vice President-Agricultural Operations
since October 1996; Vice President-Operations from May 1995; and Assistant Vice
President of Operations since we were formed in 1987. Management has recommended
that the Board of Directors approve Mr. Stauner as our Vice President- Growing
Operations in January 2001.
Robert M. Wilson joined us as our Industrial-Ingredients Division
President in April 1999 when we purchased Potomac Foods of Virginia, Inc., a
broker of fruit juices and other fruit products. Before that, he was the
President and owner of Potomac Foods of Virginia, Inc., since 1986. Management
has recommended that the Board of Directors approve Mr. Wilson as our Vice
President- Industrial/Indgredients in January 2001.
-21-
<PAGE>
PART II
-------
Item 5. Market for the Company's Common Equity and Related Shareholder Matters.
--------------------------------------------------------------------------------
Sale Price Range of Class A Common Stock (1)
--------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------------------------------------------------------------------------
Fiscal Year Ended August 31, 2000
High $7.25 $7.44 $6.75 $4.44
Low $5.00 $5.00 $3.44 $1.41
Fiscal Year Ended August 31, 1999
High $15.00 $14.06 $9.56 $9.19
Low $8.75 $7.38 $6.44 $6.56
---------------
(1) The range of sale prices listed for each quarter includes intra-day trading
prices as reported on The Nasdaq Stock Market. These quotations represent
inter-dealer prices, without retail mark-up, mark-down, or commissions, and
may not necessarily represent actual transactions.
On November 27, 2000, there were approximately 1,249 beneficial
shareholders for the shares of our Class A Common Stock and two shareholders of
record for the shares of our Class B Common Stock. Shares of our Class A Common
Stock trade on The Nasdaq Stock Market under the symbol CBRYA. No public market
exists for the shares of our Class B Common Stock.
See Item 6 for information on cash dividends paid on our common stock.
Our amended revolving credit facility contains various covenants, specifically
covenants requiring us to maintain and meet certain minimum levels of
shareholders' equity ($125,000,000 as of August 31, 2000) and operating ratios,
which would prevent us from issuing any cash dividends on our Class A shares or
Class B shares if we were not in compliance therewith. As of November 27, 2000,
we were not in compliance with those covenants and, as a result, are currently
prohibited by the terms of the amended revolving credit facility from issuing
any such cash dividends. As a result, subsequent to the dividend payment in the
third quarter of fiscal 2000, we suspended further dividend payments on our
common stock indefinitely. On November 27, 2000, the last sale price of shares
of our Class A Common Stock was $1.00 per share.
Pursuant to the listing requirements of The Nasdaq Stock Market, our
Class A Common Stock may be delisted from Nasdaq if it fails for a period of
thirty consecutive business days to maintain a minimum bid price in excess of
$1.00 per share. The Class A Common Stock traded below $1.00 per share
periodically during the fourth quarter of fiscal 2000.
On October 24, 2000, we converted approximately $1,600,000 of
brokerage and other commissions payable to Crossmark, Inc. into our convertible
promissory note in the principal amount of $1,600,000. The note is unsecured and
is payable, including interest at 5%, on October 24, 2002. The note provides
that each $100 increment of the outstanding principal and accrued interest will
be convertible into one share of $100 stated value Series A Convertible
Preferred Stock ("Preferred Stock"), which series of Preferred Stock is yet to
be established by our Board of Directors, 180 days after the occurrence of a
refinancing, as defined in the note. Each share of Preferred Stock will be
convertible into 40 shares of Class A Common Stock at the option of the holder
or automatically upon the occurrence of certain events. Each share of Preferred
Stock will entitle the holder to receive cumulative annual cash divideds at a
rate of 5% on the $100 stated value. We issued the note in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended.
-22-
<PAGE>
Item 6. Selected Financial Data.
---------------------------------
<TABLE>
<CAPTION>
(In thousands, except per share data)
--------------------------------------------------------------------------------
Year Ended August 31
-------------------------------------------------------------------------------
Statement of Operations Data(1): 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 266,211 $ 236,841 $ 112,828 $ 47,375 $ 37,608
Cost of sales 259,397 152,481 62,475 23,171 16,517
------------------------------------------------------------------------------------------------------------------------
Gross profit 6,814 84,360 50,353 24,204 21,091
Selling, general and administrative
expenses 112,845 66,530 38,741 15,968 7,045
(Gain) loss on disposals of business and
property and equipment (2,229) 67 11 (5) (25)
------------------------------------------------------------------------------------------------------------------------
(Loss) income from operations (103,802) 17,763 11,601 8,241 14,071
Interest expense 14,556 8,565 6,826 4,493 2,657
Interest income (1,388) -- -- -- --
------------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (116,970) 9,198 4,775 3,748 11,414
Income taxes (benefit) (12,000) 3,618 1,920 1,516 4,509
------------------------------------------------------------------------------------------------------------------------
Net (loss) income $(104,971) $ 5,580 $ 2,855 $ 2,232 $ 6,905
------------------------------------------------------------------------------------------------------------------------
Weighted average shares
outstanding - diluted 20,330 20,207 15,266 14,309 13,928
Per share data:(2)
Net (loss) income - diluted $ (5.16) $ 0.28 $ 0.19 $ 0.16 $ 0.50
Cash dividends:
Class A common $ 0.12 $ 0.16 $ 0.16 $ 0.16 $ 0.145
Class B common $ 0.109 $ 0.145 $ 0.145 $ 0.145 $ 0.132
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
August 31
-------------------------------------------------------------------------------
Balance Sheet Data(1): 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets $ 85,457 $ 141,484 $ 71,298 $ 39,691 $ 18,617
Current liabilities 226,948 30,916 21,811 11,545 12,067
Total assets 284,235 354,921 250,872 180,932 145,485
Long-term debt 3,927 147,797 64,276 83,131 56,978
Shareholders' equity 53,359 160,553 153,870 76,811 69,059
------------------------------------------------------------------------------------------------------------------------
(1) See Notes 2 and 4 to Notes to Consolidated Financial Statements for a discussion of significant acquisitions
and dispositions affecting the comparability of information reflected herein.
(2) All share and per share data has been adjusted for our September 3, 1996 two-for-one stock split. Effective
following the third quarter dividend payment in fiscal 2000, we have suspended dividend payments on our common
stock indefinitely.
</TABLE>
-23-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations.
-------------
Results of Operations
General
Fiscal 2000 was a difficult year. The industry-wide cranberry
oversupply continued to affect cranberry prices. Competitive pricing of
cranberry products continued to require significant promotional spending to
maintain market share. The sale of our private label business reduced revenues
from levels we could have otherwise achieved. Internal conversion of our
information systems also created unanticipated expenses during the year. As a
result of these and other factors, we incurred a large net loss for fiscal 2000.
More specifically, these factors included:
o The industry's fall 1999 cranberry harvest represented the third
consecutive nationwide bumper crop, adding more raw fruit to an already
oversupplied industry and further depressing the per barrel price of
cranberries. As a result, we were required under generally accepted accounting
principles to write down the value of our cranberry inventory by a total of
approximately $57.4 million during the fiscal year. See "- Fiscal 2000 Compared
to Fiscal 1999 - Cost of Sales."
o Heavy price and promotional discounting by Ocean Spray and others
throughout the fiscal year made it necessary for us to continue our relatively
high levels of marketing and promotional spending in order to maintain our sales
levels and market share in the shelf-stable bottled cranberry beverage category.
We spent approximately $67.7 million on marketing and promotional activities in
fiscal 2000 compared to $46.3 million in fiscal 1999. Additionally, our
promotional spending was focused on increasing our revenues. This strategy was
costly, difficult to administer, did not produce the sales results we expected,
and resulted in a significant increase in our accrued liabilities. See "- Fiscal
2000 Compared to Fiscal 1999 - Selling, General and Administrative Expenses."
o In an effort to eliminate overcapacity and streamline production
operations, we announced in August 2000 our restructuring plan to close our
Bridgeton, New Jersey manufacturing facility effective November 22, 2000,
resulting in approximately $7.9 million of added expense which was charged to
cost of sales. See "- Fiscal 2000 Compared to Fiscal 1999 - Cost of Sales."
o We encountered significant unanticipated difficulties associated
with a planned conversion of our internal information systems, made necessary by
our rapid growth over the preceding three fiscal years, which required
substantial time and effort from our senior level management to oversee and
implement (generally without the assistance of our Chief Financial Officer who
became seriously ill in fiscal 2000), delayed reporting of complete information
to management and diverted additional company resources. See "- Fiscal 2000
Compared to Fiscal 1999 - Selling, General and Administrative Expenses."
o We sold our private label juice business to Cliffstar in March in
return for an unsecured, subordinated promissory note for $28 million and
approximately $6.8 million in cash related to inventory transferred to Cliffstar
on the closing date. Our private label juice business had $23.6 million in
revenues in fiscal 2000. After the closing of the sale, we became involved in
litigation with Cliffstar regarding the sale, which you can read about in "Item
3 - Legal Proceedings." As a result of the litigation, (i) our co-packing
revenues were less than anticipated because we believe Cliffstar failed to
comply with the terms of our co-packing agreement, which has increased our
manufacturing costs and negatively impacted our cash flow; and (ii) Cliffstar
has failed to pay us for certain cranberry concentrate inventory and cranberry
sauce we transferred to Cliffstar, and has also failed to pay us for certain
co-packing services we performed. Cliffstar's failure to timely make payments
has adversely affected our results of operations and financial condition.
-24-
<PAGE>
o The United States Department of Agriculture adopted a federal
marketing order in fiscal 2000 that had previously been recommended by the
Cranberry Marketing Committee. Our efforts to comply with the marketing order
included reducing our growing efforts at several locations and not growing
cranberries at certain other locations. As a result, we incurred costs
associated with maintaining marshes on which we did not grow or harvest
cranberries during the year. See "Item 1 - Business - Agricultural Operations"
and "Item 1 - Business - Regulation."
As a result of the foregoing, we were unable to remain in compliance
with several covenants of our revolving credit agreement and other long-term
debt agreements (including various covenants of two term loans payable to an
insurance company and a term note with a bank). We have not made scheduled
interest payments on the revolving credit facility in fiscal 2001 aggregating
$3.8 million as of October 31, 2000, and do not expect to make a $5 million
principal payment and scheduled interest payment due November 30, 2000. As a
result of our defaults under the terms of our debt agreements, our lenders have
the ability to immediately require us to pay all outstanding principal and
interest thereunder. Accordingly, because our lenders have not waived these
covenant defaults, our long-term repayment obligations under our revolving
credit facility and long-term debt agreements have been classified for
accounting purposes as current liabilities. If our lenders require us to repay
all amounts outstanding under our credit facility, it is highly unlikely that we
would be able to satisfy such an obligation, and we would likely be unable to
continue operation as a going concern. However, we continue to work closely with
our lenders to renegotiate the terms of those arrangements, and we continue to
actively explore alternative sources of debt and equity capital and ways in
which we can refinance all or some of our indebtedness.
