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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
[Mark One]
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2003
[ ] 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
(Address of principal telephone number)
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $1,965,309 based on the average bid and asks price as reported by
NASDAQ on July 14,2003. 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 July 30,
2003 was 3,284,775.
Documents Incorporated by Reference
-----------------------------------
None
PART I
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ITEM 1. BUSINESS
General
Lucille Farms, Inc. (the "Company") is engaged in the manufacture, processing,
shredding and marketing of low moisture mozzarella cheese and the shredding of
other cheese and cheese blends. Also, utilizing proprietary formulas and
processes, the Company has developed a line of mozzarella type cheese products,
which include reduced fat, non-fat and low moisture products. The Company also
sells whey, which is a by-product of its cheese making operation. For the fiscal
year ended March 31, 2003 low moisture mozzarella cheese, shredded cheese and
blended cheese sales accounted for approximately 86.6% of the Company's sales
revenues. Sales of the Company's mozzarella type cheese products during the
fiscal year ended March 31, 2003, were 2.6%, of the Company's revenue, and sales
from a variety of other cheese purchased by the Company including provolone,
ricotta, feta, cheddar and organic were 5.8% of the Company's revenues. Whey
accounted for 5% of the Company's revenue. The Company's low moisture mozzarella
cheese and mozzarella type cheese products are manufactured in the Company's
production facility in Swanton, Vermont and are made of natural ingredients.
The Company's low moisture mozzarella cheese, shredded cheese and cheese blends
are sold primarily to the food service and industrial segments of the cheese
market. The food service segment consists of 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 Company's products are sold into this marketplace by
distributors who deal directly with the Company's in house sales staff and
brokers. The industrial segment includes manufacturers that utilize cheese as an
ingredient in processed foods and frozen entrees and side dishes. Products are
sold into this marketplace by the Company's in-house sales staff and brokers.
The Company also sells some cheese to retail food distributors.
The Company purchases provolone, ricotta, cheddar, feta and organic cheese from
co-packers. These cheeses are premium quality, all-natural cheese that meets or
exceeds all federal and industry standards for purity, freshness, taste,
appearance and texture. These cheeses are sold to food service distributors.
In addition, the Company manufactures a small amount of provolone that it uses
in its shred operation.
Products
The Company's products include the following:
(1) Whole Milk and Part Skim Low Moisture Mozzarella Cheese
The Company's premium quality, all natural low moisture mozzarella cheese meets
or exceeds all federal and industrial standards for purity, freshness, taste,
appearance and texture. During the fiscal years ended March 31, 2003, 2002 and
2001, whole milk and part skim low moisture mozzarella cheese loafs and shredded
cheese and cheese blends accounted for approximately 86.6%, 88% and 88%,
respectively, of the Company's sales.
(2) Mozzarella Type Cheese Products, including Reduced Fat, Non-Fat and
low moisture Mozzarella Type Cheese Products
During the fiscal years ended March 31, 2003, 2002 and 2001, the Company's
mozzarella type cheese products accounted for approximately 2.6%, 1% and 1%,
respectively, of the Company's total sales. The Company's low moisture
mozzarella type cheese is positioned as a value alternative to mozzarella
cheese, and the Company's reduced fat and non-fat products are viewed as having
certain health benefits and are considered "premium" products, which enables the
Company to charge higher prices.
The Company's mozzarella type cheese products are made using the formulas and
processes developed by the Company, which are believed to be proprietary.
(3) Whey
The Company dries whey, a by-product of cheese making, in its Company owned
whey-drying facility, for sale as animal feed. During the fiscal years ended
March 31, 2003, 2002 and 2001, sales of whey accounted for approximately 5%, 7%
and 6%, respectively, of the Company's sales.
(4) Provolone, Cheddar, Ricotta, Feta and Organic Cheese
During the fiscal years ended March 31, 2003, 2002 and 2001, sales of these
cheeses accounted for approximately 5.8%, 3% and 4%, respectively, of the
Company's sales.
Production Facilities
Currently, the Company produces substantially all of its products at its
manufacturing plant in Franklin County, Swanton, Vermont, Vermont's highest
volume dairy producing area. The plant has 82 full-time employees. The Company
has equipment to shred, dice, and vacuum package, gas flush bag package, and
label its products. The Company's facility has the capacity to produce
approximately 2,700,000 pounds of bulk product per month and shred 2,000,000
pounds of product per month. 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, or (b) further expand its current plant
facilities, subject to appropriate financing and an increase in the volume of
wastewater it is licensed to process.
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 facility 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. The facility dries whey into a product referred
to as popcorn whey, which is milled and mixed with other ingredients for animal
feed.
