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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[Mark One] FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12506
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LUCILLE FARMS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 13-2963923
(State of incorporation) (I.R.S. employer identification no.)
150 River Road, P.O. Box 517 (973) 334-6030
Montville, NJ 07045 (Registrant's telephone number)
(Address of principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.001 per share
(Titles of Classes)
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]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $3,245,130 based on the average bid and ask price as reported by
NASDAQ on June 24, 2002. Shares held by each officer, director, and person who
owns 10% or more of the Registrant's outstanding common stock have been excluded
in that such persons may be deemed to be affiliates. The determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of the Registrant's common stock outstanding as of June 24,
2002 was 3,284,775.
Documents Incorporated by Reference
-----------------------------------
Portions of the Registrant's Proxy Statement for the 2002 Annual Meeting
of Shareholders, which is to be filed subsequent to the date hereof, are
incorporated by reference into Part III.
PART I
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ITEM 1. BUSINESS
General
Lucille Farms, Inc. (the "Company") is engaged in the manufacture and marketing
of mozzarella cheese and, to a lesser extent, other Italian variety cheeses.
Utilizing proprietary formulas and processes, the Company has developed a line
of value-added Nutritional cheeses, including reduced fat, fortified, and
organic cheeses. For the fiscal year ended March 31, 2002 conventional
mozzarella cheese sales and blends accounted for over 90% of the Company's
cheese sales revenues. Sales of the Company's Nutritional line of products
during the fiscal year ended March 31, 2002, were not significant. The Company's
products, which are primarily manufactured in the Company's production facility
in Swanton, Vermont, are made of natural ingredients.
The Company's conventional mozzarella cheese is sold primarily to the food
service and industrial segments of the cheese market. The food service segment
includes pizza chains and independent pizzerias, restaurants, recreational
facilities, business feeders, health care facilities, schools and other
institutions which prepare food for on-premises consumption. The industrial
segment includes manufacturers that utilize cheese products as an ingredient in
processed foods and frozen entrees and side dishes.
The Company believes that its proprietary process utilized in its Nurtitional
cheeses can be applied to a wide variety of cheeses, and plans to continue to
develop new healthful products that satisfy consumer taste and appearance
expectations.
The Company has installed the necessary equipment enabling it to package retail
shredded cheese. The Company is negotiating with several companies to co-pack
their private label retail cheese lines in popular sizes. Additionally, the
Company has developed a distinctive Lucille Farms branded line of retail
cheeses. The Company is shipping to retailers in the Northeast United States.
The Company believes its retail sales will enable it to realize the higher
profit margins available in the retail marketplace. At present the Company is
considering other retail opportunities. For the year ended March 31, 2002, sales
to the retail segment of the cheese market amounted to approximately 2.5% of the
Company's total cheese sales.
Health and Nutritional Concerns
During the past twenty years, medical and dietary experts have been advocating a
diet that is lower in saturated fat, cholesterol and sodium as a means of
reducing the risk of heart disease and other health problems. The public's
concern with eating a more healthful diet has increased significantly.
The Company believes that as public awareness of health and nutrition continues
to grow, consumers will increasingly purchase organic, natural and/or fortified
foods. Accordingly, the Company believes that nutritional cheeses will represent
an increasingly larger share of total cheese sales as a result of their
nutritional advantages over conventional cheeses.
2
Products
The Company's products include the following:
Conventional Cheese Group:
Conventional Mozzarella. The Company's premium quality, all natural
mozzarella cheese meets or exceeds all federal and industrial standards
for purity, freshness, taste, appearance and texture. During the fiscal
years ended March 31, 2000, 2001 and 2002, conventional mozzarella
cheese sales and blends accounted for approximately 89%, 88% and 88%,
respectively, of the Company's sales.
Conventional Provolone. The Company's provolone is a premium quality,
all natural cheese that meets or exceeds all federal and industry
standards for purity, freshness, taste, appearance and texture. During
the fiscal years ended March 31, 2000, 2001 and 2002, sales of
conventional provolone accounted for approximately 4%, 4% and 3%,
respectively, of the Company's sales.
Conventional Feta. The Company's Feta is a premium quality, all natural
cheese that meets or exceeds all federal and industrial standards for
purity, freshness, taste, appearance and texture. During the fiscal
years ended March 31, 2000, 2001 and 2002, sales of Feta accounted for
less than 1% of the Company's sales in each of such periods.
Nutritional Product Group:
Organic Cheese. The Company is now marketing a line of Organic Cheeses.
The line includes consumer sized packages of shredded Mozzarella,
Cheddar, Monterey Jack, sold to supermarkets, gourmet and health food
stores in the Northeastern USA.
Mozzi-RITE(TM). The Company manufactures a proprietary mozzarella-style
cheese substitute made with 97% pasteurized skim milk and 3% vegetable
oils. Mozzi-RITE(TM) is all natural, cholesterol free and low in
saturated fat and sodium. A "substitute cheese" must be nutritionally
equal or superior to its conventional counterpart, whereas "imitation
cheese" (which the Company does not produce) is nutritionally inferior
to conventional cheese. The Company believes that its Mozzi-RITE(TM)
cheese substitute has the taste, mouth feel, texture, handling and
cooking characteristics of conventional mozzarella. Mozzi-RITE(TM)
differs from "conventional cheese" in that vegetable oil is used in its
manufacture, whereas butterfat containing cholesterol and saturated fat
is used in the manufacture of conventional cheese. To the Company's
knowledge, there is currently no other all-natural, cholesterol-free
mozzarella-style cheese substitutes on the market.
Tasty-Lite Cheese(TM) - Fat Free. This all natural mozzarella cheese is
made from 100% pasteurized skim milk, and contains no fat or
cholesterol, is low in sodium and has reduced calories compared to
conventional mozzarella. The Company is not aware of any other
all-natural, real mozzarella cheese available that is both fat and
cholesterol free.
Tasty-Lite Cheese(TM) - Light. This all-natural mozzarella cheese is
made from 100% pasteurized part-skim milk and contains nearly 60% less
fat than whole milk mozzarella, and 50% less fat than conventional
part-skim mozzarella. This product is low in cholesterol and sodium. Its
fat content, however, is greater than the Company's Tasty-Light
Cheese(TM) - Low Fat nutritional product.
During the fiscal years ended March 31, 2000, 2001 and 2002, the
Company's nutritional products accounted for approximately 1%, 1% and
1%, respectively, of the Company's total sales. While the Company's
conventional cheeses are viewed as commodity items, the Company believes
that its nutritional line should be viewed as "premium" products, which
enables the Company to charge higher prices.
Proprietary Formulas and Processes; New Product Development
The Company's nutritional products are made using the Company's formulas
and processes, which are believed to be proprietary. The formulas and
processes for the Company's nutritional products were designed and
developed by the Company's founders specifically for these products. The
rights to these formulas and processes have been assigned by such
officers to the Company. These proprietary processes can be applied to a
wide variety of cheese, and the Company's future plans include
developing other varieties of nutritional cheeses. However, there can be
no assurance that the Company will be successful in such development, or
that, if developed, such products will be accepted by the marketplace or
prove profitable.
Popcorn Whey-Animal Feed. The company produces as a cheese by-product,
popcorn whey, used in animal feed. It processes this product in its
company owned whey-drying facility. All of the whey produced is sold and
shipped to International Ingredients, Inc. for further processing.
3
Production Facilities
The Company currently produces substantially all of its products at its
manufacturing plant in Swanton, Vermont. The Swanton facility, located in
Franklin County, Vermont's highest volume dairy producing area, operates 24
hours a day, 6 days a week and ships approximately 550,000 pounds of bulk
products per week. The plant currently has 90 full-time employees. The Company
has equipment for shredding, dicing, slicing, vacuum packaging, gas flush bag
packaging, and labeling its products. The manufacturing equipment is of modern
design and assembled in a flow through arrangement for a labor saving operation.
The production operation has been established in such a way that changes in
cheese orders, whether size, specification, packaging, labeling or delivery
dates, can be accomplished without significant effort or disruption of
operations. Due to recent improvements, the Company's facility now has the
capacity to produce approximately 600,000 pounds of bulk product per week. In
the event additional capacity is required, the Company may either (a) contract
out its excess production to, and/or rent plant time from, other manufacturers
("co-packing"), or (b) further expand its current plant facilities, subject to
appropriate financing, for which it believes it has sufficient acreage and
technical capabilities. However, there can be no assurance that co-packing
arrangements can be effectuated, or, if effectuated, that such arrangements
could be done in a timely manner and at a reasonable cost.
Whey Drying Facility
In 1999 the Company completed construction of, and began operating, a 10,000
square foot whey drying facility adjacent to its Swanton, Vermont cheese plant.
This project was built in conjunction with a leading ingredient processing
company, who provided the drying equipment and has agreed to purchase all of the
whey produced at the facility.
Whey is the residue of making cheese. It consists of water, protein, calcium and
other minerals. In the past, whey was regarded as an environmental pollutant,
and its disposal was expensive. Recently, whey has become a valuable product,
and is now used in animal feeds, infant formulas, protein powders, ice cream and
a variety of other products.
The facility dries whey into a product referred to as popcorn whey, which is
milled and mixed with other ingredients for animal feed. The plant was designed
to enable the Company to upgrade it in the future in order to take advantage of
emerging new technologies in whey protein fractionalization. The Company's
ability to produce this higher value whey protein has not been proven and there
can be no assurance that this upgrade will occur.
4
Quality Control
The Company is supplied with milk by the largest milk cooperative headquartered
in Vermont. Quality control starts on the local farms, which produce the milk
for the cooperative. The milk is delivered to the Company directly from the
farms on a regular and timely basis. The Company tests all milk received.
Throughout the production process, the Company subjects its products to quality
control inspection and testing in order to satisfy federal regulation, meet
customer specifications and assure consistent product quality. The Company
currently employs two persons qualified to perform the necessary testing as
prescribed by state, federal and the Company's quality standards and
specifications. Such tests are performed at the Company's on-site laboratory. A
sample of each product batch is tested promptly after the manufacture and again
before shipment for various characteristics, including taste, color, acidity,
surface tension, melt, stretch and fat retention. On a frequent basis, random
samples are sent to qualified independent labs to test for bacteria and other
micro organisms. Federal and state regulatory agencies also perform regular
inspections of the Company's products and facilities.
Raw Materials
At present, there are adequate supplies of raw materials, primarily milk,
utilized by the Company in manufacturing its products and the Company expects
such adequate supplies to continue to be available. The Company has a milk
supply contract with St. Albans Cooperative Creamery, Inc. and has been able to
purchase as much milk as needed for its production. The cooperative also ensures
the Company a flexible mix of milk products, besides direct farm milk, such as
extra milk, skim milk, condensed skim milk or dry milk powder. This flexibility
is an advantage in cheese production. It enables the Company to switch from one
milk product to another on short notice with no down time.
Markets and Customers
The Company's products are sold primarily to the food service and industrial
segment of the cheese market. The Company began marketing its products to the
retail segment of the cheese market in July 1999.