While we have recently encountered these and other operational
difficulties, we have undertaken efforts that we believe will improve our
results of operations and financial condition in the next fiscal year. Some of
those efforts include:
o We entered into a strategic marketing alliance with Crossmark
whereby we will combine our sales and marketing efforts and further consolidate
our food broker network with Crossmark. We anticipate that this arrangement will
reduce our sales and marketing expenses over the next fiscal year. See "Item 1 -
Business - Branded Products - Marketing" and "Item 1 - Business - Branded
Products - Sales" for further discussion of this arrangement with Crossmark.
o In connection with our Crossmark agreement, we intend to refocus our
trade promotional strategies to emphasize profitability as opposed to generating
revenue growth. We believe this change may result in slower but more profitable
revenue growth, more predictable cash flows and decreased trade spending in
fiscal 2001. We also expect that certain higher-cost promotional activites we
entered into in fiscal 2000 will be completed by the end of the first quarter of
fiscal 2001.
o In the first quarter of fiscal 2001, we increased the cranberry
juice content in all of our Northland brand 100% juice cranberry blends to 27%
and began the rollout of these new reformulated blends, which we refer to as the
"27% Solution." While Northland brand 100% juice blends have always contained
100% fruit juice (as opposed to many of our competitors' products which
generally contain a lesser percentage of fruit juice sweetened by fructose or
corn syrup), they have historically contained only approximately 15% cranberry
juice. We have reformulated our Northland blends to include 27% cranberry juice
in response to increasing evidence of the potential health benefits associated
with drinking cranberry juice. This reformulation should help to reduce our
inventory levels since we will use more cranberries per case of juice products.
o We have scaled back our manufacturing operations by closing our
Bridgeton facility and transferring current volume to our remaining production
facilities, terminating the receiving and processing of grapes at our Dundee,
New York facility, and consolidating our warehouse storage programs throughout
the distribution network with the intent to reduce costs and improve
profitability.
o We have transferred production of our frozen concentrated juice
products from the Dundee, New York facility to our Mountain Home, North Carolina
facility for the purpose of consolidating volume and thereby improving
manufacturing costs through purchasing and manufacturing synergies.
-25-
<PAGE>
o We have converted $1.6 million in outstanding payables to a vendor
into a promissory note convertible into convertible preferred stock (and are
pursuing similar arrangements with certain other significant trade creditors),
as well as undertaken efforts to renegotiate payment terms with our trade
creditors.
o We have reduced total personnel in all areas in an effort to reflect
the current needs of our business, which we expect will reduce administrative
expenses.
o We have completed the conversion of our internal information systems
in an effort to assist management in obtaining more complete financial
information in a more efficient manner.
o Congress approved a $50 million federally funded assistance program
in October 2000 under which (i) the federal government will make direct cash
subsidies totaling $20 million to growers, of which we expect to receive
approximately $1.1 million before the end of fiscal 2001 and (ii) $30 million
will be used by the federal government to purchase cranberry products containing
the equivalent of approximately one million barrels of cranberries from the
industry on a "bid" basis (we have not yet determined whether we will
participate in the "bid" portion of this program).
o We undertook a process of exploring strategic alternatives in fiscal
2000 which we intend to continue in fiscal 2001, including a potential strategic
alliance with an industry partner, a sale of all or a part of the company,
and/or obtaining additional debt or equity financing.
While we currently continue to experience cash flow difficulties, we
hope to improve our cash position and results of operations through focusing on
a return to profitability as opposed to driving increased revenues as well as
the other measures described above.
Fiscal 2000 Compared to Fiscal 1999
Revenues. Our total revenues for fiscal 2000 increased 12.4% to $266.2
million from $236.8 million during fiscal 1999. The private label juice
business, which we sold to Cliffstar, had revenues of approximately $23.6 and
$40.3 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.
We believe our increased revenues over the last year were primarily
due to a full year of sales of our Seneca branded products, offset by a decrease
in our Northland branded sales. 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. We expect
this intense price competition to continue in fiscal 2001. Co-packing sales
increased in fiscal 2000 primarily as a result of increasing volume with
established customers.
We anticipate that our sales will decrease in fiscal 2001 primarily as
a result of anticipated lower co-packing sales volume as well as our change in
promotional and pricing strategies to focus more on profitability as opposed to
revenue growth.
Cost of Sales. Our cost of sales for fiscal 2000 was $259.4 million
compared to $152.5 million in fiscal 1999, with gross margins of 2.6% and 35.6%,
respectively. The increase was primarily the result of a pre-tax lower of cost
or market inventory adjustment of $57.4 million and a $7.9 million pre-tax
restructuring charge, consisting primarily of a $6.0 million non-cash write-down
of our Bridgeton, New Jersey manufacturing facility that has been closed and
$1.9 million of accrued plant closing and employee termination related costs
(which we expect
-26-
<PAGE>
to pay over the course of the next fiscal year). 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 gross margins of 27.1%. 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.
We anticipate that cost of sales will decrease in fiscal 2001
primarily due to (i) the effects of the fiscal 2000 inventory adjustments which
reduced cranberry cost to estimated market levels; and (ii) the closing of our
Bridgeton, New Jersey facility, the sale of our grape business and our grape
receiving station in Portland, New York, and other efficiency measures
associated with increasing capacity at our remaining facilities and reducing
overhead.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were $112.8 million, or 42.4%, of total revenues for
fiscal 2000, compared to $66.6 million, or 28.1% of total 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; (iv) expenses associated with
the national introduction of our new easy grip bottle; and (v) additional
slotting expenses for product introductions. Fiscal 2000 advertising, promotion
and slotting expenses in support of our branded products totaled $67.7 million
compared to $46.3 million in fiscal 1999. In addition, in the fourth quarter, 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, which we expect to pay over the course
of the next fiscal year.
We anticipate that selling, general and administrative expenses for
fiscal 2001 will decrease both in absolute terms and as a percentage of
revenues. We expect this decrease primarily as a result of our anticipated focus
on increasing profitability as opposed to revenues and our restructuring efforts
in fiscal 2000, including (i) the outsourcing of certain sales functions to, and
further consolidation of our food broker network with, Crossmark; (ii) the
planned reduction in trade spending; (iii) anticipated efficiencies as a result
of our new internal information systems; and (iv) the elimination of certain
outsourced warehousing facilities and services.
(Gain) Loss on Disposals of Business and 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. 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. We are currently in default under the terms of
our revolving credit facility and other debt arrangements with third parties.
See "Financial Condition" below.
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<PAGE>
Interest Income. In fiscal 2000, we recorded $1.4 million in interest
income associated with Cliffstar's $28 million unsecured, subordinated
promissory note we received in connection with the sale of our private label
juice business.
Income Tax Expense (Benefit). Due to our net loss, we realized a $12
million income tax benefit in fiscal 2000. In fiscal 1999, we recorded income
tax expense of $3.6 million. Future deferred income tax benefits of
approximately $30.8 million have not been recognized at August 31, 2000 because
of concerns with respect to realization of those benefits. See Note 12 of Notes
to Consolidated Financial Statements.
Fiscal 1999 Compared to Fiscal 1998
Revenues. Our total revenues for fiscal 1999 increased 110% to $236.8
million from $112.8 million during fiscal 1998. Our increased fiscal 1999
revenues were primarily due to sales of additional branded products acquired
through our Seneca acquisition and a full year of sales of private label
products acquired through our Minot acquisition, as well as increased co-packing
revenue, increased sales of our Northland brand 100% juice products, and initial
sales of our products through the foodservice distribution channels. Industry
data for the 12-week period ended September 12, 1999 indicated that our
Northland juice products were available in approximately 93% of the nation's
30,000 supermarkets and held a 12.8% national market share of the supermarket
bottled shelf-stable cranberry beverage dollar sales, up for 11.9% for the
12-week period ended September 13, 1998. In response to trade promotion and
marketing support, our market share reached as high as 14.4% for the 12-week
period ended July 18, 1999. We believe our increased branded juice sales and
increased market share over the last year were primarily due to our aggressive
branded product marketing campaign. During fiscal 1999, sales of concentrate and
bulk frozen fruit decreased primarily due to our increased use of raw
cranberries to support the production of our branded and non-branded juice
products as well as continued intense price competition resulting from the
recent industry-wide record cranberry harvests.
Cost of Sales. Our cost of sales for fiscal 1999 was $152.5 million
compared to $62.5 million in fiscal 1998, with gross margins of 35.6% and 44.6%,
respectively. The decrease in our gross margin for fiscal 1999 was primarily due
to increased private label and co-packing product mix during fiscal 1999. Our
1998 revenues were more heavily weighted toward higher margin sales of our
branded products.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were $66.6 million, or 28.1% of total revenues for
fiscal 1999, compared to $38.8 million, or 34.3% of total revenues, during the
prior fiscal year. The increase in our selling, general and administrative
expenses was primarily attributable to our ongoing aggressive marketing campaign
to support the development and growth of our Northland brand 100% juice products
and our Seneca brand products. It also included expenses associated with our
launch of a new Seneca line that includes four additional flavors and new
packaging. Additionally, we incurred expenses in fiscal 1999 associated with the
integration of the systems and operations of Minot and Seneca into our own, as
well as increased expenses associated with the addition of personnel and
organizational changes necessary to manage our larger and more diversified
operations resulting from those acquisitions. Fiscal 1999 advertising, promotion
and slotting expenses in support of our branded products totaled $46.3 million
compared to $26.7 million in fiscal 1998.
Interest Expense. Interest expense was $8.6 million for fiscal 1999
compared to $6.8 million during fiscal 1998. The increase in our interest
expense was due to increased debt levels during most of the year, which resulted
from funding our Seneca and Minot acquisitions, as well as our March 1999
acquisition of certain assets formerly owned by Clermont, Inc. We also utilized
our revolving credit facility to fund increased levels of inventory and accounts
receivable to support our growing consumer cranberry product business, as well
as seasonal operating activities.
-28-
<PAGE>
Income Tax Expense. We recorded $3.6 million in income tax expense in
fiscal 1999 compared to $1.9 million in fiscal 1998. See Note 12 of Notes to
Consolidated Financial Statements.
Financial Condition
Our net cash used in operating activities in fiscal 2000 was $30.9
million compared to $33.0 million in fiscal 1999. The change in net cash used in
operating activities during fiscal 2000 was primarily the result of the net loss
incurred in fiscal 2000 and increased accounts payable and accrued liabilities.
Inventory increased $15.2 million, net of the $57.4 million non-cash lower of
cost or market adjustment, due primarily to the 1999 fall harvest of our crop,
our purchase of raw cranberries from other independent cranberry growers, our
purchase of Concord grapes from an independent growers' cooperative, and
increased raw materials and finished goods inventories to support our juice
sales. Accounts payable and accrued liabilities increased $25.4 million due
primarily to increased inventory purchases, marketing spending and delaying
vendor payments. Working capital decreased $252.1 million to a $(141.5) million
deficiency at August 31, 2000 compared to working capital of $110.6 million at
August 31, 1999. This decrease is due primarily to the classification at fiscal
year end of amounts outstanding under our debt arrangements as current
liabilities as a result of our defaults under certain financial covenants
contained in our debt agreements and our failure to make certain interest
payments, as well as increased accounts payable and accrued liabilities. Our
current ratio decreased to 0.4 to 1.0 from 4.6 to 1.0 at August 31, 1999. If
amounts outstanding under our debt arrangements were classified as long-term
liabilities instead of current liabilities as of the fiscal year end, then
working capital would have been $23.0 million, and our current ratio would have
been 1.4 to 1.0.