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. Reprocessed, the whey produced can be sold as a
component of animal feed. The whey is priced based on a formula tied to the
price of whey on a commodity market.
Quality Control
The Company is supplied its 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. On
a regular 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 sells
the Company skim milk, condensed skim milk, and dry milk powder.
Markets and Customers
The Company's products are sold primarily to the food service, industrial and
retail segments of the cheese market.
The food service segment of the cheese market includes food service
distributors, pizza chains, recreational facilities, business feeders, health
care facilities, schools and other institutions that 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 approximately 140 distributors throughout the eastern United States, who
deal directly with the Company's in house sale force and network of
non-exclusive food brokers. For the fiscal years ended March 31, 2003, 2002 and
2001, sales of the Company's products to the food service segment of the cheese
market accounted for approximately 69%, 69% and 69% of revenues, respectively.
Virtually all of such sales were of the Company's low moisture mozzarella and
low moisture mozzarella type cheeses. In the fiscal years ended March 31, 2003
and 2001, one customer accounted for approximately 14% and 10% of the Company's
sales, respectively. In 2002, no one customer accounted for more than 10% of
sales.
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 retail food stores under various brand
names. The majority of the Company's sales of its cheese products to the
industrial market are made directly by the Company's in-house sales staff and
its brokers. For the fiscal years ended March 31, 2003, 2002 and 2001, sales of
the Company's products to the industrial segment of the cheese market accounted
for approximately 22%, 22%, and 20% of revenues, respectively.
The retail segment of the cheese market consists of product sold to customers
for distribution to convenience stores, independent and chain supermarkets,
natural food stores, warehouse club stores, and other food retailers. The retail
segment accounted for approximately 2%, 2% and 5% of total sales in 2003, 2002
and 2001, respectively.
Sales and marketing
The thrust of the Company's sales and marketing efforts recently has shifted to
emphasize the quality of its products. This emphasis is designed to increase the
prices the Company charges for its products. The Company is also emphasizing
sales of its shredded cheese and mozzarella type cheese products, which have
higher profit margins.
Competition
The Company faces intense competition. Its low moisture mozzarella cheese is a
commodity. It is a price-sensitive product sold by numerous small local,
medium-sized regional and large national competitors. Established national
manufacturers include Sorrento Cheese Company Inc. and Saputo. There also are a
number of national dairy cooperatives, D.F.A. Inc. and Land O' Lakes, Inc.,
which compete in the Company's marketplace. Many of these competitors have
significantly greater financial and other resources than the Company.
The Company has positioned its reduced fat and nonfat mozzarella type cheese
products as premium products within the low moisture mozzarella cheese category.
The Company believes that the principal competitive factors in the marketing of
its reduced fat and nonfat mozzarella type cheese products are quality,
performance characteristics, consistency, customer service, and price. The
Company believes that its products compete favorably with respect to these
factors in its primary market segments.
The Company's low moisture mozzarella type cheese product has been positioned to
compete with Leprino Foods. The Company's low moisture mozzarella type cheese
product was created to sell at prices below mozzarella cheese.
Trademarks and Patents
The Company owns the trademarks Lucille Farms Select(TM), Monte Carlo(TM),
Mozzi-RITE(TM), and Tasty-Lite Cheese(TM) for its products. In addition, the
Company currently is pursuing trademark protection for a number of other names
for low moisture mozzarella type cheese. The Company believes these trademarks
are an important means of establishing customer 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
mozzarella type cheese 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 confidentiality 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 brought back 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 of its
products meet 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 manufacturing
facility. The Company entered into an agreement with the State of Vermont, to
make significant improvements in its wastewater facility. The improvements have
been completed and the Company believes the facility is in compliance with all
regulatory requirements.
Employees
The Company currently employs 88 full-time employees. Of the 88 employees, six
are in executive and administrative positions, 77 are in production and
distribution, and five are in clerical positions. Of such employees, 82 are
located at the Swanton, Vermont facility and six are located at the Company's
executive offices in Montville, New Jersey.
Website
The Company's website is www.Lucille-Farms.com. The Company's website enables
users to access its filings with the SEC as soon as reasonably practicable. The
Company makes available, free of charge through its website, its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC.
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 leases a parcel of land adjacent to the Vermont facility. Messrs
Gennaro Falivene, Alfonso Falivene and the Estate of Philip Falivene own this
parcel. 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 beginning April 1998. 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, 2003, 2002, and 2001, 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'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 Falivene, Alfonso Falivene and the
Estate of Philip Falivene, officers, directors, and/or principal stockholders of
the Company, all of who 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. During the fiscal years
ended March 31, 2003, 2002 and 2001, the Company paid approximately $14,000,
$14,000 and $14,000, respectively, towards the rental of such offices. The
Company also leases an additional 900 adjacent square feet for $750 monthly on a
month--to--month basis. Messrs. Alfonso Falivene, Gennaro Falivene, and the
Estate of Philip Falivene also own these premises. 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, 2003, 2002 and 2001.