The food service segment of the cheese market includes pizza chains and
independent pizzerias, restaurants, recreational facilities, transportation
hubs, business feeders, health care facilities, schools and other institutions
which utilize the company's products as ingredients in preparing foods for on
premise consumption. The Company sells its products to the food service segment
of the cheese market through a network of approximately 20 non-exclusive food
brokers that sell to approximately 140 customers that service the accounts in
over 27 states and Washington, D.C. The bulk of the Company's products
distributed in the food service market are utilized by regional pizza chains and
independent pizza shops. For the fiscal years ended March 31, 2002, 2001 and
2000, sales of the Company's products to the food service segment of the cheese
market accounted for approximately 69%, 69% and 68% of revenues, respectively.
Virtually all of such sales were of the Company's conventional cheeses. In the
fiscal years ended March 31, 2001 and 2000, one customer, Lisanti Foods, Inc.,
accounted for approximately 10% and 11% of sales, respectively. In fiscal year
ended March 31, 2002, no one customer accounted for greater than 10% of sales.
5
In the industrial segment of the cheese market, the Company sells its products
to manufacturers for use as an ingredient in processed foods, such as frozen and
refrigerated pizzas, a variety of Italian specialty convenience foods, and
general frozen entrees and side dishes. The finished processed foods are then
generally sold to retail supermarkets and grocery accounts under various brand
names. The majority of the Company's sales of its conventional cheese and
nutritional products to the industrial market are made directly by the Company's
in-house sales staff. For the fiscal years ended March 31, 2002, 2001 and 2000,
sales of the Company's products to the industrial segment of the cheese market
accounted for approximately 22%, 20%, and 28% of revenues, respectively. The
retail segment of the cheese market consists of product sold to customers for
distribution to independent and chain supermarkets, natural food stores,
warehouse club stores, and other food retailers. The retail segment accounted
for approximately 2%, 5% and 0% of total sales in 2002, 2001 and 2000,
respectively.
Sales of whey were approximately 7%, 6% and 4% in the periods ended March 31,
2002, 2001 and 2000.
Sales and Marketing
The thrust of the Company's sales and marketing efforts have recently shifted to
emphasize retail and shredded cheese products. We believe that the retail and
shredded cheese market offers the Company a significant marketing opportunity.
The Company is seeking to establish these products as a substantial portion of
its sales, but there can be no assurance that it will be successful in doing so.
Competition
The Company faces intense competition. The conventional cheese market is a
commodity, price-sensitive industry, with numerous small local, medium-sized
regional and large national competitors. The Company competes with many
established national manufactures of conventional cheese, including Kraft, Inc.,
Borden, Inc., Sargento Foods, Inc. and Sorrento Cheese Company Inc. There are
also a number of national dairy cooperatives, including Dairymen's Creamery
Association Inc., Agri-Mark and D.F.A. Inc. Many of these competitors have
significantly greater financial and other resources than the Company.
The principal competition for the Company's nutritional products group include
many of the same major competitors listed above in the conventional cheese
industry, in addition to Century Foods, Galaxy Foods, Land O' Lakes Inc. and
Stella Foods, Inc.
The Company's nutritional products are positioned as premium products and are
generally higher in price than certain similar competitive products. The Company
believes that the principal competitive factors in the marketing of cheese
products are quality, customer service, price and brand recognition. While the
Company believes that its products compete favorably with respect to these
factors and believes that its anticipated increased sales and marketing efforts
will result in greater product recognition and market penetration for its
existing and new products, there can be no assurance that the Company will be
able to compete successfully, particularly with respect to its new products and
its entry into new markets.
6
Trademarks and Patents
The Company owns the trademarks Lucille Farms(TM), Monte Carlo(TM),
Mozzi-RITE(TM), and Tasty-Lite Cheese(TM) for its products. In addition the
Company is currently pursuing trademark protection for a number of other
potential names for existing and planned new products. The Company believes
these trademarks are an important means of establishing consumer recognition for
the Company and its products. However there can be no assurance as to the degree
that these trademarks offer protection to the Company, or that the Company will
have the financial resources to engage in litigation against any infringement of
its trademarks, or as to the outcome of any litigation if commenced.
Although the Company believes its formulas, processes and technology for its
nutritional products are proprietary, the Company has not sought and does not
intend to seek patent protection for such technology. In not seeking patent
protection, the Company is instead relying on the complexity of its technology,
trade secrecy laws and employee confidentially agreements. However, there can be
no assurance that other companies will not acquire information which the Company
considers to be proprietary or will not independently develop equivalent or
superior products or technology and obtain patents or similar rights with
respect thereto. Although the Company believes that its technology has been
independently developed and does not infringe upon the patents of others,
certain components of the Company's manufacturing processes could infringe
existing or future patents, in which event the Company may be required to modify
its processes or obtain a license. No assurance can be given that the Company
will be able to do so in a timely manner or upon acceptable terms and
conditions, and the failure to do either of the forgoing could have a material
adverse effect on the Company.
Government Regulation
The dairy industry is subject to extensive federal, state and local government
regulation, including the Food and Drug Administration ("FDA"), the United
States Department of Agriculture, the State of Vermont Department of Agriculture
and the Vermont Environmental Protection Agency, regarding the quality, purity,
manufacturing, marketing, advertising, labeling and distribution of food
products. The Company's plant is subject to regulation and inspection by these
agencies and failure to comply with one or more regulatory requirements can
result in fines and sanctions, including the closing of all or a portion of the
facility until the manufacturer, is able to bring its operations or products
into compliance.
Food products are also subject to "standard of identity" requirements mandated
by both federal and state agencies to determine the permissible qualitative and
quantitative ingredient content of foods. The Company believes that all its
products meet the applicable FDA standards of identity and that the various
products it labels as "no-cholesterol," "low-sodium," "low saturated fat,"
"fat-free," reduced calorie" and "source of calcium" meet the applicable FDA
standards of identity for such designations.
The Company's manufacturing plant is believed to be operating in compliance with
all regulations, and has all the necessary licenses, permits and approvals
required to operate. The Company currently operates a facility for the purpose
of pre-treating the wastewater generated from the Company's
7
manufacturing facility. The Company entered into an Agreement with the State of
Vermont, to make significant improvements in its waste water facility. The
improvements have been completed and the Company believes the facility is in
compliance with all regulatory requirements.
Employees
The Company currently employs 97 full-time employees. Of the 97 employees, six
are in executive and administrative positions, 86 are in production and
distribution, and five are in clerical positions. Of such employees, 90 are
located at the Swanton, Vermont facility and seven are located at the Company's
executive offices in Montville, New Jersey.
8
ITEM 2. PROPERTIES
The Company's Swanton, Vermont manufacturing plant was constructed in 1975 in
conjunction with the Target Area Development Corporation (a non-affiliated
industrial development agency), which was to retain title to the plant during a
fixed lease period expiring on December 31, 1999. Under such lease, the Company
was obligated by Target Area Development Corporation to finance the cost of
constructing the plant. On July 5, 1994 the Company exercised its right to
purchase the premises for $1.00 plus the unamortized balance of said loans. A
majority of the machinery and equipment located at the plant is also included
under the above arrangement. The Swanton facility is one floor consisting of
approximately 40,000 square feet.
The Company currently operates a facility for the purpose of pre-treating the
wastewater generated from the Company's manufacturing facility. The Company
entered into an agreement with the State of Vermont to make significant
improvements in the wastewater facility. The improvements have been completed
and the Company believes the facility is in compliance with all regulatory
requirements.
In 1999 the Company completed construction, and began operating, a 10,000 square
foot whey drying facility adjacent to its Swanton, Vermont cheese plant.
The Company's executive offices, consisting of approximately 1,900 square feet,
are located in Montville, New Jersey. Approximately 1,000 square feet of such
premises are leased from Messrs. Gennaro and Alfonso Falivene and the estate of
Philip Falivene, officers, directors, and/or principal stockholders of the
Company, all of whom own the office condominium unit. The Company currently pays
Messrs. Falivene $1,200 per month rent for such premises, which is the fair
market value for such space, on a month-to-month basis. The remainder of the
Company's premises is occupied pursuant to a month-to-month lease from Messrs.
Gennaro and Alfonso Falivene, and the estate of Philip Falivene, pursuant to
which the Company pays $750 per month rent.
The Company leases a parcel of land adjacent to the Vermont facility. This
parcel is owned by Messrs. Gennaro and Alfonso Falivene, and the estate of
Philip Falivene. The space is used as an employee parking lot and its use was
required in conjunction with the construction of the Whey drying facility. The
lease is for a ten year period. Rentals are $750 monthly for the first five
years and $900 monthly for the additional five year period. This lease has a
purchase option to purchase the land at fair market value at the end of the ten
year period. This lease was assigned to the Bank in conjunction with the Whey
Plant financing.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock trades on the National Association of Securities Dealers
Automated quotation System ("NASDAQ") under the symbol "LUCY". The following
table sets forth the high and low bid quotations reported on NASDAQ for the
Common Stock for the periods indicated.
High Low
Year Ended March 31, 2002:
First Quarter 2.125 1.500
Second Quarter 3.060 1.540
Third Quarter 3.300 2.050
Fourth Quarter 3.250 1.150
Year Ended March 31, 2001:
First Quarter 5.000 3.250
Second Quarter 4.125 3.000
Third Quarter 4.000 1.250
Fourth Quarter 3.250 1.325
The above quotations represent prices between dealers, do not include retail
mark-ups, markdowns or commissions and do not necessarily reflect actual
transactions.
As of June 24, 2002 there were approximately 115 holders of record of Common
Stock. Since many shares are registered in street name, the number of beneficial
owners is considerably higher.
The Company has never paid cash dividends on its Common Stock. Payment of
dividends, if any, will be within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company. At the
present time, the Company's anticipated capital requirements are such that it
intends to follow a policy of retaining earnings, if any, in order to finance
its business.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables summarize certain financial data which should be read in
conjunction with the report of the Company's independent auditors and the more
detailed financial statements and the notes thereto which appear elsewhere
herein.
Statement of Operations Data (in thousands, except share and per share data)
Year Ended March 31
-----------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net Sales ....................... $ 44,915 $ 41,374 $ 42,810 $ 46,048 $ 36,175
Net income (loss) ............... (1,540) (1,477) 71 729 (2,138)
Net income (loss) per
share ........................... (.52) (.50) .02 .24 (.71)
Weighted average common
and common equivalent
shares outstanding .............. 2,961,392 2,971,342 2,971,342 2,994,711 3,002,500
Balance Sheet Data (in thousands)
March 31
------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total assets .................... $ 18,827 $ 17,194 $ 15,223 $ 16,156 $ 11,656
Long-term debt and
capital lease
obligations .................. 6,771 9,250 7,970 8,163 4,832
Total liabilities .. 18,583 15,924 12,486 13,490 9,645
Working capital .... (3,885) 1,103 1,945 2,746 1,282
Stockholders' equity 244 1,270 2,737 2,666 2,011
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
General
The Company's conventional cheese products, which account for substantially all
of the Company's sales, are commodity items. The Company prices its conventional
cheese products competitively with others in the industry, which pricing, since
May 1997, is referenced to the Chicago Mercantile Exchange (and was formerly
referenced to the Wisconsin Block Cheddar Market). The price the Company pays
for fluid milk, a significant component of cost of goods sold, is not determined
until the month after its cheese has been sold. Regulatory factors effecting our
milk suppliers such as dairy subsidies and price supports may have an effect on
our raw material costs, but that impact can not be predicted. Milk is generally
sold above the subsidy price, which is established by government regulation. The
subsidy price generally establishes a floor for such costs. While the Company
generally can anticipate a change in price of milk, it cannot anticipate the
extent thereof. There is no corresponding floor on the commodity mercantile
exchange block cheddar price. Therefore, if the block cheddar price to which our
selling price is referenced changes at a different rate than the price of milk
our margins are affected accordingly. By virtue of the pricing structure for its
cheese and the delay in the determination of cost, the Company cannot pass along
to the customer the changes in the cost of milk in the price of its conventional
cheese. As a consequence thereof, the Company's gross profit margin for such
cheese is subject to fluctuation, which fluctuation, however slight, can have a
significant effect on profitability.