Operating activities consumed substantial amounts of cash during
fiscal 2000 due primarily to the high levels of marketing and promotional
spending to maintain sales levels of our branded products in light of the
continued heavy promotional spending by our competition. As a result, we
incurred operating losses and experienced negative cash flow from operations
during the year. Additionally, we have reached our borrowing capacity under our
revolving credit facility and continue to experience cash flow difficulties
caused by market pricing pressures. We have failed to make payments of interest
on our revolving credit facility due in fiscal 2001 and have otherwise defaulted
on certain covenants contained in our bank loan agreements as well as certain
note agreements with additional third parties. Additionally, we are currently in
default under the terms of our grower contracts (see Note 14 to Notes to
Consolidated Financial Statements). These factors, combined with lower than
anticipated sales in the third and fourth quarters, have decreased our working
capital and continued to increase our outstanding accounts payable with our
vendors and other trade creditors. To help ease the cash flow burden over the
next fiscal quarter and help allow us to reduce our accounts payable, we intend
in fiscal 2001 to focus more on profitability as opposed to revenues and, for
that reason, we intend to spend less on trade promotion in the upcoming fiscal
year. Additionally, we have recently (i) made substantial changes to our pricing
and promotional strategies, including entering into an agreement with Crossmark,
Inc., a national food broker, pursuant to which we have outsourced many of our
sales and marketing functions to Crossmark; (ii) converted $1.6 million in
outstanding accounts payable to Crossmark into an unsecured convertible
promissory note in the principal amount of $1.6 million bearing interest at the
rate of 5% per annum and payable in full on October 24, 2002 (which note is
convertible into convertible preferred stock under certain circumstances); (iii)
completed the conversion of our internal information systems to help obtain more
complete financial information in a quicker and more efficient manner; and (iv)
revised certain agreements with various trade creditors to obtain payment terms
more favorable to us. Additionally, we intend to continue to pursue
opportunities to refinance our debt or obtain additional debt or equity
financing in fiscal 2001. Despite these efforts, we cannot assure you that we
will be able to obtain additional financing or that cash flow from operations
will be sufficient to allow us to manage our payables. We intend to continue to
work closely with our trade creditors in managing the terms of our accounts
payable.
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<PAGE>
Our net cash provided by investing activities during fiscal 2000 was
$4.0 million compared to net cash used in investing activities in fiscal 1999 of
$40.7 million. This increase was due primarily to cash generated from the sale
of our private label business (as opposed to cash spending for acquisitions in
fiscal 1999), and from the sale of certain property and equipment. Fiscal 2000
property and equipment purchases were $5.4 million compared to total property
and equipment purchases of $8.3 million in the prior year.
Our net cash provided by financing activities in fiscal 2000 was $26.3
million compared to $73.8 million during the prior fiscal year. Net cash
provided by financing activities was primarily the result of our borrowing $31.0
million under our $155.0 million revolving credit agreement which we entered
into in March 1999 and amended in May and December 1999 and February and July
2000. Those borrowings were used to finance increased working capital needs. See
Note 9 of Notes to Consolidated Financial Statements. Our total debt (including
the current portion) was $181.0 million at August 31, 2000 for a total
debt-to-equity ratio of 3.4 to 1 compared to total debt of $150.2 million and a
total debt-to-equity ratio of 0.9 to 1 at August 31, 1999. Depending upon our
future sales levels and relative sales mix of our products during fiscal 2001,
we expect our working capital requirements to fluctuate periodically during
fiscal 2001.
In addition, as described in Note 14 to Notes to Consolidated
Financial Statements, we are not in compliance with the terms of our grower
contracts. We were unable to make an aggregate payment of approximately $670,000
due to the growers under the terms of the contracts, and we notified the growers
of our intention to also defer payments required in fiscal 2001 under the
contract for the 2000 calendar year crop. We intend to pursue amendment of the
payment terms required under the contracts and seek the necessary waivers from
the growers.
As of August 31, 2000, we had reached the maximum available amount
under our revolving credit facility of $155 million. In both the second and
third quarters of fiscal 2000, we obtained waivers of certain covenant defaults
under our credit facility that resulted primarily from our operating performance
from our syndicate of banks. However, as mentioned, we were not in compliance
with several provisions of our revolving credit agreement and other long-term
debt agreements (including various covenants of two term loans payable to an
insurance company and a term note with a bank) as of and for the year ended
August 31, 2000, and, accordingly, because the lenders have not waived these
covenant defaults, the balance of the debt agreement revolving credit facility
and long-term debt agreements have been classified as a current liability. We
have not made scheduled interest payments on the revolving credit facility in
the amount of $3.8 million as of October 31, 2000, and do not expect to make a
$5 million principal payment and scheduled interest payment due November 30,
2000. Additionally, the interest rate under our revolving credit facility
increases to the bank's domestic rate plus 3.25% while we are in default. We are
currently negotiating a forbearance agreement with our syndicate of banks as
well as seeking to refinance our outstanding debt. We are not certain that we
will be able to renegotiate the terms of our credit facility or that we will
obtain additional financing. By the terms of our credit facility, since we are
currently in default thereof, the creditors have the ability to call all
outstanding principal and interest thereunder immediately due and payable. In
such event, it is highly unlikely that we would be able to satisfy such an
obligation, and we would likely be unable to continue operation as a going
concern. However, we continue to work with our lenders to renegotiate the terms
of those arrangements. As a result of these factors and others, there is
substantial doubt about our ability to continue as a going concern. See Notes to
Consolidated Financial Statements and Independent Auditors' Report, included in
this Form 10-K.
Additionally, effective following the third quarter dividend payment
in fiscal 2000, we have suspended dividend payments on our common stock
indefinitely.
Unless our lenders call our loans due and payable immediately, we
believe that we will be able to fund our ongoing operational needs for the
upcoming first half of fiscal 2001 through (i) cash generated from operations;
(ii) our intended actions to reduce our near-term working capital requirements;
and (iii) additional measures to reduce costs and improve cash flow from
operations.
-30-
<PAGE>
Quarterly Results
Our quarterly results in fiscal 2000 varied significantly from
comparative quarters in the prior fiscal year and from quarter to quarter during
fiscal 2000:
o Revenues declined in the second half of fiscal 2000 largely because
of the sale of our private label juice business, which accounted for
approximately $23.6 million in revenues during the first half of fiscal 2000.
This decline in revenues was partially offset by inclusion of our first full
fiscal year of sales of branded products we acquired in the Seneca transaction
as well as increased co-packing sales.
o Our significant losses before income taxes in the second and fourth
quarters were largely the result of a $27.0 million lower of cost or market
inventory adjustment in the second quarter and a $30.4 million lower of cost or
market inventory adjustment in the fourth quarter, as well as additional charges
in the fourth quarter including an $8.3 million charge associated with our
restructuring efforts.
o We continued our heavy spending on media advertising, trade and
consumer promotion to build the Northland brand and to respond to increasing
competitive pricing pressure throughout the fiscal year.
Our quarterly results will likely continue to fluctuate in fiscal 2001
and will likely cause comparisons with prior quarters to be unmeaningful,
largely because (i) we anticipate that our levels of trade promotional spending
during future quarterly periods will be reduced due to a change in our pricing
and promotional strategies (however, such spending levels may vary based on then
current market and competitive conditions and company-specific factors); (ii) we
anticipate revenues to decline as we focus our promotional strategies on
returning to profitable operations as opposed to pursuing revenue growth; and
(iii) we expect to realize cost savings from our marketing alliance with
Crossmark as well as 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 February 29, 2000, we
recorded an inventory lower of cost or market adjustment of $27.0 million to
cost of sales and (ii) during the quarter ended August 31, 2000, we recorded a
lower of cost or market inventory adjustment of $30.4 million and a
restructuring charge of $7.9 million to cost of sales and $0.4 million to
selling, general and administrative expenses), that we consider necessary for a
fair presentation:
-31-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarters Ended
(In thousands, except per share data)
Fiscal 2000 Fiscal 1999
-----------------------------------------------------------------------------------------------------
Aug. 31, May 31, Feb. 29, Nov. 30, Aug. 31, May 31, Feb. 28, Nov. 30,
2000 2000 2000 1999 1999 1999 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 61,206 $ 61,417 $ 68,621 $ 74,967 $ 76,609 $ 70,895 $ 55,101 $ 34,236
Gross profit (loss) (34,273) 22,095 (4,420) 23,412 26,675 23,581 20,225 13,879
(Loss) income before
income taxes (78,602) (4,410) (34,512) 553 5,856 3,000 130 212
Net (loss) income $ (79,846) $ (4,410) $(21,036) $ 321 $ 3,577 $ 1,816 $ 67 $ 120
Net (loss) income per
share-diluted:
Weighted average shares
outstanding 20,338 20,338 20,338 20,305 20,430 20,360 19,988 20,152
Net (loss) income per
share $(3.93) $(0.22) $(1.03) $0.02 $0.18 $0.09 $0.00 $0.01
Cash dividends per share:
Per Class A share (1) -- 0.040 0.040 0.040 0.040 0.040 0.040 0.040
Per Class B share (1) -- 0.036 0.036 0.036 0.036 0.036 0.036 0.036
(1) Effective following the third quarter dividend payment in fiscal 2000, we have suspended dividend payments on our common
stock indefinitely.
</TABLE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
-------------------------------------------------------------------
We do not enter into any material futures, forwards, swaps, options or
other derivative financial instruments for trading or other purposes. Our
primary exposure to market risk is related to changes in interest rates and the
effects those changes may have on our earnings as a result of our long-term
financing arrangements. We manage our exposure to this market risk by monitoring
interest rates and possible alternative means of financing. Our earnings are
affected by changes in short-term interest rates under our revolving credit
agreement, pursuant to which our borrowings bear interest at a variable rate.
Based upon our debt outstanding under our revolving credit agreement and bank
term note as of August 31, 2000, an increase of 1.0% in market interest rates
would increase interest expense and decrease earnings before income taxes by
approximately $1.6 million. This analysis does not take into account any actions
we might take in an effort to mitigate our exposure in the event interest rates
were to change materially. See Note 6 of Notes to Consolidated Financial
Statements. The fair market value of long-term fixed interest rate debt may also
be subject to interest rate risk. Generally, the fair market value of fixed
interest rate debt will increase as interest rates fall and decrease as interest
rates rise. Based upon the respective rates and prepayment provisions of our
fixed interest rate debt, which approximated $15.8 million at August 31, 2000,
the carrying amounts of such debt approximates their fair value.
-32-
<PAGE>
Item 8. Financial Statements and Supplementary Data.
-----------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board
of Directors of Northland Cranberries, Inc.:
We have audited the accompanying consolidated balance sheets of
Northland Cranberries, Inc. and subsidiaries as of August 31, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended August 31, 2000. Our
audits also included the consolidated financial statement schedule listed at
Item 14(a)(2). These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Northland Cranberries, Inc.
and subsidiaries as of August 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
The accompanying consolidated financial statements for the year ended
August 31, 2000 have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 1 to the consolidated financial statements,
the Company is experiencing difficulty in generating sufficient cash flow to
meet its obligations and sustain its operations, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
November 24, 2000
-33-
<PAGE>
<TABLE>
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2000 AND 1999
-----------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS 2000 1999
CURRENT ASSETS (Notes 1 and 9):
<S> <C> <C>
Cash and cash equivalents $ 164,211 $ 769,126
Accounts receivable 20,650,152 35,453,371
Current portion of note receivable and accounts
receivable - other (Note 2) 7,787,365
Refundable income taxes 1,101,391
Inventories (Note 5) 48,200,907 97,059,828
Prepaid expenses 908,098 3,869,398
Assets held for sale (Note 3) 6,644,859
Deferred income taxes (Note 12) 4,332,000
------------ ------------
Total current assets 85,456,983 141,483,723
NOTE RECEIVABLE, Less current portion (Notes 2 and 9) 26,000,000
PROPERTY AND EQUIPMENT - Net (Notes 1, 3, 6, 9 and 13) 153,119,069 169,420,178
INTANGIBLE ASSETS - Net (Notes 1, 7 and 9) 17,728,274 41,074,130
OTHER ASSETS (Note 9) 1,930,607 2,943,395
------------ ------------
TOTAL ASSETS $284,234,933 $354,921,426
============ ============
</TABLE>
See notes to consolidated financial statements.