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.
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, 2003:
First Quarter 1.750 1.590
Second Quarter 2.260 1.060
Third Quarter 1.760 .810
Fourth Quarter 2.000 .530
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
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 July 14, 2003 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, is 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
anticipated capital requirements are such that the Company intends to follow a
policy of retaining earnings, if any, in order to finance its business.
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
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2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Net Sales .................... $ 36,691 $ 44,915 $ 41,374 $ 42,810 $ 46,048
Net income (loss)............. (847) (1,540) (1,477) 71 729
Net income (loss) per share... (.26) (.52) (.50) .02 .24
Weighted average common
and common equivalent
shares outstanding............ 3,229,220 2,961,392 2,971,342 2,971,342 2,994,711
Balance Sheet Data (in thousands)
March 31
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2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Total assets................. $ 16,762 $ 18,827 $ 17,194 $ 15,223 $ 16,156
Long-term debt and capital...
Lease obligations............ 7,143 6,771 9,250 7,970 8,163
Total liabilities............ 13,817 18,583 15,924 12,486 13,490
Working capital.............. (238) (3,885) 1,103 1,945 2,746
Stockholders' equity......... 2,945 244 1,270 2,737 2,666
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
General
The Company's low moisture mozzarella cheese, which accounts for more than a
majority of the Company's sales, is a commodity item. The Company prices this
product competitively with others in the industry, which pricing, is based on
the Chicago Mercantile Exchange Block Cheddar Market (CME Block Market). The
price the Company pays for fluid milk and condensed skim milk solids, a
significant component of cost of goods sold, is not determined until the month
after its cheese has been sold. The price of milk is based upon the raw milk
components and a weighted average of a number of market components. While the
Company generally can anticipate a change in the price of milk because of
changes in the CME Block Market, it cannot anticipate the full extent thereof.
Therefore, if the CME 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 in the industry the
Company cannot readily pass along to the customer the changes in the cost of
milk. As a consequence thereof, the Company's gross profit margin for its
products 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 CME Block Market as such market is 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 CME Block
Market, the extent of such movement and the timing thereof is not predictable.
As a result of these factors, the Company is unable to predict pricing trends.
Year ended March 31, 2003 compared to the year ended March 31, 2002
Sales for the year ended March 31, 2003 decreased to $36,691,000 from
$44,915,000 for the comparable period in 2002, a decrease of $8,224,000 (or
18.3%). Approximately $6,937,000 (or 84.4%) of such decrease was due to a
decrease in the average selling price for cheese. The decrease in average
selling price was the result of a decrease in the CME Block Market prices
resulting in a lower selling price per pound of cheese. The remaining $1,287,000
sales decrease this period represented a decrease in whey sales. Such decrease
was due to a decrease in the average selling price of whey. In the years ended
March 31, 2003 and March 31, 2002 approximately 27,200,000 and 27,300,000 pounds
of cheese and 12,160,337 and 13,747,248 pounds of whey were sold, respectively.
During the fiscal year, ended March 31, 2003, the average quarterly selling
price ranged from approximately $1.34 to $1.24. During the fiscal year ended,
March 31, 2002, the average quarterly selling price ranged from approximately
$1.80 to $1.37. There is no way to predict the trend of the CME Block Market and
the Company cannot provide any guidance as to future trends or as to range of
selling price for commodity cheese.
In the years ended March 31, 2003 and March 31, 2002, sales of whey amounted to
$1,795,000 and $3,082,000, respectively.
Cost of sales and gross profit margin for the year ended March 31, 2003 were
$35,786,000 (or 97.5% of sales) and $905,000 (or 2.5% of sales), respectively,
compared to a cost of sales and gross profit margin of $43,897,000 (or 97.7% of
sales) and $1,018,000 (or 2.3% of sales), respectively, for the comparable
period in 2002.
Selling, general and administrative expenses for the year ended March 31, 2003
amounted to $1,813,000 (or 5.0% of sales) compared to $1,672,000 (or 3.7% of
sales) for the comparable period in 2002.
Selling expenses are mainly variable in nature. The most significant component
of selling expense is sales commission expense, which was $302,000 and $231,000
in 2003 and 2002, respectively. The increase resulted from an increase in
commissionable sales in the year ended March 31, 2003. Business travel also
increased over the previous year to $103,000 in 2003 compared to $53,000 in
2002.