The Company is unable to predict any future increase or decrease in the prices
in the Chicago Mercantile Exchange as such markets are subject to fluctuation
based on factors and commodity markets outside of the control of the Company.
Although the cost of fluid milk does tend to move correspondingly with the
Chicago Mercantile Exchange, the extent of such movement and the timing thereof
is not predictable as it is subject to government control and support. As a
result of these factors, the Company is unable to predict pricing trends.
Year ended March 31, 2002 compared to the year ended March 31, 2001
Sales for the year ended March 31, 2002 increased to $44,915,000 from
$41,374,000 for the comparable period in 2001, an increase of $3,541,000 (or
8.6%). Approximately $5,065,000 (or 143.0%) of such amount was offset by a
decrease in the number of pounds of cheese sold. Approximately $7,916,000 (or
223.6%) of such increase was due to a increase in the average selling price for
cheese. The volume decrease was due to decreased demand in the commodity cheese
markets. Due to the weak cheese markets, the Company anticipates volume
decreases and decreased demand in the months ahead, although there can be no
assurance in this regard. The increase in average selling price was the result
of an increase in the block cheddar market prices resulting in a higher selling
price per pound of cheese. Of the $3,541,000 sales increase this period,
approximately $690,000 (or 19.5%) represented increased whey sales produced in
our new facility. In the years ended March 31, 2002, and March 31, 2001,
approximately 27,300,000 and 30,600,000 pounds of cheese were sold,
respectively.
During the fiscal year, ended March 31, 2002, the average quarterly selling
price ranged from approximately $1.80 to $1.37. During the fiscal year ended,
March 31, 2001, the average quarterly selling price ranged from approximately
$1.37 to $1.17. There is no way to predict the trend of the Chicago Mercantile
Exchange and therefore we can provide no guidance as to future trends as to
range of selling price for commodity cheese.
In the years ended March 31, 2002, and March 31, 2001, sales of whey amounted to
$3,082,000 and $2,392,000, respectively.
Cost of sales and gross profit margin for the year ended March 31, 2002 were
$43,897,000 (or 97.7% of sales) and $1,018,000 (or 2.3% of sales), respectively,
compared to a cost of sales and gross profit margin of $40,448,000 (or 97.8% of
sales) and $926,000 (or 2.2% of sales), respectively, for the comparable period
in 2001. The cost of sales and corresponding gross profit margin for 2002 as a
percentage of sales remained relatively constant.
13
Selling, general and administrative expenses for the year ended March 31, 2002
amounted to $1,672,000 (or 3.7% of sales) compared to $1,572,000 (or 3.8% of
sales) for the comparable period in 2001. The Company is currently classifying
all freight expense as a component of cost of sales and has reclassified prior
years to conform.
Selling expenses are mainly variable in nature. The most significant amount in
selling expense is sales commission expense, which was $231,000 and $382,000 in
2002 and 2001, respectively. The decrease resulted from a decrease in
commissionable sales in the year ended March 31, 2002.
General and administrative expenses are generally fixed in nature. The more
significant items in general and administrative expense are payroll,
professional fees, consulting and provision for bad debts amounting to:
2002 2001
---- ----
Professional $ 90,000 $ 75,000
Payroll 348,000 257,000
Consulting 156,000 143,000
Provision for bad debts 107,000 78,000
The increase in payroll results from the addition of administrative personnel in
the home office. Consultants are primarily engaged in management, planning, data
processing and public relations on a month-to-month or annual basis.
Interest expense for the year ended March 31, 2002 amounted to $896,000 compared
to $841,000 for the year ended March 31, 2001 an increase of $55,000. This
increase is the result of increased borrowing due to the addition of new plant
production equipment and higher revolving credit line usage in the year.
The provision for income tax for the years ended March 31, 2002, 2001 and 2000
of $2,000, $2,000 and $8,000, respectively, reflect minimum state taxes with the
tax benefits of operating losses being offset by the effect of changes in the
valuation allowance. Such amounts are re-evaluated each year based on the
results of the operations.
The Company's net loss of $1,540,000 for the year ended March 31, 2002
represents an increase of $63,000 from the net loss of $1,477,000 for the
comparable period in 2001. The primary factors contributing to these changes are
discussed above.
Year ended March 31, 2001 compared to the year ended March 31, 2000
Sales for the year ended March 31, 2001 decreased to $41,374,000 from
$42,810,000 for the comparable period in 2000, a decrease of $1,436,000 (or
3.4%). Approximately $1,205,000 (or 83.9%) of such amount was offset by an
increase in the number of pounds of cheese sold. Approximately $3,275,000 (or
228.1%) of such decrease was due to a decrease in the average selling price for
cheese. The volume increase was due to increased demand in the commodity cheese
markets. The decrease in average selling price was the result of a decrease in
the block cheddar market prices resulting in a lower selling price per pound of
cheese. Of the $1,436,000 decrease this period, there was an offset of
approximately $640,000 which represented increased whey sales produced in our
new facility. In the years ended March 31, 2001, and March 31, 2000,
approximately 30,600,000 and 29,600,000 pounds of cheese were sold,
respectively.
During the fiscal year, ended March 31, 2001, the average quarterly selling
price ranged from approximately $1.37 to $1.17. During the fiscal year ended,
March 31, 2000, the average quarterly selling price ranged from approximately
$1.71 to $1.17.
In the years ended March 31, 2001, and March 31, 2000, sales of whey amounted to
$2,392,000 and $1,752,000, respectively.
Cost of sales and gross profit margin for the year ended March 31, 2001 were
$40,448,000 (or 97.8% of sales) and $926,000 (or 2.2% of sales), respectively,
compared to a cost of sales and gross profit margin of $41,019,000 (or 95.8% of
sales) and $1,791,000 (or 4.2% of sales), respectively, for the comparable
period in 2000. The increase in cost of sales and corresponding decrease in
gross profit margin for 2001 as a percentage of sales is primarily due to a
increase in the Company's cost of raw materials as a percentage of selling
price.
14
Selling, general and administrative expenses for the year ended March 31, 2001
amounted to $1,572,000 (or 2.6% of sales) compared to $1,292,000 (or 3.0% of
sales) for the comparable period in 2000. The increase in selling, general and
administrative expenses was primarily due to an increase caused by increased
commissions in the period and increases in consulting and bad debt provisions.
The Company is currently classifying all freight expense as a component of cost
of sales and has reclassified prior years to conform.
Selling expenses are mainly variable in nature. The most significant amount in
selling expense is sales commission expense which was $382,000 and $264,000 in
2001 and 2002, respectively. The increase resulted from an increase in
commissionable sales in the year ended March 31, 2001.
General and administrative expenses are generally fixed in nature. The more
significant items in genral and adminstrative expense are payroll, professional
fees, consulting and provision for bad debts amounting to:
2001 2000
---- ----
Professional $ 75,000 $ 87,000
Payroll 257,000 270,000
Consulting 143,000 64,000
Provision for bad debts 78,000 52,000
Consultants are primarily engaged in management, planning, data processing and
public relations on a month-to-month or annual basis.
Interest expense for the year ended March 31, 2001 amounted to $841,000 compared
to $691,000 for the year ended March 31, 2000 an increase of $150,000. This
increase is the result of increased borrowing due to the addition of new plant
production equipment and higher revolving credit line usage in the year.
The provision for income tax for the years ended March 31, 2001, 2000 and 1999
of $2,000, $8,000 and $3,000, respectively, reflect minimum state taxes with the
tax benefits of operating losses being offset by the effect of changes in the
valuation allowance. Such amounts are re-evaluated each year based on the
results of the operations.
The Company's net loss of $1,477,000 for the year ended March 31, 2001
represents a decrease of $1,548,000 from the net income of $71,000 (after giving
effect to income arising from officers life insurance proceeds of $256,000) for
the comparable period in 2000. The primary factors contributing to these changes
are discussed above. If officers life insurance proceeds were excluded there
would have been a loss of $185,000 in the comparable period ended March 31,
2000, and the Company's net loss of $1,477,000 for the year ended March 31,
2001, would have reflected an increased loss of $1,292,000 from the $185,000
loss before insurance proceeds in the comparable period.
Liquidity and Capital Resources
The Company had available a $5,000,000 revolving credit facility at March 31,
2002 that was to expire on June 1, 2002. The bank has extended the loan's
maturity to September 1, 2002 at which time the outstanding principal is due.
The rate of interest on amounts borrowed against the revolving credit facility
is based upon the New York prime rate plus 1% (5.75% at March 31, 2002 and 9% at
March 31, 2001). Advances under this facility are limited to 50% of inventory
(with a cap on inventory borrowings of $1,000,000) and 80% of receivables as
defined in the agreement. The commitment contains various restrictive covenants
the most significant of which relates to limitations on capital expenditures
($1,000,000 annually without bank consent). In addition, the Company is required
to generate an increase in its dollar amount of net worth annually. The Company
is not in compliance with the covenants and the Company is seeking alternative
financing to replace this loan. Should the Company not be able to secure
alternative financing by the extended due date it will request an additional
extension until such financing is secured. However, there is no assurance that
such financing can be secured or the extension granted. Failure to secure such
financing can have a significant negative effect on the Company's liquidity.
At March 31, 2002 the Company had negative working capital of ($3,884,000) as
compared to working capital of $1,103,000 at March 31, 2001. The Company's
revolving bank line of credit is available for the Company's working capital
requirements.
At March 31, 2002, $3,744,000 was outstanding under such revolving credit line
of credit and $96,000 was available for additional borrowing at that time.
On February 8, 1999, a $4,950,000 bank loan agreement was signed. The loan is
collateralized by the Company's plant and equipment. Provisions of the loan are
as follows:
A $3,960,000 commercial term note with interest fixed at 9.75 percent
having an amortization period of 20 years with a maturity in February,
2019.
15
A $990,000 commercial term note with interest fixed at 10.75 percent
having an amortization period of 20 years with a maturity in February,
2019.