-34-
<PAGE>
<TABLE>
-----------------------------------------------------------------------------------------------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 31,357,380 $ 18,636,626
Accrued liabilities (Notes 3 and 8) 18,489,027 9,925,255
Current maturities of long-term debt (Notes 1 and 9) 12,643,000 2,354,000
Long-term debt classified as a current liability (Notes 1 and 9) 164,458,992
------------ ------------
Total current liabilities 226,948,399 30,915,881
LONG-TERM DEBT, Less current maturities (Notes 1 and 9) 3,927,069 147,797,163
DEFERRED INCOME TAXES (Notes 1 and 12) 15,655,000
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 9, 13 and 14)
SHAREHOLDERS' EQUITY (Notes 9, 10 and 11):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued
Common stock:
Class A, $.01 par value, 19,702,221 and 19,655,621
shares issued and outstanding, respectively 197,022 196,556
Class B, $.01 par value, 636,202 shares issued
and outstanding 6,362 6,362
Additional paid-in capital 148,976,780 148,768,724
(Accumulated deficit) retained earnings (95,820,699) 11,581,740
------------ ------------
Total shareholders' equity 53,359,465 160,553,382
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $284,234,933 $354,921,426
============ ============
</TABLE>
See notes to consolidated financial statements.
-35-
<PAGE>
<TABLE>
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
REVENUES (Notes 1, 2 and 4) $ 266,211,349 $236,841,077 $112,828,336
COST OF SALES (Notes 3, 5 and 13) 259,396,905 152,481,190 62,474,847
------------- ------------ ------------
GROSS PROFIT 6,814,444 84,359,887 50,353,489
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 3) 112,845,208 66,529,989 38,741,244
(GAIN) LOSS ON DISPOSALS OF BUSINESS AND
PROPERTY AND EQUIPMENT (Note 2) (2,228,691) 67,061 10,913
------------- ------------ ------------
(LOSS) INCOME FROM OPERATIONS (103,802,073) 17,762,837 11,601,332
INTEREST EXPENSE 14,556,330 8,564,480 6,826,525
INTEREST INCOME (Note 2) (1,387,827)
-------------
(LOSS) INCOME BEFORE INCOME TAXES (BENEFIT) (116,970,576) 9,198,357 4,774,807
INCOME TAXES (BENEFIT) (Notes 1 and 12) (12,000,000) 3,618,000 1,920,000
------------- ------------ ------------
NET (LOSS) INCOME $(104,970,576) $ 5,580,357 $ 2,854,807
============= ============ ============
NET (LOSS) INCOME PER SHARE (Note 1):
Basic $ (5.16) $ 0.28 $ 0.19
Diluted $ (5.16) $ 0.28 $ 0.19
SHARES USED IN COMPUTING NET (LOSS)
INCOME PER SHARE:
Basic 20,330,039 20,005,517 14,813,757
Diluted 20,330,039 20,206,512 15,266,162
</TABLE>
See notes to consolidated financial statements.
-36-
<PAGE>
<TABLE>
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
2000 1999 1998
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income $(104,970,576) $ 5,580,357 $ 2,854,807
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization of property and equipment 8,157,849 8,010,453 6,434,048
Amortization of tradenames, trademarks and goodwill 794,916 842,944 106,935
Provision for deferred income taxes (11,323,000) 2,473,000 1,416,000
Provision for inventory lower of cost or market adjustment 57,400,000
Provision for writedown of assets held for sale 6,000,000
(Gain) loss on disposals of business and property and equipment (2,228,691) 67,061 10,913
Changes in assets and liabilities (net of effects of business
acquisitions and disposition):
Receivables, prepaid expenses and other current assets 5,019,396 (14,807,868) (13,749,395)
Inventories (15,176,886) (30,680,548) (12,328,714)
Accounts payable and accrued liabilities 25,390,681 (4,521,337) 4,001,637
------------- ------------ ------------
Net cash used in operating activities (30,936,311) (33,035,938) (11,253,769)
------------- ------------ ------------
INVESTING ACTIVITIES:
Acquisitions of businesses (Note 4) (31,700,438) (35,203,177)
Proceeds from disposition of business (Note 2) 6,822,187
Collection on note receivable 250,000
Property and equipment purchases (5,397,401) (8,333,350) (7,945,506)
Proceeds from disposals of property and equipment 1,854,291 40,778 103,960
Net decrease (increase) in other assets 497,721 (658,510) 1,276,689
------------- ------------ ------------
Net cash provided by (used in) investing activities 4,026,798 (40,651,520) (41,768,034)
------------- ------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in borrowings under revolving credit facilities 30,950,000 90,950,000 (16,350,000)
Proceeds from issuance of long-term debt 1,500,000
Payments on long-term debt (2,388,289) (14,122,493) (3,759,881)
Dividends paid (2,431,863) (3,194,024) (2,443,088)
Net proceeds from common stock offering 74,481,730
Exercise of stock options 174,750 475,911 145,035
Other (286,236) (149,235)
------------- ------------ ------------
Net cash provided by financing activities 26,304,598 73,823,158 53,424,561
------------- ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (604,915) 135,700 402,758
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 769,126 633,426 230,668
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 164,211 $ 769,126 $ 633,426
============= ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid during the year for:
Interest (net of interest capitalized) $ 13,672,749 $ 8,458,891 $ 6,862,888
Income taxes (refunded) - net 698,736 669,700 (858,466)
SUPPLEMENTAL NON-CASH INVESTING
AND FINANCING ACTIVITIES (Notes 2, 3 and 9)
</TABLE>
See notes to consolidated financial statements.
-37-
<PAGE>
<TABLE>
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Accumulated
Common Stock Additional Deficit)
---------------------- Paid-in Retained
Class A Class B Capital Earnings
<S> <C> <C> <C> <C>
BALANCES, SEPTEMBER 1, 1997 $132,074 $ 6,362 $ 67,888,801 $ 8,783,688
Net proceeds from common stock offering (5,715,000 shares) 57,150 74,424,580
Common stock issued for acquisition of business (136,986 shares) 1,370 1,994,863
Stock options exercised (13,628 shares) 136 144,899
Tax benefit from exercise of stock options 24,083
Cash dividends paid:
Class A ($.16 per share) (2,350,559)
Class B ($.14544 per share) (92,529)
Net income 2,854,807
---------- ------- ------------ -------------
BALANCES, AUGUST 31, 1998 190,730 6,362 144,477,226 9,195,407
Common stock issued for acquisitions of businesses (457,287 shares) 4,573 3,466,857
Common stock issued for compensation (4,000 shares) 40 58,024
Stock options exercised (121,350 shares) 1,213 474,698
Tax benefit from exercise of stock options 291,919
Cash dividends paid:
Class A ($.16 per share) (3,101,495)
Class B ($.14544 per share) (92,529)
Net income 5,580,357
---------- ------- ------------ -------------
BALANCES, AUGUST 31, 1999 196,556 6,362 148,768,724 11,581,740
Stock options exercised (46,600 shares) 466 174,284
Tax benefit from exercise of stock options 33,772
Cash dividends paid:
Class A ($.12 per share) (2,362,466)
Class B ($.10908 per share) (69,397)
Net loss (104,970,576)
---------- ------- ------------ -------------
BALANCES, AUGUST 31, 2000 $ 197,022 $ 6,362 $148,976,780 $ (95,820,699)
========== ======= ============ =============
</TABLE>
See notes to consolidated financial statements.
-38-
<PAGE>
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The business of Northland Cranberries, Inc. (the
"Company") consists principally of growing and selling cranberries and
cranberry products. The Company's vertical integration business strategy
includes marketing and selling its Northland, Seneca, TreeSweet and Awake
brand cranberry and other fruit juice products, fresh, frozen, and dried
cranberries, and cranberry concentrate domestically through retail
supermarkets and other distribution channels including international. In
addition, the Company produces and packages juice beverages for other
companies on a contract basis.
Going Concern Basis of Presentation - The accompanying consolidated
financial statements for the year ended August 31, 2000 have been prepared
on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. Recent
production levels of cranberries in the United States have been in excess
of demand and usage which has resulted in an industry-wide excess of supply
of frozen cranberries and cranberry concentrate. Prices paid to growers for
raw cranberries are currently below production costs for many growers. In
July 2000, the United States Department of Agriculture ("USDA") adopted a
federal marketing order which is designed to reduce the industry-wide
cranberry crop for the year 2000 from levels of that of the past three
years. The Company currently operates in a marketplace that has experienced
increased levels of competitive price discounting and selling activities as
the industry responds to the excess cranberry supply levels. In addition,
Federal legislation signed on October 27, 2000 provides for an aggregate of
$20,000,000 in direct payments to certain growers with funds from the
Commodity Credit Corporation ("CCC") and $30,000,000 in funding for the
USDA to purchase cranberry products for school lunch and other meal
programs. Management expects to receive approximately $1,100,000 in direct
payments from the CCC in fiscal 2001 and is currently evaluating its
alternatives with respect to participating in the USDA cranberry product
purchase programs. As shown in the consolidated financial statements,
during the year ended August 31, 2000, the Company incurred a net loss of
approximately $104,971,000, and, as of August 31, 2000, the Company's
current liabilities exceeded its current assets by approximately
$141,491,000. These factors, among others, raise substantial doubt that the
Company will be able to continue as a going concern.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. As described
in Note 9, the Company did not make its scheduled interest payments on the
revolving credit facility in September and October 2000, and does not
expect to make a $5,000,000 principal payment and scheduled interest
payment due November 30, 2000 and the Company was not in compliance with
several provisions of its revolving credit agreement and other long-term
debt agreements as of and for the year ended August 31, 2000. Accordingly,
as also described in Note 9, because the lenders have not waived these
covenant defaults, the balance of the revolving credit facility and
long-term debt agreements have been classified as a current liability.
Under the terms of the Company's debt agreements, the lenders have the
ability to call all outstanding principal and interest thereunder
immediately due and payable. In such event, it is highly unlikely that the
Company would be able to satisfy such an obligation, and the Company would
likely be unable to continue operations as a going concern. In addition, as
described in Note 14, the Company is not in compliance with the terms of
its grower contracts. The Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to comply with the terms and covenants of
its financing agreements, to obtain additional financing or refinancing as
may be required, and ultimately to attain successful operations. Management
is continuing its efforts to obtain additional funds through additional
equity and debt financing, to reduce costs and related near-term working
capital
-39-
<PAGE>
requirements and to explore various strategic alternatives related to the
sale of all or a portion of the Company's assets or common stock, so the
Company can meet its obligations and sustain its operations. Despite these
efforts, management cannot provide assurance that the Company will be able
to obtain additional financing or that cash flows from operations will be
sufficient to allow it to meet its obligations.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents - Cash equivalents include amounts due from banks and
highly liquid debt instruments purchased with maturities of three months or
less.
Concentration of Credit Risk and Significant Customer - The Company
manufactures and sells to wholesale food processors, distributors and
retailers throughout the United States. The Company performs certain credit
evaluation procedures and does not require collateral. Accounts receivable
are stated net of allowances for doubtful accounts of approximately
$250,000 and $600,000 as of August 31, 2000 and 1999, respectively. In
fiscal 2000, the Company had revenues from one customer of approximately
$45,888,000, or 17.2%, of total revenues. In fiscal years 1999 and 1998,
the Company did not have revenues from any one customer that exceeded 10%
of total revenues. Accounts receivable as of August 31, 2000 included
approximately $6,563,000 due from this customer.
Inventories - Inventories, which primarily consist of cranberries,
cranberry and other concentrates, juice, packaging supplies and deferred
crop costs, are stated at the lower of cost or market. Cranberries and
cranberry content of inventories are accounted for using the specific
identification costing method, which approximates the first-in, first-out
("FIFO") costing method. All other inventory items are accounted for using
the FIFO costing method. Deferred crop costs consist of those costs related
to the growing of the crop which will be harvested in the following fiscal
year.
Assets Held for Sale - Assets held for sale consisted of the land, building
and equipment related to a manufacturing facility in Bridgeton, New Jersey
which discontinued production on November 22, 2000 and is reported in the
accompanying consolidated balance sheet as held for sale. The assets were
reclassified from property and equipment and are recorded at their fair
value less cost of disposal.
