Annual Meeting of Shareholders
August 30, 2001
Fiscal 2000 was a financial and mental disaster for management,
shareholders and employees of Northland. We started the year in September of
1999 with a belief that we would post a small profit for the year. We expected
the year to be tough because of the excess fruit in inventory within the
cranberry industry. We knew that since we held fruit in inventory at $85 per
barrel, the profit for the year would be small. We also added significant staff
to the branded sales and marketing force with the intention of building sizeable
increases in revenue. Thus, a part of the 2000 business plan included an
increase of about $3,000,000 in overhead.
All in all, we expected 2000 to be profitable, but unspectacular. In
October, we were informed that John Pazurek, our CFO since the company went
public in 1987, was diagnosed with an extremely aggressive, rare form of cancer.
We harvested the 1999 crop in October and brought in 525,000 barrels versus a
projected 400,000-barrel crop. We quickly discovered that the national crop was
about 30% over projections and would significantly increase the industries
excess inventories.
Ocean Spray re-launched its Well Fleet Farms juice line as Ocean Spray
Premium and literally began giving away product in an attempt to gain market
share. The Northland brand had to compete with deep discounting and free product
coupons at the grocer. At that point we increased our marketing budget and
revised our sales projections. By late January it had become obvious that it
would be extremely difficult to compete with cranberries carried in inventory at
$85 per barrel.
We began discussions with our auditors regarding the need to mark down
our cranberry inventory to net realizable value. At that point in time, it
appeared as though approximately $45 per barrel was a reasonable market value.
Thus, in February we took a charge of $27 million against our inventory.
During January we upgraded our accounting system to a new system to
match the large revenue growth we experienced in fiscal 1999. We retained
outside consultants to install the system and train our employees. Since the
system was a total package, every aspect of our company was involved. The system
changeover took place on January 10th and we looked forward to generating more
management detail on a timely basis. Over 100 people within the company were
involved in preparing to operate the new system. Our excitement turned to horror
by January 31st when we discovered that as of the January 31st month end, we had
accounting variances in excess of $15,000,000. Obviously, we had a problem that
would take a great deal of work to fix.
We sold our private label division early in March and by year-end found
ourselves in litigation regarding the sale and approximately $5 million of
proceeds were not paid as agreed by the buyer. Cranberry prices continued to
fall to the $10 per barrel level as Ocean Spray continued aggressive spending at
the trade level and drastic price cutting in the concentrate markets. Our
manufacturing costs skyrocketed on a per case basis because our sales were under
projections and the private label buyer failed to honor their co-packing
obligation.
The unreceived $5 million from Cliffstar placed severe cash flow
problems on Northland and forced us into a cash position where we could not
service debt. This cash shortfall was magnified by our increased overhead in the
branded division, escalating per case manufacturing costs, cranberries carried
at higher than market and significantly increased marketing costs.
At year-end, we recorded another charge against inventory and various
restructuring costs totaling $38.65 million. We posted a year-end loss of $105
million and we were looking at a stock price under $1.00 per share.
As a result of our fiscal 2000 loss, we were in default on our loan
agreement and our debt was transferred from long-term liabilities to a current
liability. That change in the accounting for our senior bank debt forced our
auditors to issue a going concern opinion in conjunction with our audit.
We were notified by NASDAQ that if our stock did not close above a
$1.00 bid for ten consecutive trading days, we could be delisted. Obviously, the
last six months of fiscal 2000 were a living hell.
Since year-end we have initiated the following actions:
1) Closed Bridgeton, New Jersey Plant
2) Reduced overhead by over $3 MM
3) Entered an agreement with Crossmark
4) Entered a forbearance agreement with our senior lenders
5) Negotiated several trade credit agreements
6) Temporarily laid off approximately 45 employees
7) Reorganized our marketing plan
8) Reformulated and launched our 27% Solution in the Northland brand
9) Fixed our accounting system
10) Held several discussions with our lenders
11) Explored other lending alternatives
AND
We made a profit in the first quarter.
We have a long way to go to fix our problems. In fiscal 2000 we tried
to be something that we are not. We tried to be a "best in class" competitor
like Coke or Pepsi. We tried to compete at the grocery store by opening up our
checkbook and showing that we could play with the big guys.
Our motto for 2001 is simply "be who we are". We are a small,
vertically integrated cranberry grower from Wisconsin. We produce a premium
product and expect a premium price. We are not a multi-national billion-dollar
company with deep pockets. We are a small Wisconsin company with a dedicated
team of employees that can react much quicker to new ideas than our competitors.
We are a small Wisconsin company that can grow cranberries and process juice
without the waste of a large multi-national corporation. We are a small
Wisconsin company that can develop small profitable niche markets that don't
appeal to large competitors. We are a small Wisconsin company that can and will
return to profitability.
The first quarter profit was achieved by combining profitable juice
sales with the seasonal fresh fruit and sauce business. As we continue to
restructure our business, we believe that our second quarter, scheduled to end
February 28th will result in a small loss. The second quarter will be totally
dependent on juice sales for revenues. We have dramatically realigned our
promotional activities at the grocery trade level during the first six months of
the year in order to define a profitable base business.
We will launch a print advertising campaign in the third quarter and a
television campaign in the fourth quarter. We believe that we should post a
small profit for the year to reverse our $105 million loss in fiscal 2000.
Honestly, our problems are not yet behind us. I can tell you that your
current management team is ready to put forth the time and effort required to
get us back on track. We need to fix our operations and we need to fix our
balance sheet. We are dedicated to doing the best we can within the perimeters
of the current cranberry industry.
We will not win every battle as we take up this challenge and we will
probably not fix the problems as fast as some would prefer. You have my
guarantee that we will do our best and I am confident that in the long-term,
while we may lose some battles, we can win the war.