On May 23, 2001, a new $2,000,000 bank loan agreement was signed. The new loan
is collaterized by the Company's plant and equipment. Provisions of the loan are
as follows:
A promissory note with interest payable at 1% above the rate of interest
established by the bank as its national variable rate and principal
repayable in four consecutive annual installments of $500,000.00 with
the first such installment due on May 1, 2003 and the last such
installment due on May 1, 2006.
Proceeds of the new loan were used for working capital
On May 16, 2002, Lucille Farms, Inc. entered into an agreement with St. Albans
Cooperative Creamery, Inc., the Company's primary supplier of raw materials,
pursuant to which St. Albans has (i) converted $1,000,000 of accounts payable
currently owed by Lucille Farms to St. Albans into 333,333 shares of common
stock, (ii) converted $3,500,000 of accounts payable currently owed by Lucille
Farms to St. Albans into (A) preferred stock convertible into 583,333 shares of
common stock, which preferred stock (1) automatically converts into such number
of shares of common stock if the common stock is $8.00 or higher for 30
consecutive trading days, and (2) may be redeemed by Lucille Farms for
$3,500,000, and (B) a 10-year warrant to purchase 583,333 shares of common stock
(subject to adjustment under certain circumstances to a maximum of 1,416,667
shares of common stock) at $.01 per share, which warrant (1) may not be
exercised for a period of three-years, (2) terminates if, during such three-year
period, Lucille Farms' common stock is $8.00 or higher for 30 consecutive
trading days, and, (3) in the event Lucille Farms' common stock is not $8.00 or
higher for 30 consecutive trading days during such three-year period, may only
be exercised on the same basis percentage wise as the preferred shares are
converted, (iii) converted an additional $1,000,000 of accounts payable
currently owed by Lucille Farms to St. Albans into a convertible promissory note
due on April 14, 2005, which note is convertible into common stock at $6.00 per
share at any time by St. Albans and, at the option of Lucille Farms,
automatically shall be converted into common stock at $6.00 per share if the
common stock is $8.00 or higher for a period of 30 consecutive trading days, and
(iv) provided Lucille Farms with a pricing structure for milk and milk
by-products, for a minimum of one-year and a maximum of four-years (subject to
renegotiation at the expiration of the applicable period), designed to produce
profitability for Lucille Farms.
The Company's major source of external working capital financing has been the
revolving line of credit. For the foreseeable future the Company believes that
the Company's revolving line of credit will continue to represent the major
source of working capital financing besides income generated from operations.
However, there is no assurance that replacement of the revolving line or an
extension thereof can be secured and failure to secure such replacement
financing or extension can have a significant negative effect on the Company's
liquidity.
Accounts receivable turnover is directly related to the sales volume in the
month proceeding the statement date. Therefore, any change in turnover rate is
not attributable to rate of collections or changes in customer base.
For the year ended March 31, 2002, cash provided by operating activities was
$373,000. A loss from operations of $1,540,000 decreased cash. In addition,
decreases in accounts receivable of $914,000, and an increase in accounts
payable of $1,309,000 provided cash. Increases in inventory of $1,006,000,
accrued expenses of $6,000 and an increase in prepaid expenses and other assets
of 65,000 decreased cash.
Net cash used by investing activities was $1,681,000 for the year ended March
31, 2002 which represented purchase of property, plant and equipment of
$1,673,000, and an increase in loans receivable of $8,000.
Net cash provided by financing activities was $1,271,000 for the year ended
March 31, 2002. Payments of the revolving credit loan of $523,000 decreased
cash. Proceeds from long-term debt of $2,000,000, provided cash in the period.
Payments of long-term debt and notes of $183,000, and loan costs of $23,000 also
decreased cash in the year.
In fiscal 2002, the Company spent $1,681,000 on plant machinery and improvements
most of which were related to the packaging room and plant operation. These
expenditures were considered necessary in order to competitively enter new
markets. The Company has budgeted approximately $1,000,000, $200,000 of which is
anticipated to complete current projects in process and $800,000 of which is
budgeted for additional capital expenditures during the fiscal year ended March
31, 2003. The Company anticipates financing a significant portion of these
expenditures, however, the ability to obtain such financing cannot be assured.
The Company estimates that based upon its current plans, its resources,
including revenues from operations and utilization of its credit lines, will be
sufficient to meet its anticipated needs for at least 12 months.
Safe Harbor Statement
This Annual Report on Form 10K (and any other reports issued by the Company from
time to time) contains certain forward-looking statements made in reliance upon
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements, including statements regarding the
application of the Company's proprietary processes to other cheese products, and
the Company's ability to improve margins and increase retail sales, are based on
current expectations that involve
16
numerous risks and uncertainties. Actual results could differ materially from
those anticipated in such forward-looking statements as a result of various
known and unknown factors including, without limitation, future economic,
competitive, regulatory, and market conditions, future business decisions, the
uncertainties inherent in the pricing of cheese on the Chicago Mercantile
Exchange upon which the Company's prices are based, changes in consumer tastes,
fluctuations in milk prices, and those factors discussed above under
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Words such as "believes," "anticipates," "expects," "intends,"
"may," and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. The
Company undertakes no obligation to revise any of these forward-looking
statements.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The registrant does not utilize market rate sensitive instruments for trading or
other purposes.
The Company is subject to interest rate exposure on variable rate debt. The
amount of that debt at balance sheet date, March 31, 2002 and March 31, 2001
amounted to $5,744,000, and $4,267,000, respectively. In as much as this debt is
based upon the Prime Rate plus 1%, the cost of this debt will increase or
decrease accordingly with changes in the prime rate.
The Company has exposure to the commodity price for cheese, dry whey and fluid
milk. We have addressed these exposures in the general paragraph of MD&A Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Follow on next page
17
Table of Contents
Independent Auditor's Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
Shareholders
Lucille Farms, Inc.
and Subsidiaries
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of Lucille Farms,
Inc. and Subsidiaries as at March 31, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended March 31, 2002, 2001 and 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Lucille Farms, Inc.
and Subsidiaries as at March 31, 2002 and 2001, and the results of their
operations and their cash flows for the years ended March 31, 2002, 2001 and
2000 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Citrin Cooperman & Company, LLP
-----------------------------------
CITRIN COOPERMAN & COMPANY, LLP
New York, New York
June 17, 2002
F-2
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND 2001
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 175,000 $ 212,000
Accounts receivable, net of allowances of
$144,000 in 2002 and $132,000 in 2001 3,688,000 4,614,000
Inventories 3,169,000 2,163,000
Deferred income taxes 72,000 71,000
Prepaid expenses and other current assets 164,000 119,000
------------ ------------
Total Current Assets 7,268,000 7,179,000
------------ ------------
Property, Plant and Equipment, net 10,503,000 9,011,000
------------ ------------
Other Assets:
Due from officers 101,000 133,000
Deferred income taxes 587,000 527,000
Deferred loan costs, net 250,000 247,000
Other 118,000 97,000
------------ ------------
Total Other Assets 1,056,000 1,004,000
------------ ------------
TOTAL ASSETS $ 18,827,000 $ 17,194,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit loan $ 3,744,000 $
Accounts payable 6,824,000 5,515,000
Current portion of long-term debt 201,000 171,000
Accrued expenses 384,000 390,000
------------ ------------
Total Current Liabilities 11,153,000 6,076,000
------------ ------------
Long-Term Liabilities:
Long-term debt, less current portion 6,771,000 4,983,000
Revolving credit loan 4,267,000
Deferred income taxes 659,000 598,000
------------ ------------
Total Long-Term Liabilities 7,430,000 9,848,000
------------ ------------
TOTAL LIABILITIES 18,583,000 15,924,000
------------ ------------
Stockholders' Equity:
Preferred stock, $0.001 par value, 250,000 shares
authorized, 216 shares issued and outstanding 540,000
Common stock, $0.001 par value, 10,000,000
shares authorized, 3,021,342 shares issued 3,000 3,000
Additional paid-in capital 4,462,000 4,448,000
Accumulated deficit (4,596,000) (3,056,000)
------------ ------------
409,000 1,395,000
Less: cost of 69,900 shares in 2002 and 50,000
shares in 2001 of treasury stock (165,000) (125,000)
------------ ------------
Total Stockholders' Equity 244,000 1,270,000
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 18,827,000 $ 17,194,000
============ ============
See accompanying notes to consolidated financial statements.
F-3
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
Sales $ 44,915,000 $ 41,374,000 $ 42,810,000
Cost of sales 43,897,000 40,448,000 41,019,000
------------ ------------ ------------
Gross profit 1,018,000 926,000 1,791,000
------------ ------------ ------------
Other expense (income):
Selling 728,000 856,000 648,000
General and administration 944,000 716,000 644,000
Other income (256,000)
Interest income (12,000) (12,000) (15,000)
Interest expense 896,000 841,000 691,000
------------ ------------ ------------
Total other expense (income) 2,556,000 2,401,000 1,712,000
------------ ------------ ------------
Income (loss) before income taxes (1,538,000) (1,475,000) 79,000
Provision for income taxes 2,000 2,000 8,000
------------ ------------ ------------
Net Income (Loss) $ (1,540,000) $ (1,477,000) $ 71,000
============ ============ ============
Net Income (Loss) per share:
Basic $ (0.52) $ (0.50) $ 0.02
============ ============ ============
Diluted $ (0.52) $ (0.50) $ 0.02
============ ============ ============
Weighted average shares outstanding
used to compute net income (loss)
per share:
Basic 2,961,392 2,971,342 2,971,342
============ ============ ============
Diluted 2,961,392 2,971,342 2,956,817
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000
Preferred Stock Common Stock Additional
Shares Amount Shares Amount Paid-in capital
---------- ----------- --------- ----------- -----------
Balance, March 31, 1999 $ 3,021,342 $ 3,000 $ 4,438,000
Net income
---------- ----------- --------- ----------- -----------
Balance, March 31, 2000 3,021,342 3,000 4,438,000
Net loss
Issuance of warrants 10,000
---------- ----------- --------- ----------- -----------
Balance, March 31, 2001 3,021,342 3,000 4,448,000
Preferred stock issued 216 540,000
Net loss
Issue of options for services 14,000
Purchase of treasury stock
---------- ----------- --------- ----------- -----------
Balance, March 31, 2002 216 $ 540,000 3,021,342 $ 3,000 $ 4,462,000
========== =========== ========= =========== ===========
Accumulated Treasury Stock
Deficit Shares Amount Total
----------- -------- ----------- -----------
Balance, March 31, 1999 $(1,650,000) 50,000 $ (125,000) $ 2,666,000
Net income 71,000 71,000
----------- -------- ----------- -----------
Balance, March 31, 2000 (1,579,000) 50,000 (125,000) 2,737,000
Net loss (1,477,000) (1,477,000)
Issuance of warrants 10,000
----------- -------- ----------- -----------
Balance, March 31, 2001 (3,056,000) 50,000 (125,000) 1,270,000
Preferred stock issued 540,000
Net loss (1,540,000) (1,540,000)
Issue of options for services 14,000
Purchase of treasury stock 19,900 (40,000) (40,000)
----------- -------- ----------- -----------
Balance, March 31, 2002 $(4,596,000) 69,900 $ (165,000) $ 244,000
=========== ======== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- -----------
Cash Flows from Operating Activities:
Net income (loss) $(1,540,000) $(1,477,000) $ 71,000
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 741,000 619,000 570,000
Provision for doubtful accounts 12,000 78,000 52,000
Non-cash compensation 14,000 10,000
(Increase) decrease in assets:
Accounts receivable 914,000 (1,570,000) 444,000
Inventories (1,006,000) 12,000 (390,000)
Prepaid expense and other current assets (44,000) (12,000) 36,000
Other assets (21,000) (3,000) 58,000
Increase (decrease) in liabilities:
Accounts payable 1,309,000 1,959,000 (767,000)
Accrued expenses (6,000) 83,000 (64,000)
----------- ----------- -----------
Net cash provided (used) by operating activities 373,000 (301,000) 10,000
----------- ----------- -----------
Cash Flows from Investing Activities:
(Increase) repayment of officers' loans (8,000) 11,000 (5,000)
Purchase of property, plant and equipment (1,673,000) (1,146,000) (1,199,000)
----------- ----------- -----------
Net cash used by investing activities (1,681,000) (1,135,000) (1,204,000)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from (repayments of) revolving credit loan - net (523,000) 1,150,000 (183,000)
Proceeds from long-term debt 2,000,000 204,000
Principal payments of long-term debt (183,000) (147,000) (100,000)
Increase in loan costs (23,000) (6,000)
----------- ----------- -----------
Net cash provided (used) by financing activities 1,271,000 1,201,000 (283,000)
----------- ----------- -----------
Net decrease in cash and cash equivalents (37,000) (235,000) (1,477,000)
Cash and cash equivalents - beginning 212,000 447,000 1,924,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS -
ENDING $ 175,000 $ 212,000 $ 447,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $ 850,000 $ 819,000 $ 681,000
Income taxes 2,000 5,000 8,000
Additions to property, plant and
equipment acquired by debt issue 142,000 96,000
Additions to property, plant and
equipment acquired by preferred stock issue 540,000
Treasury stock acquired in settlement of loan 40,000
See accompanying notes to consolidated financial statements.