Property and Equipment - Property and equipment are stated at cost, less
depreciation and amortization using the straight-line method over the
estimated useful lives. The costs related to the development of new
productive cranberry beds are capitalized during the development period
until commercial production is achieved (generally the fifth growing season
after planting). Amounts included in construction in progress include
construction costs of beds, dikes and ditches, irrigation systems, and
costs associated with vine clippings planted. In addition, during the
development period, certain direct costs are capitalized in construction in
progress. The Company depreciates buildings, land improvements, cranberry
vines, bulkheads and irrigation equipment over 30 to 40 years and other
depreciable assets over 3 to 10 years.
Intangible Assets - Tradenames, trademarks and goodwill (excess of purchase
price over fair value of net assets acquired) are amortized using the
straight-line method, principally over a period of 40 years.
Long-Lived Assets - The Company periodically evaluates the carrying value
of property and equipment and intangible assets in accordance with
Statement of Financial Accounting Standards
-40-
<PAGE>
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. If the sum of the expected
future undiscounted cash flows is less than the carrying amount of an
asset, a loss is recognized for the difference between the fair value and
carrying value of the asset.
Income Taxes - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes" which requires an asset and
liability approach to financial accounting and reporting for income taxes.
Revenue Recognition - The Company recognizes revenue when product is
shipped and title passes to the customer.
Advertising - Advertising costs incurred to produce media for advertising
for major new campaigns are expensed in the period in which the advertising
first takes place. Other advertising costs are expensed when incurred.
Advertising expenses of approximately $14,127,000, $10,583,000 and
$8,763,000 for fiscal 2000, 1999 and 1998, respectively, are included in
selling, general and administrative expenses.
Net Income (Loss) Per Share - Net income (loss) per share is calculated in
accordance with SFAS No. 128, "Earnings Per Share." Basic net income (loss)
per share and diluted (loss) per share are computed by dividing net income
by the weighted average number of common shares outstanding. Diluted net
income per share is computed by dividing net income by the weighted average
number of common shares outstanding increased by the number of dilutive
potential common shares based on the treasury stock method.
Segment Information - The Company operates principally in a single consumer
foods line of business, encompassing the growing and selling of cranberries
and cranberry products.
Comprehensive Income (Loss) - There is no material difference between
comprehensive income (loss) and net income (loss) for each of the three
years in the period ended August 31, 2000.
Fair Value of Financial Instruments - The Company believes the carrying
amount of its financial instruments (cash and cash equivalents, accounts
receivable, note receivable, accounts payable, accrued liabilities and
long-term debt) is a reasonable estimate of the fair value of such
instruments due to the short-term nature of such instruments and the
market interest rates applicable to similar instruments.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accounting Standards to Be Adopted - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities". In June 2000, the FASB issued SFAS No. 138, which amends
certain provisions of SFAS 133 to clarify certain areas causing
difficulties in implementation. The Company will adopt SFAS 133 and the
corresponding amendments under SFAS 138 on September 1, 2000. SFAS 133, as
amended by SFAS 138, is not expected to have a material impact on the
Company's consolidated results of operations, financial position or cash
flows.
In May 2000, the Emerging Issues Task Force ("EITF") issued EITE No. 00-14,
"Accounting for Certain Sales Incentives." The Company is currently
evaluating the impact of this statement on the consolidated financial
statements. This statement is required to be adopted no later than the
fourth quarter of fiscal 2001.
-41-
<PAGE>
Reclassifications - Certain amounts previously reported have been
reclassified to conform with the current presentation.
2. DISPOSITION OF BUSINESS AND RELATED LEGAL PROCEEDINGS
On March 8, 2000, the Company sold the net assets of its private label
juice business to Cliffstar Corporation ("Cliffstar"), pursuant to an asset
purchase agreement ("Asset Purchase Agreement"), dated January 4, 2000. The
private label juice business assets sold consisted primarily of finished
goods and work-in-process inventories, raw materials inventories consisting
of labels and ingredients that relate to customers of the private label
juice business (other than cranberry juice and cranberry juice
concentrates), certain trademarks and goodwill, contracts relating to the
purchase of raw materials inventory and the sale of products, and 135,000
gallons of cranberry juice concentrate. No plants or equipment were
included in the sale. Cliffstar also assumed certain obligations under
purchased contracts. In connection with the sale, the Company received from
Cliffstar an unsecured, subordinated promissory note for $28 million
(non-cash investing activity) which will be amortized over six years and
which bears interest at a rate of 10% per annum, as well as approximately
$6.8 million in cash (subject to potential post-closing adjustments)
related to inventory transferred to Cliffstar on the closing date. The
Company recognized a pre-tax gain of approximately $2,100,000 in connection
with the sale of the net assets.
Additionally, Cliffstar is contractually obligated to make certain annual
earn-out payments to the Company for a period of six years from the closing
date based generally on operating profit from Cliffstar's sale of cranberry
juice products. The Company also entered into certain related agreements
with Cliffstar, including among them a co-packing agreement pursuant to
which Cliffstar contracted for specified quantities of Cliffstar juice
products to be packed by the Company during each year of the period in
which Cliffstar is making earn-out payments to the Company.
The private label juice business had revenues of approximately $23,600,000,
$40,300,000 and $600,000 for the years ended August 31, 2000, 1999 and
1998, respectively. The Company recognized gross profit of approximately
$3,700,000, $12,400,000 and $200,000 on such revenues during the years
ended August 31, 2000, 1999 and 1998, respectively. Information with
respect to selling, general and administrative expenses with respect to the
private label juice business is not available, as the Company's accounting
system does not segregate such expenses by type of product.
On July 7, 2000, Cliffstar filed suit against the Company in the United
States District Court, Western District of New York, alleging, among other
things, that the Company breached certain representations and warranties in
the Asset Purchase Agreement. That lawsuit was subsequently dismissed, and
on July 31, 2000, the Company filed a lawsuit against Cliffstar in the
Northern District of Illinois, which was later amended on October 10, 2000.
The lawsuit arises out of the sale of the net assets of the Company's
private label juice business to Cliffstar in the transaction that closed on
March 8, 2000. The Company claims that (1) Cliffstar breached the Asset
Purchase Agreement by failing to make required payments under the Asset
Purchase Agreement and by failing to negotiate in good faith concerning a
cranberry sauce purchase agreement between the parties; (2) Cliffstar
breached an interim cranberry sauce purchase agreement between the two
companies by failing to adequately perform and to pay the Company the
required amounts due under it; (3) Cliffstar breached its fiduciary duty to
the Company based on the same (or similar) conduct; (4) Cliffstar breached
the promissory note issued by it in the transaction by failing to make its
payments in a timely manner and failing to pay all of the interest due; and
(5) Cliffstar breached a co-packing agreement entered into in connection
with the sale by failing to make required payments thereunder and other
misconduct. The Company also claims that Cliffstar breached its fiduciary
duties to the Company. The Company seeks compensatory damages in an amount
in excess of $5 million, plus punitive
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<PAGE>
damages for Cliffstar's breaches of its fiduciary duties and attorneys'
fees. Cliffstar's answer to the Company's amended complaint was received on
November 15, 2000.
Cliffstar has asserted counterclaims against the Company, alleging that (1)
the Company fraudulently induced Cliffstar to enter into the Asset Purchase
Agreement; (2) the Company has breached the Asset Purchase Agreement by
failing to negotiate in good faith a cranberry sauce purchase agreement, by
failing to provide Cliffstar with sufficient quantities of cranberry
concentrate meeting Cliffstar's "specifications," by selling inventory that
did not have a commercial value at least equal to the Company's carrying
value, by failing to notify Cliffstar that the Company intended to
write-down its cranberry inventory, by not providing Cliffstar its selling
prices, by decreasing its level of service to customers after the parties
signed the Asset Purchase Agreement, and by refusing to turn over certain
labels, films and plates relating to the private label juice business to
Cliffstar; (3) the Company breached the co-packing agreement by prematurely
terminating that agreement; (4) the Company converted the labels, films and
plates relating to the private label juice business; and (5) the Company
intentionally interfered with Cliffstar's contractual relations, or
reasonable expectations of entering into business relations, with the
printers who hold the labels, films and plates. Cliffstar seeks
compensatory damages in an amount not stated in the counterclaims, punitive
damages for the alleged fraudulent inducement and intentional interference
claims, and attorneys' fees. The complaint does not seek rescission of the
agreement, although Cliffstar reserves the right to seek recovery of
rescission-type damages (among other damages) without seeking to unwind the
transaction. The Company has denied the allegations of Cliffstar's
counterclaims in all material respects.
As of August 31, 2000, the note receivable from Cliffstar had an
outstanding balance of $27,750,000, and the Company had outstanding
accounts receivable and accrued interest due from Cliffstar aggregating
approximately $6,037,000. The action is in its early stages. No depositions
have been taken or scheduled and the Company has only begun to conduct
discovery. It is the opinion of the Company's management, after consulting
with outside legal counsel, that, (1) the Company has strong claims for the
required payments for cranberry concentrate, co-packing services and
cranberry sauce sales and other alleged breaches of the agreements and
these amounts owed the Company are valid and collectible; (2) the Company
has strong factual and legal defenses in all material respects to
Cliffstar's counterclaims; and (3) the note and accrued interest due from
Cliffstar are collectible. However, the resolution of the legal proceedings
cannot be predicted with certainty at this time. In addition, management
intends to vigorously defend the counterclaims against them and to pursue
any claims they may have against Cliffstar, including any actions to
collect the amounts outstanding.
Cliffstar made the required $250,000 principal and related accrued interest
payment on the note receivable that was due on May 31, 2000 on June 13,
2000, and the Company, after consulting with its outside legal counsel,
concluded that the payment was received late and, thus, the note is in
default with future interest accruing at the default rate of 12%. The
Company received Cliffstar's scheduled August 31, 2000 principal payment of
$250,000 together with $699,452 of accrued interest at 10% on September 8,
2000. The Company has recognized interest income on the note receivable at
a rate of 10% in the consolidated financial statements, pending the
resolution of this matter.
Although the note is in default, the Company has classified the balance
outstanding in the accompanying consolidated balance sheet in accordance
with the scheduled payment dates provided for in the note, as this is how
the Company anticipates payments will be received. The aggregate scheduled
principal payments required under the terms of the note receivable as of
August 31, 2000 are as follows:
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<PAGE>
Fiscal Year Principal
Ending Payments
2001 $ 1,750,000
2002 3,000,000
2003 4,500,000
2004 6,000,000
2005 8,000,000
Thereafter 4,500,000
-----------
Total $27,750,000
===========
3. RESTRUCTURING CHARGE
In the fourth quarter of fiscal 2000, the Company recorded a $8,250,000
pre-tax restructuring charge, consisting primarily of a $6,000,000
writedown of a manufacturing facility that discontinued production in
Bridgeton, New Jersey on November 22, 2000 and $2,250,000 of plant closing
costs (primarily cleanup, security and insurance costs) and employee
termination benefits. Approximately 130 employees received notification in
fiscal 2000 of their termination as a result of the restructuring plan,
primarily at the manufacturing facility that is being closed and in the
Company's sales department. This restructuring charge, of which $7,900,000
was charged to cost of sales and $350,000 was charged to selling, general
and administrative expenses, was aimed at improving future profitability by
eliminating overcapacity and streamlining operations.
The elements of the restructuring charge are as follows:
Original Accrued at
Expense Non-cash August 31, 2000
Facility writedown $6,000,000 $6,000,000
Plant closing costs 770,000 $ 770,000
Employee termination benefits 1,480,000 1,480,000
--------- ---------- ----------
Total $8,250,000 $6,000,000 $2,250,000
========== ========== ==========
4. ACQUISITIONS
On July 1, 1998, the Company completed its acquisition of certain net
assets of Minot Food Packers, Inc. ("Minot") for $35.2 million in cash and
136,986 shares of Class A Common Stock. Minot, located in Bridgeton, New
Jersey, produces, markets, sells and distributes a wide variety of Minot
branded and private label cranberry products.
On December 30, 1998, the Company acquired the juice division of Seneca
Foods Corporation ("Seneca") for approximately $28.7 million in cash, and
assumed certain liabilities in connection with the acquisition. The assets
acquired included an exclusive license to market and sell all Seneca brand
fruit beverages, bottling and packaging facilities located in New York,
North Carolina and Wisconsin, a distribution center in Michigan, and a
receiving station in New York.
On March 1, 1999, the Company acquired certain assets of Clermont, Inc.
("Clermont") for $2.6 million in cash, issuance of a $4.4 million note
payable and 367,287 shares of Class A Common Stock. The assets acquired
included cranberries, cranberry and other fruit concentrates, a
concentrating facility in Oregon, and other equipment.
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<PAGE>
On April 21, 1999, the Company acquired the common stock of Potomac Foods
of Virginia, Inc. ("Potomac") for $0.4 million in cash, $0.4 million of
assumed debt and 90,000 shares of Class A Common Stock. The assets acquired
primarily consisted of the acquisition of certain customer relationships.
The acquisitions were recorded using the purchase method of accounting and,
accordingly, the results of operations of the acquired businesses are
included in the consolidated statements of operations from the date of
acquisition. The purchase price of the acquisitions has been allocated to
the assets acquired and liabilities assumed based upon fair values.
The unaudited pro forma results of operations, assuming the Minot and
Seneca acquisitions had been consummated as of September 1, 1997, are as
follows:
1999 1998
Revenues $272,560,077 $253,340,310
Net income 5,087,357 1,900,674
Net income per share:
Basic $ 0.25 $ 0.13
Diluted 0.25 0.12
The unaudited pro forma results are not necessarily indicative of the
actual results of operations that would have occurred had the Minot and
Seneca acquisitions actually been made at the beginning of fiscal 1998. The
pro forma effects of the Clermont and Potomac acquisitions were not
significant.
5. INVENTORIES
Inventories at August 31, 2000 and 1999 were as follows:
2000 1999
Raw materials $30,528,712 $63,007,239
Finished goods 7,951,357 20,530,358
Deferred crop costs 9,720,838 13,522,231
------------ -----------
Total inventories $48,200,907 $97,059,828
============ ============
During fiscal 2000, the Company recorded a $57,400,000 pre-tax, lower of
cost or market charge to cost of sales which reduced the carrying value of
its inventory to its estimated market value. This charge was necessary to
account for the significant decline in the price of raw cranberries that
the cranberry industry is currently experiencing, as described in Note 1.
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<PAGE>
6. PROPERTY AND EQUIPMENT
Property and equipment at August 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Land $ 9,420,420 $ 10,159,972
Land improvements 19,268,931 18,919,978
Cranberry vines, bulkheads and irrigation equipment 84,477,947 83,956,687
Buildings and improvements 28,821,225 36,148,280
Equipment and vehicles 53,611,760 54,126,369
Construction in progress 1,387,682 3,759,400
------------- ------------
Property and equipment - at cost 196,987,965 207,070,686
Less accumulated depreciation and amortization 43,868,896 37,650,508
------------- -----------
Property and equipment - net $153,119,069 $169,420,178
============= ============
</TABLE>
The Company capitalized $86,501, $325,971 and $736,106 of interest for the
years ended August 31, 2000, 1999 and 1998, respectively.
7. INTANGIBLE ASSETS
Intangible assets at August 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Tradenames and trademarks $11,873,666 $12,375,009
Goodwill 7,936,801 29,893,189
------------ ------------
Total intangible assets - at cost 19,810,467 42,268,198
Less accumulated amortization 2,082,193 1,194,068
------------ ------------
Intangible assets - net $17,728,274 $41,074,130
============ ============
</TABLE>
8. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities at August 31, 2000 and 1999 were as follows:
2000 1999
<S> <C> <C>
Trade and consumer promotions $11,205,184 $1,934,466
Compensation and other employee benefits 2,208,529 2,687,272
Interest 1,304,423 401,054
Plant closing costs 770,000
Property taxes 555,533 667,719
Income taxes 168,070 472,867
Commissions 117,559 866,726
Other 2,159,729 2,895,151
------------- ------------
Total accrued liabilities $18,489,027 $9,925,255
============= ============
</TABLE>
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<PAGE>
9. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt as of August 31, 2000 and 1999 consisted of the following:
2000 1999
<S> <C> <C>
Revolving credit facility with a bank $ 155,000,000 $124,050,000
Term loan payable to insurance company with
interest at 8.08% 11,376,865 12,216,179
Term loan payable to insurance company with
interest at 7.86% 7,718,808 8,215,513
Term note with a bank 2,508,334 3,208,334
Promissory note with a vendor with interest at 5% 1,600,000
Other obligations 2,825,054 2,461,137
------------- ------------
Total 181,029,061 150,151,163
Less: Current maturities of long-term debt 12,643,000 2,354,000
Amounts classified as current liability 164,458,992
------------- ------------
Amounts classified as noncurrent $ 3,927,069 $147,797,163
============= ============
</TABLE>
The Company was not in compliance with various financial covenants for the
revolving credit facility, the two term loans payable to an insurance
company, and the term note with a bank as of August 31, 2000, and the
Company has not received waivers for any of these covenant defaults. As a
result, the borrowings under the revolving credit facility, the two term
loans payable to an insurance company and the term note payable to a bank
have been classified as a current liability as of August 31, 2000.
On March 15, 1999, the Company entered into a credit agreement with a bank
that provides for a revolving credit facility of $140,000,000. On December
29, 1999, the Credit Agreement was amended, increasing the amount that
could be borrowed under the revolving credit facility to $155,000,000. The
Credit Agreement was subsequently amended effective February 29, 2000 and
July 17, 2000 for financial covenant defaults. The revolving credit
facility terminates on February 28, 2002. This amount will be reduced by
$5,000,000 on the last day of each of the first and third quarters of the
Company commencing with the fiscal quarters ending November 30, 2000 and
May 31, 2001 and continuing thereafter until the termination date of the
agreement. Under the amended revolving credit facility, the Company through
July 17, 2000, could borrow at the bank's domestic rate (which approximates
prime, as defined) or LIBOR plus one and one-quarter percent (1.25%).
Effective July 18, 2000, the interest rate was increased to the bank's
domestic rate (which approximates prime, as defined), plus 1.25% (10.75% as
of August 31, 2000). Under the terms of the amended revolving credit
facility, interest accrues at the bank's domestic rate, plus 3.25%, while
the loan is in default. The borrowing option under LIBOR is no longer
available. Amounts outstanding under the agreement bear interest at a
weighted average of 10.09% and 7.56% as of August 31, 2000 and 1999,
respectively. The Company did not make its scheduled interest payments to
the bank and scheduled interest payment in September and October 2000 and
does not expect to make a $5,000,000 principal payment due November 30,
2000. The credit facility is collateralized by substantially all assets of
the Company not otherwise collateralized.
The 8.08% term loan with an insurance company is payable in semi-annual
installments, including interest, through July 1, 2004. The loan is
collateralized by specific property and equipment. Under the terms of the
term loan, interest accrues at a rate of 5% above the stated rate of
interest (13.08%) while the loan is in default.
The 7.86% term loan with an insurance company is payable in semi-annual
installments, including interest, through August 1, 2008. The interest rate
is subject to adjustment in fiscal year 2003, as determined by the
insurance company, but the adjusted rate will not exceed 2.25% over the
then five-year treasury bond yield. Under the terms of the term loan,
interest accrues at a rate of 5% above the stated rate of interest (12.86%)
while the loan is in default. The loan is collateralized by specific
property and equipment.
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<PAGE>
The term note with a bank is payable in monthly installments, including
interest, through March 2002, at which time the remaining principal must be
paid. The interest rate on this term note is 1% per annum less than the
prime rate, as defined, or LIBOR plus an applicable rate margin (2%) at the
option of the Company. The weighted average interest rate on the
outstanding borrowings was 7.79% and 6.85% as of August 31, 2000 and 1999,
respectively. Under the terms of the term note, interest accrues at a rate
of the prime rate, as defined, plus 2%, while the note is in default. The
note is collateralized by specific property and equipment.
The promissory note with a vendor is unsecured and is payable, including
interest at 5%, on October 24, 2002. The note provides that each $100
increment of the outstanding principal and accrued interest will be
convertible into one share of $100 stated value Series A Convertible
Preferred Stock ("Preferred Stock"), which series of Preferred Stock is yet
to be established by the Board of Directors of the Company, 180 days after
the occurrence of a refinancing, as defined. Each share of Preferred Stock
will be convertible into 40 shares of Class A Common Stock at the option of
the holder or automatically upon the occurrence of certain events. Each
share of Preferred Stock will entitle the holder to receive cumulative
annual cash dividends at a rate of 5% on the $100 stated value.
The other obligations consist of various term loans with financial
institutions with principal and interest due in various amounts through
January 2007. These loans are generally collateralized by specific property
and equipment.
The debt agreements contain various covenants which include restrictions on
dividends and other distributions to shareholders, repurchases of stock,
and require the Company to maintain and meet certain minimum levels of
shareholders' equity ($125,000,000 as of August 31, 2000) and operating
ratios, as defined.
During the year ended August 31, 2000, the Company issued notes to vendors
and finance companies in the amount of $2,410,000 to finance certain
accounts payable and equipment purchases (non-cash financing and investing
activities).
Aggregate annual principal payments required under terms of the debt
agreements consist of the following as of August 31, 2000:
Fiscal Year Principal
Ending Payments
2001 $177,102,000
2002 529,000
2003 2,801,000
2004 321,000
2005 176,000
Thereafter 100,061
------------
Total $181,029,061
============
The Company has also guaranteed $1,000,000 of outstanding obligations to a
bank of an independent cranberry grower. The grower is in default with
certain terms and conditions contained in the related debt agreements.
Management of the Company is of the opinion that the potential for any loss
to the Company is minimal.
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<PAGE>
10. SHAREHOLDERS' EQUITY
The Company is authorized to issue 5,000,000 shares of preferred stock with
a par value of $.01.
The authorized common stock of the Company consists of 60,000,000 shares of
Class A Common Stock and 4,000,000 shares of Class B Common Stock.
Outstanding Class B shares are convertible into Class A shares on a
one-for-one basis at any time. The shares of Class A Common Stock are
entitled to one vote per share and the shares of Class B Common Stock are
entitled to three votes per share. Holders of Class A Common Stock are
entitled to receive cash dividends equal to at least 110% of any cash
dividends paid on the shares of Class B Common Stock. However, cash
dividends may be paid on Class A Common Stock without a concurrent cash
dividend being paid on the Class B Common Stock. If at any time the
outstanding shares of Class B Common Stock fall below 2% of the outstanding
shares of Class A Common Stock, they will be automatically converted into
Class A Common Stock.
On July 22, 1996, the Company filed a Form S-4 Registration Statement
("shelf registration") with the Securities and Exchange Commission. The
Registration Statement covers up to 1,000,000 shares of Class A Common
Stock of the Company which may be issued from time to time in connection
with acquisitions by the Company of businesses or properties, or interests
therein. In June 1998, the Company issued 5,715,000 shares of Class A
Common Stock through a public offering resulting in net proceeds of
approximately $74.5 million.
11. STOCK OPTIONS
In 1987, the Company adopted the 1987 Stock Option Plan (the "1987 Plan"),
which provides for the issuance of 275,000 shares of Class A Common Stock
options to certain executive officers and key employees. Stock options
granted under the 1987 Plan are exercisable at a price equal to market
value on the date of grant for a period determined by the Board of
Directors, not to exceed 10 years and vest over a period of 3 to 5 years.