F-6
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Lucille Farms, Inc. and Subsidiaries (the "Company") is engaged in the
manufacture and marketing of a variety of cheese products which are sold
primarily to retailers through independent distributors. The Company's cheese
products are commodity items and as such the Company is unable to predict
pricing trends that may have a significant effect on its operations. Regulatory
factors affect the Company's milk suppliers, such as dairy subsidies and price
supports, which may have an effect on the Company's raw material cost, but the
impact cannot be predicted.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Basis of Presentation
The consolidated financial statements include the accounts of Lucille Farms,
Inc. and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Statement of Cash Flows
For purposes of the consolidated statements of cash flows, the Company considers
temporary investments with a maturity of three months or less to be cash
equivalents.
Revenue Recognition
Revenues are recognized at the time products are shipped to the customer.
Allowances are made for estimated returns and allowances. Sales of whey,
$3,082,000, $2,392,000 and $1,752,000 for 2002, 2001 and 2000, respectively, are
also recognized at time of shipment to customers.
Advertising
Advertising is expensed as incurred. Advertising expense was $15,000, $14,000
and $16,000 for 2002, 2001 and 2000, respectively.
Inventories
Inventories are stated at the lower of cost or market determined on a first-in,
first out method of accounting.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization
is being provided on a straight-line basis over the estimated useful lives of
the assets as follows:
Plant 35 years
Equipment 3-10 years
Deferred Loan Costs
Costs of obtaining a mortgage and term facilities were deferred and are being
amortized on a straight-line basis over the term of the loans.
F-7
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company provides for deferred income taxes resulting from temporary
differences in reporting certain income and expense items (principally
depreciation) for income tax and financial reporting purposes. Income tax
benefits from operating loss carryforwards are recognized to the extent
available less a valuation allowance if it is more likely than not that some
portion of the deferred tax asset will not be realized.
Earnings per Share
Basic earnings per share is computed by dividing net earnings available to
common shareholders by the weighted average common shares outstanding for the
period. Diluted earnings per share is computed by dividing net earnings
available to common shareholders by the weighted average common shares
outstanding adjusted for the dilutive effect of options granted under the
Company's stock option plans. Basic and diluted earnings per share were the same
for 2002 and 2001 since options and warrants were not included in the
calculation because their effect would have been antidilutive. Conversion of
preferred stock was not taken into consideration since the effect would be
antidilutive. The dilution for 2000 is due to the net incremental effect of
options of 14,525 shares.
Accounting for Stock-Based Compensation
The Company follows the fair value disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the
Company did not change the method of accounting for its employee stock
compensation plans under the intrinsic method. See Note 13 for the fair value
disclosures required under SFAS No. 123.
New Accounting Pronouncements
The Company adopts new accounting pronouncements as they become effective. There
are presently no new pronouncements or recently adopted pronouncements that will
have or have had a material impact on the financial statements.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or accumulated
deficit.
NOTE 2 - ACCOUNTS RECEIVABLE
The Company has entered into a revolving credit facility with a bank whereby it
has pledged all of its accounts receivable as collateral (Note 6).
NOTE 3 - INVENTORIES Inventories consist of the following:
March 31, 2002 March 31, 2001
-------------- --------------
Finished goods $2,244,000 $1,011,000
Raw materials 281,000 617,000
Supplies and packaging 644,000 535,000
---------- ----------
$3,169,000 $2,163,000
========== ==========
Inventories are pledged as collateral under a revolving credit facility with a
bank (Note 6).
F-8
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
March 31, 2002 March 31, 2001
-------------- --------------
Land $ 25,000 $ 25,000
Plant 4,649,000 4,616,000
Equipment 10,191,000 8,019,000
Whey facility 2,124,000 2,116,000
----------- -----------
16,989,000 14,776,000
Less: accumulated
depreciation and
amortization 6,486,000 5,765,000
----------- -----------
$10,503,000 $ 9,011,000
=========== ===========
Included in property, plant and equipment at March 31, 2002 is capitalized
interest of $141,000 and capitalized labor of $129,000. Interest of $20,000 and
labor of $33,000 was capitalized for the year ended March 31, 2002. Interest of
$12,000 and labor of $11,000 was capitalized for the year ended March 31, 2001.
Interest of $3,000 and labor of $24,000 was capitalized for the year ended March
31, 2000.
NOTE 5 - DUE FROM OFFICERS
Amounts due from officers reflect advances and loans which effective June 1,
1992 were converted to by promissory notes bearing interest at 9% per annum.
Interest is payable annually thereafter, with the principal originally due on
June 1, 2000. Extended to June 1, 2003. $11,000 was included in operations as
interest income for each of the years ended March 31, 2002, 2001 and 2000,
respectively. During 2002, $39,800 of the debt was repaid by the Company
acquiring shares of its common stock as settlement.
NOTE 6 - REVOLVING CREDIT LOAN
The Company has available a $5,000,000 revolving credit facility at March 31,
2002 that was to expire on June 1, 2002. The bank has extended the loan's
maturity to September 1, 2002 at which time the outstanding principal is due.
The rate of interest on amounts borrowed against the revolving credit facility
is based upon the New York prime rate plus 1% (5.75% at March 31, 2002 and 9% at
March 31, 2001). Advances under this facility are limited to 50% of inventory
(with a cap on inventory borrowings of $1,000,000) and 80% of receivables as
defined in the agreement. The commitment contains various restrictive covenants
the most significant of which relates to limitations on capital expenditures
($1,000,000 annually without bank consent). In addition, the Company is required
to generate an increase in its dollar amount of net worth annually. The Company
is not in compliance with the covenants and it is seeking alternative financing
to replace this loan. Should the Company not be able to secure alternative
financing by the extended due date it will request an additional extension of
the loan's due date. However, there is no assurance that such financing can be
secured or the extension granted. Failure to secure such financing can have a
significant negative effect on the Company's liquidity (See Note 15).
This loan is secured by substantially all of the Company's assets.
F-9
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following:
March 31, 2002 March 31, 2001
-------------- --------------
Term loan with a bank dated February 8, 1999, secured by real estate and
equipment, payable monthly at $37,561 including interest at 9.75% for 20 years
maturing February 8, 2019 $3,738,000 $3,814,000
Term loan with a bank dated February 8, 1999 secured by real estate and
equipment, payable monthly at $10,051 including interest at 10.75% for 20 years
maturing February 8, 2019 940,000 958,000
Loan payable to bank due in annual installment of $500,000 beginning May 1,
2003. The loan, collateralized by the Company's plant and equipment, bears
interest at 1% above the bank's national variable rate (5.75% at March 31,
2002). Interest is payable monthly 2,000,000
Equipment notes payable in monthly installments ranging from $972 to $3,006,
including interest at rates of 9.75% to 11%, through September 2005. The notes
are collateralized by equipment with a net book value of $314,000 at March 31,
2001 236,000 296,000
Discounted obligations under capital leases (Note 9) 58,000 86,000
---------- ----------
6,972,000 5,154,000
Less: current portion 201,000 171,000
---------- ----------
TOTAL $6,771,000 $4,983,000
========== ==========
As of March 31, 2001 long-term debt matures as follows:
2003 $ 201,000
2004 725,000
2005 711,000
2006 675,000
2007 664,000
2008 and thereafter 3,996,000
----------
$6,972,000
Virtually all of the Company's property, plant and equipment are pledged as
collateral for these obligations.
F-10
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities are as follows:
March 31, 2002 March 31, 2001
-------------------------- ------------------------
Deferred Deferred
Deferred Tax Deferred Tax
Tax Asset Liability Tax Asset Liability
----------- ----------- ----------- ---------
Depreciation $ $ 659,000 $ $ 598,000
Provision for doubtful accounts 54,000 50,000
Reserve for compensated
absences 18,000 21,000
Operating loss carryforwards 2,536,000 1,878,000
Contribution carryforwards 2,000 2,000
----------- ----------- ----------- ---------
2,610,000 659,000 1,951,000 598,000
Valuation allowance (1,951,000) (1,353,000)
----------- ----------- ----------- ---------
$ 659,000 $ 659,000 $ 598,000 $ 598,000
=========== =========== =========== =========
The net change in the valuation allowance for the periods presented were as
follows:
March 31,
-------------------------------
2002 2001 2000
-------- -------- -------
Valuation allowance increase $598,000 $486,000 $65,000
The provision for income taxes represents the provision for minimum state taxes,
with the tax benefits of loss carryforwards being offset by increases or
decreases in the valuation allowance.
The provision for income taxes is different than the amount computed using the
United States Federal Statutory income tax rate for the reasons set forth below:
Years Ended March 31,
--------------------
2002 2001 2000
---------- ---------- ----------
Expected tax at U.S. Statutory Rate (34.0)% (34.0)% 30.0%
State and local income taxes .1 .1 1.2
Permanent differences and other (4.9) .3 (104.0)
Valuation allowance for operating loss
carryforwards 38.9 33.7 82.9
---------- ---------- ----------
.1 % .1 % 10.1%
========== ========== ==========
Included in other in 2000 is the reduction of income of $256,000 of life
insurance proceeds which is not taxable.
Operating loss carryforwards totaled $6,673,000 as of March 31, 2002 and expire
on March 31, of the following years:
2010 $ 77,000
2012 913,000
2013 2,122,000
2015 268,000
2016 1,562,000
2017 1,731,000
----------
Total $6,673,000
==========
F-11
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - LEASE COMMITMENTS
The Company leases automobiles for three of its officers under lease
arrangements classified as operating leases. The leases expire in October 2002,
December 2002 and January 2003. Rent expense was approximately $20,000, $19,000
and $18,000 in the year ended March 31, 2002, 2001 and 2000, respectively.
Future minimum payments under the leases are approximately $14,000 at March 31,
2002.
On December 20, 1994 the Company began leasing waste water purification
equipment under leasing arrangements classified as an operating lease. The
monthly lease payments are $3,870 for a period of 60 months. Leasing expense was
$23, 000 for the year ended March 31, 2000. The Company exercised its option to
purchase the equipment during the year ended March 31, 2000. In addition, the
Company leases some equipment under operating leases expiring through January
2004. Minimum monthly lease payments under these leases total $1,000. Minimum
annual lease payments are $11,000 for the year ending March 31, 2003 and $4,000
for the year ending March 31, 2004.
The Company also leases some equipment under a lease that includes an option to
purchase the equipment at the end of the lease term. Capital lease property of
$128,000 less accumulated depreciation of $32,000 is included in property, plant
and equipment at March 31, 2002.
Future minimum lease payments under capital leases are as follows:
2003 $35,000
2004 35,000
2005 9,000
-------
Total minimum lease payments 79,000
Less amount representing interest 21,000
-------
Present value of net minimum payments 58,000
Less: current portion 27,000
-------
Long-term obligation $31,000
=======
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company leases a parcel of land adjacent to the facility. This parcel is
owned by three of its stockholders. The space is used as an employee parking lot
and its use was required in conjunction with the construction of the new whey
drying facility. The ten- year lease term carries a monthly rental of $750
during the first five years and $900 during the remaining five years. Rent
expense for the years ended March 31, 2002, 2001 and 2000 was $9,000 in each of
the years. This lease has a purchase option to purchase at fair market value at
the end of the ten-year period. This lease was assigned to the bank in
conjunction with the whey plant financing.
The Company leases space for its executive offices at $1,200 per month from
three of its stockholders on a month-to-month basis. Rent expense was
approximately $14,000 for each of the years ended March 31, 2002, 2001 and 2000.
The Company also leases an additional 900 square feet for $750 monthly on a
month-to- month basis. These premises are owned by three of its stockholders.
This space is primarily used for the Company's marketing operations. Rent
expense was $9,000 for each of the years ended March 31, 2002, 2001 and 2000.
The Company purchased raw materials of $615,000 from an entity affiliated with
Dr. Mali Reddy, a former Company director during the period he was a director in
2002.
F-12
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCKHOLDERS' EQUITY
In May 1993, the Board of Directors of the Company adopted a resolution
authorizing the issue of 250,000 shares of Preferred Stock, par value $0.001 per
share. Such preferred stock may be issued in series, the terms of which will be
determined by the Company's Board of Directors without action by stockholders
and may include dividend and liquidation preferences to common stock, voting
rights, redemption and sinking fund provisions and conversion rights.
In June 2001 the Company entered into an agreement to purchase plant equipment
with preferred stock. In connection therewith, the Company issued 216 shares of
Series A Convertible Redeemable Preferred Stock with a face value of $540,000.
The stock can be converted into 216,000 shares of common stock at $2.50 per
share. Preferred stock has no rights as to dividends or voting. There is a
liquidation preference at face value and the Company can redeem the preferred
stock at face value under certain defined conditions.
NOTE 12 - SIGNIFICANT CUSTOMERS
During the year ended March 31, 2002, no one customer accounted for 10% or more
of revenue. In the years ended March 31, 2001 and 2000, one customer accounted
for approximately 10% and 11% of sales, respectively.
NOTE 13 - FAIR VALUE AND CREDIT RISK
The Company does not use any derivatives and its financial instruments are
generally cash deposits, accounts receivable and debt. The Company's debt
carries interest at market rates and the Company believes that the fair value of
these instruments approximates the carrying value.
The Company provides credit to customers on an unsecured basis after evaluating
customer credit worthiness. Since the Company sells to a broad range of
customers with a wide geographical dispersion, concentrations of credit risk are
limited. in addition, the Company provides a reserve for bad debts for accounts
receivable, which are potentially uncollectable.
The Company maintains cash accounts with several major financial institutions
none of which exceeds insured limits at March 31, 2002.
NOTE 14 - OTHER EVENTS
a. Employment Agreements
During the year ended March 31, 2001 the Company engaged a new employee under an
agreement expiring in August 2002. The agreement requires an annual salary of
$100,000 plus a bonus. The employee was terminated during 2002. There are no
other employment agreements.
F-13
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - OTHER EVENTS (CONTINUED)
b. 1993 Stock Option Plan
On April 1, 1993 the Company adopted its 1993 Stock Option Plan. An aggregate of
200,000 shares of Common Stock were reserved for issuance upon exercise of
options which may be granted from time to time in accordance with the plan. The
aggregate shares reserved was increased to 500,000 in 2001. Options may be
granted to employees, including officers, directors, consultants and advisors.
Options shall be designated as either Incentive Stock Options or Non-Incentive
Stock Options being issued at a purchase price of not less than 100% (110% in
case of optionees who own more than 10% of the voting power of all classes of
stock of the Company) of fair market value of the Common Stock on the date the
option is granted. In April 1995, options to purchase 10,000 shares were granted
to each of two employees at an exercise price of $3.625. The options shall
expire on April 4, 2005. In May 1996, options to purchase 50,000 shares were
granted to a newly hired employee at an exercise price of $4.00. These options
vest and are exercisable ratably over a five year period beginning one year from
date of employment, and expire April 1, 2003. In January 1998, options to
purchase 25,000 shares were granted to a director of the Company in his capacity
as consultant at an exercise price of $1.50 per share. The options expire on
January 2008 and vest to the extent of 5,000 shares on date of issue and 5,000
shares on each of the next four anniversary dates. On March 1, 1999 the Company
granted an option to a consultant to purchase 7,500 shares of common stock at
$4.00 per share for a period of three years. During the year ended March 31,
2000 the agreement was terminated and the options canceled. On August 14, 2000
the Company granted an option to an employee to purchase 150,000 share of common
stock at $3.9375 per share for a period of ten years. The options vest to the
extent of 30,000 shares on the date of issue and 30,000 shares on each of the
next four anniversary dates thereof. The employment was terminated in 2001 and
the options cancelled. In June, 2001 the Company issued options for consulting
services and for a directorship. The ten year options were for 5,000 shares each
with an exercise price at the fair market value on the date of grant of $1.80
and $1.84 and were valued as determined using the Black Scholes option-pricing
model for a total of $13,695. The options were fully vested during 2002. The per
share fair value of stock options granted was $1.39 and $1.35 in 2002 and $2.87
in 2001. The per share value of warrants granted during the year ended March 31,
2001 was $1.29. All values calculated, on the date of grant using the Black
Scholes option-pricing model with the following assumptions:
March 31, 2001 March 31, 2002
---------------------- ----------------------
Options Warrants Options Options
-------- ------- -------- --------
Expected dividend yield -0-% -0-% -0-% -0-%
Risk free interest rate 5.0% 5.0% 5.0% 5.0%
Expected stock volatility 58.6% 59.4% 62.4% 62. 6%
Expected option life 10 years 2 years 10 years 10 years
The Company applies APB Opinion No. 25 in accounting for options issued under
its Plan, and accordingly, no compensation costs has been recognized in the
financial statements for its stock options which have an exercise price equal to
the fair value of the stock on the date of the grant. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options and warrants under SFAS No. 123, the Company's net income would have
been reduced to the pro forma amounts indicated below:
Years Ended March 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
Net income (loss):
As reported $(1,540,000) $(1,477,000) $ 71,000
Pro forma $(1,546,000) $(1,572,000) $ 49,000
Net earnings (loss) per share:
As reported $ (.52) $ (.50) $ .02
Pro forma $ (.52) $ (.53) $ .02
F-14
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - OTHER EVENTS (CONTINUED)
b. 1993 Stock Option Plan (Continued)
The full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options' vesting period.
Stock options are summarized as follows:
Exercise price 2002 2001 2000
--------------- --------- -------- -------
Outstanding - beginning $ 1.50 to $4.00 245,000 95,000 102,500
Issued 1.80 and 3.9375 10,000 150,000
Terminated 3.9375 and 4.00 150,000 7,500
--------- -------- -------
Outstanding - ending $ 1.50 to $4.00 105,000 245,000 95,500
========= ======== =======
At March 31, 2002 options for 105,000 shares were exercisable at a weighted
average exercise price of $3.13.
In April, 2000 the Company entered into an agreement with an investment banking
firm wherein for one year such firm would act as the Company's exclusive
financial advisor with respect to a combination. For such services the Company
granted the firm a seven-year warrant to acquire 90,000 shares of the Company's
common stock at $4.63 per share, the closing price of the of the Company's
common stock on the date the agreement was entered into. The warrant will vest
only upon the conclusion of a transaction during the term. In the event no
combination is consummated the warrants will be terminated. In April, 2001 the
agreement was terminated and the warrants canceled.
In July, 2000 the Company entered into a service agreement with an individual.
As additional compensation under the agreement warrants to purchase 15,000
shares of common stock were issued in lieu of additional cash compensation of
$10,000. The warrants are exercisable for a period of two years with an exercise
price of $5.00 per share. The warrants were valued at the value of the services
provided of $10,000.
c. Purchase of Stock
In April of 1996 the Company purchased 50,000 share of its common stock for cash
at a total cost of $125,000 from one of its former officers. In February of
1999, the Company purchased and retired 31,158 shares of its common stock for
cash at a total cost of $74,000. Effective October 1, 2001, the Company acquired
19,900 shares of its common stock , valued at $2 per share, in payment of a loan
due from one of its shareholders.
F-15
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - OTHER EVENTS (CONTINUED)
d. Preferred Share Purchase Rights
On June 2, 1997, the Board of Directors declared a dividend distribution of one
preferred share purchase right on each outstanding share of common stock. The
rights will be exercisable only if a person or group acquires 20% or more of the
Company's common stock or announces a tender offer the consummation of which
would result in ownership by a person or group of 20% or more of the common
stock. Each right will entitle stockholders to buy one one-hundredth of a share
of a new series of preferred stock at an exercise price of $8.00. In the event
of an acquisition, merger, or other business combination transaction after a
person has acquired 20% or more of the Company's outstanding common stock, each
right will entitle its holder to purchase, at the right's then-current exercise
price, a number of the acquiring company's common shares having a market value
of twice such price. In addition, if a person or group acquires 20% or more of
Company's outstanding common stock, each right will entitle its holder (other
than such person or members of such group) to purchase, at the right's
then-current price, a number of the Company's common shares having a market
value of twice such price. Following the acquisition by a person or group of
beneficial ownership of 20% or more of the Company's common stock and prior to
an acquisition of 50% or more of the common stock, the Board of Directors may
exchange the rights (other than rights owned by such person or group), in whole
or in part, at an exchange ratio of one share of common stock (or approximately
one one-hundredth of a share of the new series of junior participating preferred
stock) per right. Prior to the acquisition by a person or group of beneficial
ownership 20% or more of the Company's common stock, the rights are redeemable
for one tenth of one cent per right at the option of the Board of Directors. In
May 2002 the Board of Directors amended the rights agreement to exclude the
financing with St. Albans Cooperative Creamery, Inc. and to provide for the
expiration of the rights upon consummation of the financing.