In fiscal 1990, the Company adopted the 1989 Stock Option Plan (the "1989
Plan"), which provides for the issuance of 600,000 shares of Class A Common
Stock options to key employees and non-employee directors of the Company.
Stock options granted under the 1989 Plan are exercisable at a price
established by the Board of Directors which shall not be less than 85% of
the market value on the date of grant for a period determined by the Board
of Directors, not to exceed 10 years and vest over a period of 3 to 5
years.
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"), which provides for the issuance of 800,000 shares of Class A Common
Stock to key employees and non-employee directors of the Company. Stock
options granted under the 1995 Plan are exercisable at a price established
by the Compensation and Stock Option Committee, which shall not be less
than 100% of the fair market value on the date of grant for a period
determined by the Compensation and Stock Option Committee, not to exceed 10
years and vest over a period of 3 to 5 years.
The status of the stock option plans was as follows:
-49-
<PAGE>
<TABLE>
<CAPTION>
Number of Weighted Average
Price Range Shares Exercise Price
<S> <C> <C> <C>
Outstanding at September 1, 1997 $ 2.63 - $18.50 915,784 $ 7.77
Granted 9.75 - 19.75 187,000 17.98
Exercised 2.63 - 8.75 (13,628) 4.34
Cancelled 7.25 - 19.75 (5,500) 16.18
---------------- --------- ------
Outstanding at August 31, 1998 2.63 - 19.75 1,083,656 9.57
Granted 6.69 - 11.13 104,500 9.83
Exercised 2.63 - 7.25 (121,350) 3.92
Cancelled 7.25 - 19.75 (59,296) 14.65
---------------- --------- ------
Outstanding at August 31, 1999 2.63 - 19.75 1,007,510 9.97
Granted 1.56 - 5.50 100,500 4.94
Exercised 3.75 (46,600) 3.75
Cancelled 5.06 - 19.75 (90,824) 10.14
---------------- --------- ------
Outstanding at August 31, 2000 $ 1.56 - 19.75 970,586 $ 9.74
================ ========= ======
Shares exercisable at August 31, 2000 $ 2.63 - $19.75 815,086 $ 9.72
================ ========= ======
Available for grant after August 31, 2000 226,014
=========
</TABLE>
-50-
<PAGE>
The following table summarizes information about stock options outstanding
at August 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding
Weighted Options Exercisable
Shares Average Weighted Shares Weighted
Outstanding Remaining Average Exercisable Average
Range of at August 31, Contractual Exercise at August 31, Exercise
Exercise Prices 2000 Life-Years Price 2000 Price
<S> <C> <C> <C> <C> <C>
$1.56 - $5.50 299,800 3.4 $ 4.42 220,800 $ 4.26
6.69 - 9.63 169,300 4.4 8.03 167,300 8.01
10.00 - 19.75 501,486 6.4 13.49 426,986 13.21
-------------- -------- ---- ------ -------- ------
$1.56 - $19.75 970,586 5.1 $ 9.74 815,086 $ 9.72
============== ======== ==== ======= ======== =======
</TABLE>
The Company has adopted the disclosure - only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has elected to
continue to follow the provisions of Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations;
accordingly, no compensation cost has been reflected in the financial
statements for its stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS
123, the Company's net (loss) income and net (loss) income per share would
have been reduced to the pro forma amounts indicated below:
2000 1999 1998
Net (loss) income:
As reported $(104,970,576) $5,580,357 $2,854,807
Pro forma (105,280,000) 5,376,000 2,343,000
Net (loss) income per share-diluted:
As reported $ (5.16) $ 0.28 $ 0.19
Pro forma (5.18) 0.27 0.16
The weighted-average fair value per share of options granted was $3.08 in
2000, $3.22 in 1999 and $4.50 in 1998.
For the purpose of these disclosures, the fair value of each option granted
was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
2000 1999 1998
Expected volatility 67 % 26.8 % 20.4 %
Risk-free interest rate 5.9 % 5.5 % 5.5 %
Dividend rate during the expected term 0 % 1.6410 % 1.6410 %
Expected life in years 9 9 9
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<PAGE>
12. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which generally requires the recognition of deferred income tax assets and
liabilities based on the expected future income tax consequences of events
that have previously been recognized in the Company's financial statements
or tax returns. In addition, a valuation allowance is recognized if it is
more likely than not that some or all of the deferred income tax assets
will not be realized.
The provision for income taxes for the years ending August 31, 2000, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
Current provision (benefit):
<S> <C> <C> <C>
Federal $ (677,000) $1,145,000 $ 452,000
State 52,000
------------- ------------ ----------
Total current provision (benefit) (677,000) 1,145,000 504,000
------------- ------------ ----------
Deferred provision (benefit):
Federal (10,484,000) 1,978,000 1,081,000
State (839,000) 495,000 335,000
------------- ----------- ----------
Total deferred provision (benefit) (11,323,000) 2,473,000 1,416,000
------------- ----------- ----------
Total provision (benefit) for income taxes $(12,000,000) $3,618,000 $1,920,000
============= =========== ==========
</TABLE>
A reconciliation of the Federal statutory income tax rate to the effective
income tax rate for the years ending August 31, 2000, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Statutory income tax rate (34.0)% 34.0 % 34.0 %
Losses for which no benefit was provided 24.2
State income taxes, net of Federal tax benefit (0.5) 5.2 5.2
Other - net 0.1 1.0
------- ------ ------
Effective income tax rate (10.3)% 39.3 % 40.2 %
======= ====== ======
</TABLE>
-52-
<PAGE>
Temporary differences that give rise to deferred income tax assets and
liabilities as of August 31, 2000 and 1999 consist of the following:
<TABLE>
<CAPTION>
2000 1999
Deferred income tax assets:
<S> <C> <C>
Accounts receivable allowances $ 98,000 $ 235,000
Inventories 27,132,000 3,234,000
Accrued liabilities 4,331,000 558,000
Federal net operating loss carryforwards 16,856,000 175,000
State net operating loss carryforwards 2,744,000 130,000
Federal alternative minimum tax credit carryforwards 3,739,000 5,283,000
Federal investment tax credit carryforwards 37,000 37,000
Other items 25,000 4,000
--------------- ------------
Total deferred income tax assets 54,962,000 9,656,000
--------------- ------------
Deferred income tax liabilities
Property and equipment (24,189,000) (20,755,000)
Prepaid expenses (13,000) (224,000)
--------------- ------------
Total deferred income tax liabilities (24,202,000) (20,979,000)
--------------- ------------
Valuation allowance (30,760,000)
--------------- ------------
Net deferred income taxes recognized in the
consolidated balance sheets $ 0 $(11,323,000)
=============== ============
</TABLE>
As of August 31, 2000, there were no deferred income taxes recognized in
the consolidated balance sheet. The components of deferred income taxes
included in the consolidated balance sheet as of August 31, 1999 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Net current asset $ 4,332,000
Net noncurrent liability (15,655,000)
-------------
Net deferred income tax liabilities $(11,323,000)
=============
</TABLE>
As of August 31, 2000, the Company had, for federal income tax purposes,
net operating loss carryforwards of approximately $49,575,000, which expire
at various dates through 2020, available to offset future federal taxable
income. As of August 31, 2000, the Company also had approximately
$52,715,000 of state net operating loss carryforwards available to offset
future taxable income for state (primarily Wisconsin) income tax purposes.
In addition, as of August 31, 2000, the Company had approximately
$3,739,000 of federal alternative minimum tax credit carryforwards and
approximately $37,000 of investment tax credit carryforwards available to
offset future federal income taxes. The alternative minimum tax credit
carryforwards have no expiration date and the investment tax credit
carryforwards expire in 2004.
-53-
<PAGE>
13. LEASE COMMITMENTS
On April 10, 1990, the Company acquired leasehold interests in two
cranberry marshes in Nantucket, Massachusetts. On March 31, 1994, the
Company entered into an agreement which extended the original lease term
through November 30, 2003. Rental payments are based on 20 percent of gross
cash receipts from agricultural production, subject to certain minimums
which are dependent upon the state-wide average crop yield. Rent expense
for the years ended August 31, 2000, 1999 and 1998 was approximately
$225,000, $368,000 and $268,000, respectively. The Company has determined
that it is no longer economically feasible to operate these marshes and has
entered into negotiations to terminate the lease in fiscal 2001.
Accordingly, the remaining unamortized cost of the leasehold interests of
approximately $581,000 was expensed as cost of sales during the year ended
August 31, 2000. The cost of the leasehold interests were previously being
amortized over the term of the lease using the straight line method.
On September 5, 1991 the Company entered into a net lease with Equitable
Life Assurance Society of the United States ("Equitable") for the Cranberry
Hills cranberry marsh, which Equitable purchased on May 3, 1991 from
Cranberry Hills Partnership ("Cranberry Hills"), a partnership controlled
by the Company's CEO and two former directors. The lease, which expires
December 31, 2000, provided for rent payments to Equitable of $285,000 in
year one and increasing to $381,000 in year nine with a final payment of
$206,000 on June 1, 2000. The lease grants the Company a right of first
refusal to purchase the leased premises or to renew the lease on terms
Equitable is prepared to accept from a bona fide third party. The agreement
also provides for payments to Cranberry Hills of 25% of the premises
income, if any, during the term of the lease with Equitable. Payments to
Cranberry Hills in fiscal 2000, 1999 and 1998 aggregated approximately $0,
$95,000 and $0, respectively. The Company is currently in discussions with
Equitable to renew the lease.
14. SUPPLY CONTRACTS
The Company has multiple-year crop purchase contracts with 47 independent
cranberry growers pursuant to which the Company has contracted to purchase
all of the cranberry crop produced on 1,755 planted acres owned by these
growers. These contracts generally last for seven years, starting with the
1999 calendar year crop, and pay the growers at a market rate, as defined,
for all raw cranberries delivered plus $3 per barrel and certain incentives
for premium cranberries. In September 2000, the Company was unable to make
an aggregate payment of approximately $670,000 due to the growers under the
terms of the contracts and the Company notified the growers of the
Company's intention to also defer payments required in fiscal 2001 under
the contract for the 2000 calendar year crop. Accordingly, the Company is
currently in default under the terms of the grower contracts. However, the
contracted growers harvested and delivered their 2000 calendar year crop to
the Company subsequent to August 31, 2000. The Company intends to pursue
amendment of the payment terms required under the contracts and seek the
necessary waivers from the growers. The ultimate resolution of this matter
is currently undeterminable.
15. 401(k) RETIREMENT PLANS
The Company has a 401(k) savings plan that covers substantially all
full-time employees. The Company contributes amounts based on employee
contributions under this plan. The Company contributed approximately
$561,000, $572,000 and $182,000 to this plan in fiscal 2000, 1999 and 1998,
respectively.
-54-
<PAGE>
The Company also has a 401(k) profit sharing plan that covers substantially
all non-union employees at the Bridgeton, New Jersey location. In
accordance with plan provisions, the Company may make discretionary
contributions. No amounts were contributed to the plan in fiscal 2000, 1999
and 1998.
Item 9. Changes in and Disagreements with Accountants on Accounting and
-------------------------------------------------------------------------
Financial Disclosure.
--------------------
None.
-55-
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Company.
--------------------------------------------------------
Pursuant to Instruction G, we have incorporated the information
required by this Item with respect to directors by reference to the information
set forth under the caption "Proposal One: Election of Directors" in our
definitive proxy statement for our 2001 annual meeting of shareholders to be
filed with the Commission pursuant to Regulation 14A within 120 days of the end
of our fiscal year. The information required by Item 405 of Regulation S-K is
also incorporated by reference to the information set forth under the caption
"Other Matters--Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement. The required information with respect to executive officers
appears at the end of Part I of this Form 10-K.
Item 11. Executive Compensation.