NOTE 15 - RESTRUCTURING
The Company has incurred significant losses in the last two years, has a
deficiency in working capital at March 31, 2002, has substantially reduced its
stockholders' equity and has incurred substantial additional debt. The bank,
which had granted the Company a revolving credit line for many years, has
decided not to renew the line due to the aforementioned items past the extended
maturity of September 1, 2002.
In addition, the Company did not meet the capital requirement for listing of its
shares by NASDAQ and has been given a conditional listing as of June 12, 2002
until it has met the listing requirements.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. Management's plans for improvement
are described below including the agreement with St. Albans which became
effective in May 2002. There can be no assurance that these measures will be
successful.
F-16
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RESTRUCTURING (CONTINUED)
In an effort to improve its financial position and retain its NASDAQ listing the
Company entered into an agreement, as of May 16, 2002, with St. Albans
Cooperative Creamery, Inc. ("St. Albans"), the Company's primary supplier of raw
materials, pursuant to which St. Albans has (i) converted $1,000,000 of accounts
payable that the Company currently owes into 333,333 share of the Company's
common stock, (ii) converted $3,500,000 of accounts payable that the Company
currently owes into (A) preferred stock convertible into 583,333 shares of
common stock, which preferred stock (1) automatically converts into such number
of shares of common stock if the common stock is $8 or higher for thirty
consecutive trading days, and (2) may be redeemed by the Company for $3,500,000,
and (B) a ten-year warrant to purchase 583,333 shares of common stock (subject
to adjustment under certain circumstances to a maximum of 1,416,667 shares of
common stock) at $.01 per share, which warrant (1) may not be exercised for a
period of three-years, (2) terminates if, during such three-year period, the
Company's common stock is $8 or higher for thirty consecutive trading days, and
(3) in the event the Company's common stock is not $8 or higher for thirty
consecutive trading days during such three-year period, may only be exercised on
the same basis percentage wise as the preferred shares are converted, (iii)
converted an additional $1,000,000 of accounts payable the Company currently
owes to St. Albans into a convertible promissory note, bearing interest at the
applicable federal rate (4.99%) at the note's inception, due on April 14, 2005,
which note is convertible into common stock at $6 per share at any time by St.
Albans and, at the Company's option, automatically shall be converted into
common stock at $6 per share if the common stock is $8 or higher for a period of
30 consecutive trading days, and (iv) provided the Company with a pricing
structure for milk and milk by-products, for a minimum of one-year and a maximum
of four-years (subject to renegotiation at the expiration of the applicable
period), designed to produce profitability for the Company.
Although there can be no assurance, management of the Company is of the opinion
that as a result of this agreement it will be able to replace or renew the
revolving credit line.
The Company incurred costs of $125,000 in connection with the St. Albans
agreement of which $25,000 will be settled by the issuance of 500,000 warrants
to purchase common stock at $3 per share. The net effect of $100,000 will be
offset against additional paid-in capital.
F-17
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RESTRUCTURING (CONTINUED)
The pro forma balance sheet reflects the adjustments as if the above had been in
force at March 31, 2002 as follows:
Pro forma
Historical adjustments Pro forma
------------ ---------- ------------
ASSETS
Current assets:
Cash $ 175,000 $ $ 175,000
Accounts receivable, net 3,688,000 3,688,000
Inventories 3,169,000 3,169,000
Other current assets 236,000 236,000
------------ ---------- ------------
Total current assets 7,268,000 7,268,000
Property, plant and equipment 10,503,000 10,503,000
Other assets 1,056,000 1,056,000
------------ ---------- ------------
TOTAL ASSETS $ 18,827,000 $ $ 18,827,000
============ ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit loan $ 3,744,000 $ $ 3,744,000
1,000,000(iii)
1,000,000(i)
Accounts payable 6,824,000 3,500,000(ii) 1,324,000
Current portion of long-term debt 201,000 201,000
Accrued expenses 384,000 (100,000)(a) 484,000
------------ ---------- ------------
Total current liabilities 11,153,000 5,400,000 5,753,000
Long-term liabilities:
Long-term debt, less current portion 6,771,000 (1,000,000)(i) 7,771,000
Deferred income taxes 659,000 659,000
------------ ---------- ------------
Total liabilities 18,583,000 4,400,000 14,183,000
------------ ---------- ------------
Stockholders' equity:
Preferred stock 540,000 (3,500,000)(i) 4,040,000
Common stock 3,000 3,000
(1,000,000)(i)
Additional paid-in capital 4,462,000 100,000(a) 5,362,000
Accumulated deficit (4,596,000) (4,596,000)
Treasury stock (165,000) (165,000)
------------ ---------- ------------
Total stockholders' equity 244,000 (4,400,000) 4,644,000
------------ ---------- ------------
TOTAL LIABLILITES AND
STOCKHOLDERS' EQUITY $ 18,827,000 $ $ 18,827,000
============ ========== ============
Adjustments (i) through (iii) relate to the items listed in the St. Albans
agreement and adjustment (a) relates to the costs of obtaining the agreement as
noted above.
F-18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of June 24, 2002 are as
follows:
Name Age Present office or Position
---- --- --------------------------
Gennaro Falivene 72 Chairman of the Board of Directors
and Executive Vice President-Quality Control
Alfonso Falivene 60 Director, President and Chief Executive Officer
David McCarty 46 Vice President-Sales and Marketing
Stephen M. Katz 67 Director, Vice-President-Finance and
Administration, Chief Financial Officer
and Secretary
Howard S. Breslow 62 Director
Jay M. Rosengarten 57 Director
18
Mr. Gennaro Falivene is a founder of the Company and has been a director of the
Company since inception in 1976. He served as Vice president and Treasurer of
the Company from inception until April 1993 when he was appointed Vice chairman
of the Board and Executive Vice president-Quality Control.
Mr. Alfonso Falivene is a founder of the Company and has been a director of the
Company since inception in 1976. He served as Vice President and Secretary of
the Company until April 1993 when he was appointed President and Chief Executive
Officer.
Mr. David McCarty has been Vice President-Marketing and Sales of the Company
since April 1993. From July 1991 to March 1993, Mr. McCarty was the Vice
President of Braff & Company, Inc., a New York, New York based marketing and
public relations firm which specializes in consumer products, particularly in
the food industry. Braff & Company, Inc. has represented a broad range of
clients, including The Dannon Company, Kraft General Foods and The Seagram
Beverage company and has played an integral role in the start-up, launch and
promotion of such products as The Dove Bar and Micro Magic Foods. From February
1990 to July 1991, Mr. McCarty was the New York area Manager for Good Humor, a
division of Thomas J. Lipton, where he established a new distribution network,
created a sales promotion program and aided in reversing a sales decline and
increasing sales. From August 1986 to February 1990, Mr. McCarty was the
Director of Marketing of Braff & Company, Inc. From 1982 to 1986, Mr. McCarty
was the Director of Marketing (1985 and 1986) and National Sales Manager
(1982--1985) for Ginseng VP Corp., a "New Age" beverage corporation.
Mr. Stephen M. Katz has been a director of the Company, its Vice
President-Finance and Administration and Chief Financial Officer and Secretary
since April 1993. Mr. Katz was a partner in the certified public accounting firm
of Drogin & Katz, a position he held since 1970. Drogin & Katz was the company's
accounting firm from 1973 to March 1993. Mr. Katz is a certified public
accountant licensed in New York.
Mr. Howard S. Breslow has been a director of the Company since April 1993. He
has been a practicing attorney in New York for more than 35 years and has been a
member of the law firm of Breslow & Walker, LLP New York, New York for more than
30 years, which firm is counsel to the Company. Mr. Breslow currently serves as
a director of Cryomedical Sciences, Inc., a publicly-held company engaged in the
research, development and sale of products for use in low temperature medicine,
Vikonics, Inc., a non-operating publicly-held company formerly engaged in the
design and sale of computer-based security systems, and Excel Technology, Inc.,
a publicly-held company engaged in the development and sale of laser products.
Mr. Jay Rosengarten was appointed to the Board of Directors effective February
1, 1998. Mr. Rosengarten, the former Board Chairman of Shopwell, Chicago is an
internationally recognized consultant, author and lecturer on Consumer
Marketing, Ethnic Marketing and Business Management. He has been the keynote
speaker at numerous national trade association meetings and major corporate
events. Mr. Rosengarten has a J.D., from Fordham University Law School. Mr.
Rosengarten is a principal in the Rosengarten Group, a management consulting
firm, a position he has held from 1993 to present.
19
Gennaro Falivene is the uncle of Alfonso Falivene. No other family relationship
exists between any director or executive officer and any other director or
executive officer of the Company.
Officers serve at the discretion of the Board of Directors and are elected at
the annual meeting of the Board of Directors. Directors are elected at the
annual meeting of stockholders for a term of one year. The Company's Certificate
of Incorporation provides that no director shall be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
except for: (a) any breach of the duty of loyalty; (b) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (c) improper distributions to stockholders or loans to officers or
directors; or (d) any transactions from which a director derives an improper
personal benefit. The Company currently maintains insurance to indemnify
directors and officers.
Section 16A Benefical Ownership Reporting Compliance
The Company is not aware of any late filings of, or failure to file, the reports
required by Section 16(a) of the Securities Exchange Act of 1934, as amended,
except that Dr. Mali Reddy did not file Form 3 and Form 5.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation paid
by the Company during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and to each of the Company's executive
officers (other than the Chief Executive Officer) who received salary and bonus
payments in excess of $100,000 during the year ended March 31, 2002. None of
such persons owns, or ever has been granted, stock options of the Company.
20
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------------------------
Name and Principal Fiscal Other Annual
Positions Year Salary Bonus Compensation (1)
- ------------------ ---- ------ ----- ----------------
Alfonso Falivene 2002 $106,000 -- $9,000
President and Chief 2001 106,000 -- 9,000
Executive Officer 2000 110,000 -- 9,000
Gennaro Falivene 2002 106,000 -- 7,000
Executive Vice 2001 106,000 -- 5,000
President -- Quality 2000 108,000 5,000
Control
(1) Represents automobile allowances and/or automobile lease payments for the
benefit of such employee.
Employment Agreements
Effective April 1, 2002, there are no employment agreements in effect.
Compensation of Directors
The Company has not compensated its directors for their services in such
capacity.