--------------------------------
Pursuant to Instruction G, we have incorporated the information
required by this Item by reference to the information set forth under the
caption "Executive Compensation" in the Proxy Statement; provided, however, that
the subsection titled "Executive Compensation - Report on Executive
Compensation" shall not be deemed to be incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
-----------------------------------------------------------------------
Pursuant to Instruction G, we have incorporated the information
required by this Item by reference to the information set forth under the
caption "Stock Ownership of Management and Others" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
-------------------------------------------------------
None.
-56-
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
-------------------------------------------------------------------------
(a)(1) The financial statements of Northland Cranberries, Inc.,
consisting of our consolidated balance sheets as of August 31, 2000 and 1999,
consolidated statements of operations, cash flows and shareholders' equity for
the fiscal years ended August 31, 2000, 1999 and 1998, notes to consolidated
financial statements and independent auditors' report, are filed herewith.
(a)(2) Schedule II, Valuation and Qualifying Accounts, is filed
herewith. We have omitted other schedules because they are not required or not
applicable, or the information required to be shown is included in our financial
statements and related notes.
(a)(3) The exhibits we have filed herewith or incorporated by
reference herein are set forth on the attached Exhibit Index.*
(b) We did not file any Current Reports on Form 8-K with the
Securities and Exchange Commission during the fourth quarter of fiscal 2000.
* We will furnish to shareholders the Exhibits to this Form 10-K, including
long-term debt instruments disclosed in Exhibit 4.5, on request and advance
payment of a fee of $0.20 per page, plus mailing expenses. Requests for
copies should be addressed to Robert E. Hawk, President and Chief Operating
Officer, Northland Cranberries, Inc., 800 First Avenue South, P.O. Box
8020, Wisconsin Rapids, Wisconsin 54495-8020.
-57-
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CRANBERRIES, INC.
Date: November 27, 2000 By: /s/ John Swendrowski
------------------------------------
John Swendrowski
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed on November 27, 2000 below by the
following persons on behalf of the Company and in the capacities indicated.
By: /s/ John Swendrowski By: /s/ John C. Seramur
--------------------------------- -------------------------------------
John Swendrowski John C. Seramur
Chairman of the Board, Director
Chief Executive Officer and Director,
Chief Accounting Officer
By: /s/ Jeffrey J. Jones By: /s/ LeRoy J. Miles
--------------------------------- -------------------------------------
Jeffrey J. Jones LeRoy J. Miles
Director Director
By: /s/ Patrick F. Brennan By: /s/ Robert E. Hawk
--------------------------------- -------------------------------------
Patrick F. Brennan Robert E. Hawk
Director President and Chief Operating Officer
and Director
By: /s/ Pat Richter
-------------------------------------
Pat Richter
Director
-58-
<PAGE>
<TABLE>
NORTHLAND CRANBERRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Year ended August 31,
---------------------
2000 1999 1998
---- ---- ----
Valuation accounts deducted in the consolidated balance
sheets from assets to which they apply:
Accounts receivable - allowance for doubtful accounts:
<S> <C> <C> <C>
Balances at beginning of year $ (600,000) $ - $ -
Additions - charged to expense (645,000) (600,000) -
Deductions - amounts written off, net of recoveries 995,000 - -
-------------------------------------------------
Balances at end of year $ (250,000) $ (600,000) $ -
=================================================
Deferred income taxes - valuation allowance:
Balances at beginning of year $ - $ - $ -
Additions - allowance established (30,760,000) - -
-------------------------------------------------
Balances at end of year $(30,760,000) $ - $ -
=================================================
</TABLE>
-59-
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
---------- -----------
2.1 Asset Purchase Agreement, dated as of January 5, 2000, by and
between the Company and Cliffstar Corporation. [Incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form
8-K dated March 23, 2000.]
2.2 First Amendment to Asset Purchase Agreement, dated as of March 8,
2000, by and between the Company and Cliffstar Corporation.
[Incorporated by reference to Exhibit 2.2 to the Company's
Current Report on Form 8-K dated March 23, 2000.]
2.3 Asset Purchase Agreement, dated as of December 2, 1998, by and
between the Company and Seneca Foods Corporation. [Incorporated
by reference to Exhibit 2.0 to the Company's Current Report on
Form 8-K dated December 30, 1998.]
3.1 Articles of Incorporation, as amended, dated January 8, 1997.
[Incorporated by reference to Exhibit 3.4 to the Company's Form
10-K for the fiscal year ended August 31, 1996.]
3.2 By-Laws of the Company, as amended and restated. [Incorporated by
reference to Exhibit 3.3 to the Company's Form 10-K for the
fiscal year ended August 31, 1998.]
4.1 Secured Promissory Note, dated as of June 14, 1989, issued by the
Company to The Equitable Life Assurance Society of the United
States. [Incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K dated July 7, 1989.]
4.2 Mortgage and Security Agreement, dated as of June 14, 1989, from
the Company to The Equitable Life Assurance Society of the United
States. [Incorporated by reference to Exhibit 10.2 to the
Company's Form 8-K dated July 7, 1989.]
4.3 Mortgage and Security Agreement dated July 9, 1993, between the
Company and The Equitable Life Assurance Society of the United
States. [Incorporated by reference to Exhibit 4.8 to the
Company's Form 10-Q dated November 12, 1993.]
4.4 Modification Agreement, dated as of July 9, 1993, between the
Company and The Equitable Life Assurance Society of the United
States. [Incorporated by reference to Exhibit 4.9 to the
Company's Form 10-Q dated November 12, 1993.]
4.5 Credit Agreement, dated as of March 15, 1999, by and among the
Company, various financial institutions Firstar Bank, N.A.
(formerly Firstar Bank Milwaukee, N.A.), as Agent. [Incorporated
by reference to Exhibit 10 to the Company's Form 10-Q for the
quarter ended February 28, 1999.]
E-1
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- -----------
4.6 Secured Promissory Note, dated July 9, 1993, between the Company
and The Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 4.23 to the Company's Form
10-K for the fiscal year ended March 31, 1995.]
4.7 Stock Pledge, dated July 9, 1993, between the Company and The
Equitable Life Assurance Society of the United States.
[Incorporated by reference to Exhibit 4.24 to the Company's Form
10-K for the fiscal year ended March 31, 1995.]
4.8 Collateral Pledge Agreement, dated April 13, 2000. [Incorporated
by reference to Exhibit 4.1 to the Company's Form 10-Q for the
quarter ended February 29, 2000.]
4.9 First Amendment to Credit Agreement and Consent, dated as of May
1, 1999, by and among Northland Cranberries, Inc., various
financial institutions and Firstar Bank Milwaukee, N.A. (now
known as Firstar Bank, N.A.) as agent. [Incorporated by reference
to Exhibit 4.1 to the Company's Form 10-Q for the quarter ended
November 30, 1999.]
4.10 Second Amendment to Credit Agreement and Consent, dated as of
December 29, 1999, by and among Northland Cranberries, Inc.,
various financial institutions and Firstar Bank, N.A. as agent.
[Incorporated by reference to Exhibit 4.2 to the Company's Form
10-Q for the quarter ended November 30, 1999.]
4.11 Third Amendment to Credit Agreement, dated as of February 29,
2000, by and among Northland Cranberries, Inc., various financial
institutions and Firstar Bank, N.A. as agent. [Incorporated by
reference to Exhibit 4.2 to the Company's Form 10-Q for the
quarter ended February 29, 2000.]
4.12 Fourth Amendment to Credit Agreement and Limited Waiver, dated as
of July 17, 2000, by and among Northland Cranberries, Inc.,
various financial institutions and Firstar Bank, N.A. as agent.
[Incorporated by reference to Exhibit 4.1 to the Company's Form
10-Q for the quarter ended May 31, 2000.]
Other than as set forth in Exhibits 4.1 through 4.12, the Company
has numerous instruments which define the rights of holders of
long-term debt. These instruments, primarily security agreements
and mortgages, were entered into in connection with debt
financing provided by Firstar Bank, N.A., and are disclosed in
the Credit Agreement filed as Exhibit 4.5 to this Form 10-K and
the various amendments thereto. The Company will furnish a copy
of any of such instruments to the Commission upon request.
E-II
<PAGE>
*10.1 1987 Stock Option Plan, dated June 2, 1987, as amended.
[Incorporated by reference to Exhibit 10.5 to the Company's Form
10-K for the fiscal year ended December 31, 1987.]
*10.2 Forms of Stock Option Agreement, as amended, under 1987 Stock
Option Plan. [Incorporated by reference to Exhibit 10.6 to the
Company's Form 10-K for the fiscal year ended December 31, 1987.]
*10.3 Form of Modification Agreement, dated as of April 16, 1996,
between the Company and each of John A. Pazurek, John B. Stauner,
John Swendrowski, William J. Haddow and Robert E. Hawk, modifying
Stock Option Agreements previously entered into between the
parties. [Incorporated by reference to Exhibit 10.3 to the
Company's Form 10- K for the fiscal year ended August 31, 1996.]
*10.4 1989 Stock Option Plan, as amended. [Incorporated by reference to
Exhibit 4.4 to the Company's Form S-8 Registration Statement
(Reg. No. 33-32525).]
*10.5 Forms of Stock Option Agreements under the 1989 Stock Option
Plan, as amended. [Incorporated by reference to Exhibits 4.5-4.8
to the Company's Form S-8 Registration Statement (Reg. No.
33-32525).]
*10.6 1995 Stock Option Plan, as amended. [Incorporated by reference to
Exhibit 10.6 to the Company's Form 10-K for the fiscal year ended
August 31, 1997.]
*10.7 Form of Stock Option Agreements under the 1995 Stock Option Plan,
as amended. [Incorporated by reference to Exhibit 10.7 to the
Company's Form 10-K for the fiscal year ended August 31, 1996.]
10.8 Lease Agreement dated September 5, 1991 between The Equitable
Life Assurance Society of the United States and the Company.
[Incorporated by reference to Exhibit 10.13 to the Company's Form
10-K for the fiscal year ended March 31, 1992.]
10.9 Agreement dated September 5, 1991 between the Company and
Cranberry Hills Partnership. [Incorporated by reference to
Exhibit 10.14 to the Company's Form 10-K for the fiscal year
ended March 31, 1992.]
10.10 Lease, dated March 31, 1994 between Nantucket Conservation
Foundation, Inc. and the Company. [Incorporated by reference to
Exhibit 10.11 to the Company's Form 10-K for the fiscal year
ended March 31, 1994.]
*10.11 Amended and Restated Key Executive Employment and Severance
Agreement, dated as of April 14, 2000, between the Company and
John Swendrowski.
*10.12 Key Executive Employment and Severance Agreement, dated as of
April 14, 2000, between the Company and Robert E. Hawk.
E-III
<PAGE>
*10.13 Registration Rights Agreement, dated as of July 1, 1998, by and
between the Company and Michael A. Morello. [Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K dated July 1, 1998.]
*10.14 Northland Cranberries, Inc. 2000 Incentive Bonus Plan.
[Incorporated by reference to Exhibit 10 to the Company's Form
10-Q for the quarter ended November 30, 1999.]
*10.15 Northland Cranberries, Inc. 2001 Incentive Bonus Plan.
*10.16 Northland Cranberries, Inc. Severance and Stay Bonus Plan.
[Incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended May 31, 2000.]
21 Subsidiaries of the Company. [Incorporated by reference to
Exhibit 21 to the Company's Form 10-K for the fiscal year ended
August 31, 1999.]
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
99 Definitive Proxy Statement for the Company's 2001 annual meeting
of shareholders scheduled to he held on January 30, 2001 (which
will be filed with the Commission under Regulation 14A within 120
days after the end of the Company's fiscal year and which is
incorporated by reference herein to extent indicated in this Form
10-K).
* This exhibit is a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of
Form 10-K.
E-IV