Compensation Committee Interlocks and Insider Participation
During the year ended March 31, 2002, Messrs. Alfonso Falivene, Gennaro
Falivene, and Stephen Katz were each officers of the Company as well as
directors of the Company who participated in deliberations of the Company's
Board of Directors concerning executive officer compensation. Reference is made
to Item 13 "Certain Relationships and Related Transactions".
STOCK PERFORMANCE GRAPH
The information required by this item is incorporated by reference from the
information to be provided in the Company's definitive proxy statement, which
statement is anticipated to be file within 120 days of the end of the fiscal
year to which this report relates.
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table, as of June 24, 2002, sets forth certain information
regarding beneficial ownership of common stock and preferred stock by (i) all
persons known by the Company to be the beneficial owner of more than 5% of the
Company's outstanding voting stock, (ii) each director of the Company, (iii)
each Named Executive Officers and all executive officers and directors of the
Company as a group. Unless expressly indicated otherwise, each stockholder
exercises sole voting and investment power with respect to the shares
beneficially owned.
Name (and Address of 5% Amount and Nature
Owners) of Beneficial Ownership Percent of Class
----------------------- --------------------
Series B Series B
Common Stock Prfd. Stock Common Pfd. Stock
------------ ----------- ------ ----------
Gennaro Falivene 327,417 10.0%
Box 125
Swanton, VT 05488
Alfonso Falivene (1) 464,917 14.2%
150 River Rd., P.O. Box 517
Montville, NJ 07045
The Estate of
Philip Falivene 200,017(8) 6.1%
Box 125
Swanton, VT 05488
Stephen Katz (2) 85,750 2.6%
B&W Investment Associates 693,799(3) 18.3%
c/o Breslow and Walker
100 Jericho Quadrangle
Jericho, NY 11753
Howard S. Breslow 693,799(3) 18.3%
100 Jericho Quadrangle
Jericho, NY 11753
David McCarty 81,250 2.5%
Jay M. Rosengarten 25,000(4) *
St. Albans Cooperative Creamery, Inc. 333,333(7) 583(6) 10.1% 100%
140 Federal Street
St. Albans, VT 05478
All officers and
directors as a group 1,878,150(5) 49.3%
22
Shares of Common Stock subject to options and warrants currently exercisable or
exercisable within 60 days are deemed outstanding for computing the number of
shares and the percentage of the outstanding shares held by a person holding
such options and warrants, but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote and subject to
community property laws where applicable, the Company believes that the person
named in the table has sole voting and investment power with respect to all
shares shown as beneficially owned by them.
(1) Includes 7,500 shares owned by Mr. Falivene's wife and 20,000 shares
owned by one of his children.
(2) Includes 40,000 shares owned by Mr. Katz's wife.
(3) Represents all of the shares owned by B&W Investment Associates, a
partnership of which Howard S. Breslow, a director of the Company, is a
partner. Includes 500,000 shares issuable under outstanding warrants.
See "Certain Relationships and Related Transactions".
(4) Includes 25,000 shares issuable under outstanding options.
(5) Includes 25,000 shares issuable under outstanding options and 500,000
shares issuable under outstanding warrants.
(6) Convertible into 583,333 shares of Common Stock. See "-Liquidity and
Capital Resources". St. Albans is entitled to vote, on an "as
converted" basis, on all matters to which holders of Common Stock are
entitled to vote.
(7) Excludes warrants convertible into 583,333 shares of Common Stock,
which may not be exercised until May 16, 2005. See "-Liquidity and
Capital Resources".
(8) Represents all of the shares owned by the Estate of Philip Falivene, of
which Alfonso Falivene is executor.
* Less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At March 31, 2002, Alfonso Falivene, Gennaro Falivene and the Estate of Philip
Falivene each were indebted to the Company in the amount of $30,167, and $30,166
and $4,289, respectively. Such indebtedness is represented by promissory notes,
dated as of June 1, 1992, with the principal due on June 1, 2000, which has been
extended to June 1, 2003. The notes bear interest at the rate of 9% per annum,
which interest is payable annually commencing June 1, 1994. The Company
purchased 19,900 shares of Common Stock from the Estate of Philip Falivene, for
$39,800, and used the proceeds in partial settlement of the loan due from the
Estate.
The Company leases a parcel of land adjacent to its facility. This parcel is
owned by Alfonso Falivene, Gennaro Falivene and the Estate of Philip Falivene.
The space is used as an employee parking lot and its use was required in
conjunction with the construction of the new Whey drying facility. The lease is
for a ten year period. Rentals are $750 monthly for the first five years and
$900 monthly for the additional five year period. Rent expense for the years
ended March 31, 2002, 2001, and 2000, was $9,000, $9,000 and $9,000
respectively. This lease has a purchase option to purchase at fair market value
at the end of the ten year period. This lease was assigned to the Bank in
conjunction with the Whey Plant financing.
The Company leases a portion of its Montville, New Jersey offices from Messrs.
Alfonso Falivene, Gennaro Falivene, and the Estate of Philip Falivene the joint
owners of the office condominium unit. During the fiscal years ended March 31,
2000, 2001 and 2002, the Company paid approximately $14,000, $14,000 and
$14,000, respectively, towards the rental of such offices. The Company currently
pays $1,200 per month rent for such premises on a month--to-month basis. The
Company also leases an additional 900 adjacent square feet for $750 monthly on a
month--to--month basis. These premises are also owned by Messrs. Alfonso
Falivene, Gennaro Falivene, and the Estate of Philip Falivene. This space is
primarily used for marketing operations. Rent expense for this space was $9,000,
$9,000 and $9,000, respectively, for the years ended March 31, 2000, 2001 and
2002.
The Company has retained Jay Rosengarten as an independent consultant. Mr.
Rosengarten has been paid $50,000 per annum for his services.
The Company is the owner and beneficiary of life insurance policies on the lives
of Messrs. Alfonso and Gennaro Falivene, each in the amount of $300,000. In the
event of the death of any such insured, the Company has agreed (subject to
tender) to utilize the proceeds of such policy to purchase shares of Common
Stock from the deceased's estate at the market value of such shares on the date
of death.
The Company purchased raw materials of $615,000 from an entity affiliated with
Dr. Mali Reddy, a former Company director, during the period he served as a
director in fiscal 2002.
On June 10, 2002, B&W Investment Associates, a partnership of which Howard S.
Breslow, a director of the Company, is a partner, purchased, for $25,000, a ten
year warrant to purchase 500,000 shares of Common Stock at $3.00 per share. This
transaction took place in connection with the conversion into equity and long
term debt of outstanding accounts payable owed by the Company to St. Albans
Cooperative Creamery, Inc. and the revision of the pricing structure for milk
and milk by-products. See "-Liquidity and Capital Resources".
23
EQUITY COMPENSATION PLAN INFORMATION
Plan Category Number of securities to be Weighted average exercise Number of securities remaining
issued upon exercise of price of outstanding options, available for future issuance
outstanding options, warrants warrants and rights under equity compensation plans
and rights. (excluding securities reflected
in column (a).
- --------------------- ------------------------------ ------------------------------ -------------------------------
(a) (b) (c)
Equity compensation
plan approved by
shareholders 105,000 $3.13 395,000
Equity compensation
plan not approved by
shareholders 15,000(1) $5.00 0
Total 120,000 $3.36 395,000
(1) In July 2000, the Company entered into a service agreement with an
individual. As additional compensation under such agreement warrrants to
purchase 15,000 shares of Common Stock were issued in lieu of additional
cash compensation of $10,000. The warrants are exercisable for a period of
two years with an exercise price of $5.00 per share. The warrants were
valued at the value of the services provided of $10,000.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 10-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements (included in Part II, Item 8):
Independent Auditors' Report
Consolidated Balance Sheet as at March 31, 2001 and March 31, 2000
Consolidated Statement of Operations for the years ended March
31, 2001, March 31, 2000 and March 31, 1999
Consolidated Statement of Stockholders' Equity for the years
ended March 31, 2001, March 31, 2000 and March 31, 1999
Consolidated Statement of Cash Flows for the years ended March
31, 2001, March 31, 2000 and March 31, 1999
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules (included in Part II, Item 8)
3. Exhibits included herein: Index to Exhibits for exhibits filed as part
of this Form 10-K annual report.
(b) Reports on Form 8-K: None
Financial statement schedules are omitted because they are either
not applicable or not required, or because the information sought
is included in the consolidated Financial Statements or the Notes
thereto.
INDEX TO EXHIBITS
Exhibit Number Document
- -------------- --------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 By-Laws of the company, as amended (1)
4.1 Specimen Common Stock Certificate (1)
4.2 Certificate of Designation of Series A Convertible Redeemable
Preferred Stock of the Company. (7)
25
10.1 1993 Stock Option Plan (1)
10.2 Loan facility with Chittenden Bank, including Commitment Letter,
dated April 30, 1996, Loan Agreement, dated June 13, 1996, and
Promissory Notes, dated June 13, 1996, relating to short term
working capital facility and capital expenditures line of credit
(3) and amendment thereto dated June 11, 1997 (4)
10.3 Loan facility with First International Bank, N.A., including
Collateral Assignments, Financial Condition Affidavits, Loan
Agreements and Promissory Notes, dated February 8, 1999,
Assignment of Contract Rights, Security Agreement, dated
February 8, 1999, and Commercial Mortgage and Security
Agreement, dated February 8, 1999.(5)
10.5 Loan facility with CoBANK, ACB including Single Advance Term
Loan Supplement, dated May 23, 2001, Master Loan Agreement,
dated May 23, 2001, Real Estate Mortgage, dated May 23, 2001,
Security Agreement, dated May 23, 2001 and Continuing
Guarantees, dated May 23, 2001. (7)
10.6 Production and Sales Agreement dated the 27 day of February 1998
with International Ingredient Corporation and amendment thereto
dated June 12, 2001. (7)
10.7 Equipment Purchase Agreement dated June 12, 2001 with
International Ingredient Corporation. (7)
21 List of subsidiaries of the Company (1)
23 Consent of Citrin Cooperman & Company, LLP
(1) Incorporated by reference to the Company's Registration Statement Form S-1,
File No. 33-64868.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994.
(3) Incorporated by reference to the company's Annual Report on Form 10-K the
fiscal year ended March 31, 1996.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1999.
(6) Incorporated by reference to the Company's Form 10Q-A for the quarterly
period ended September 30, 2000.
(7) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended March 31, 2001.
26
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
LUCILLE FARMS, INC.
By:/s/Alfonso Falivene
Alfonso Falivene, President (Principal
Executive Officer)
By:/s/Stephen Katz
Stephen Katz, Vice President--Finance
and Administration (Principal Financial and
Accounting Officer)
Date: June 26, 2002
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
- --------- ----- ----
/s/Gennaro Falivene Director June 26, 2002
Gennaro Falivene
/s/Alfonso Falivene Director June 26, 2002
Alfonso Falivene
/s/Stephen M. Katz Director June 26, 2002
Stephen M. Katz
/s/Howard S. Breslow Director June 26, 2002
Howard S. Breslow
/s/Jay M. Rosengarten Director June 26, 2002
Jay M. Rosengarten