Generally, general and administrative expenses are fixed in nature. The more
significant items in general and administrative expense are professional fees,
payroll, consulting fees and provision for bad debts amounting to:
2003 2002
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Professional fees $166,000 $ 90,000
Payroll 280,000 348,000
Consulting fees 137,000 156,000
Provision for bad debts 145,000 107,000
The increase in professional fees resulted from additional legal work performed
throughout the year. Consultants are primarily engaged in planning and data
processing. The Company has terminated its relationship with the consultant for
public relations as of April 2003. Provisions for bad debt increased in 2003 due
to the bankruptcy of the Company's largest customer.
Interest expense for the year ended March 31, 2003 amounted to $812,000 compared
to $896,000 for the year ended March 31, 2002, a decrease of $84,000. This
decrease is the result of decreased borrowing against the revolving credit line
and lower interest rates.
The provision for income tax for the years ended March 31, 2003 and 2002 of
$7,000 and $2,000 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 before extraordinary items of $1,722,000 for 2003 was
$182,000 more than the loss of $1,540,000 for the comparable period in 2002. The
extraordinary item of $875,000 (as a result of restructuring debt) reduced the
loss to $847,000 for 2003. The primary factors contributing to these changes are
discussed above.
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 an increase in the average selling price for
cheese. The volume decrease was due to decreased demand in the commodity cheese
markets. 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.
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.
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.
Selling expenses are mainly variable in nature. The most significant amount in
selling expense is sales commission expense, which were $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.
Generally, general and administrative expenses are fixed in nature. The more
significant items in general and administrative expense are professional fees,
payroll, consulting fees and provision for bad debts amounting to:
2002 2001
-------- -------
Professional fees $ 90,000 $ 75,000
Payroll 348,000 257,000
Consulting fees 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 and 2001 of
$2,000 and $2,000, 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.
Liquidity and Capital Resources
The Company had available a $4,000,000 revolving credit facility at March 31,
2003 that was to expire on June 1, 2003. The bank has extended the loan's
maturity to September 15, 2003 (with St. Albans Cooperative participating
therein to the extent of $3,000,000) 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% (5.25% at March 31, 2003
and 5.75% at March 31, 2002). 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. At March 31, 2003, the Company was in default of its debt
coverage ratio covenant. On July 29, 2003, the lender provided a waiver of that
covenant violation. In addition, the Company is required to generate an increase
in its dollar amount of net worth annually. 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, 2003, the Company had negative working capital of ($238,000) as
compared to negative working capital of ($3,885,000) at March 31, 2002. The
Company's revolving bank line of credit is available for the Company's working
capital requirements.
At March 31, 2003, $2,924,000 was outstanding under such revolving credit line
of credit and $332,000 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.
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, the Company entered into a term loan with Co-op Bank for
$2,000,000 with interest payable at 1% above the rate of interest established by
the bank as its national variable rate. $500,000 of such loan has been repaid,
and the balance is repayable in three consecutive annual installments of
$500,000.00 with the next installment due on May 1, 2004 and the last such
installment due on May 1, 2006. The loan is collateralized by the Company's
plant and equipment and was 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 (i) converted $1,000,000 of accounts payable owed
by Lucille Farms to St. Albans into 333,333 shares of common stock, (ii)
converted $3,500,000 of accounts payable 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 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 any 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.
For the year ended March 31, 2003, cash provided by operating activities was
$1,283,000. A loss from operations of $847,000 decreased cash. In addition,
decreases in accounts receivable and inventory and increases in accounts payable
and accrued expenses provided cash while increases in prepaid expenses and other
current assets decreased cash.
Net cash used by investing activities was $432,000 for March 31, 2003, which
represented purchases of plant and equipment.
Net cash used by financing activities was $1,022,000 for the year ended March
31, 2003, which represented payments of the revolving credit line of $820,000
and long-term debt of $119,000.
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (FAS 146), which will be effective for exit or
disposal activities initiated after December 31, 2002, is not expected to have a
material impact on the company's results of operation, financial position or
cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45), which elaborates on the existing disclosure
requirements for most guarantees and clarifies that at the time a company issues
a guarantee, it must recognize a liability for the fair value of the obligations
it assumes under the guarantee and must disclose that information in its interim
and annual financial statements. The disclosure requirements of FIN 45 are
effective for financial statements ending after December 15, 2002. The initial
recognition and measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company does
not expect FIN 45 to have a material impact on its financial position or results
of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure"
(FAS 148), which amends FAS 123, "Accounting for Stock-Based Compensation",
transition requirements when voluntarily changing to the fair value based method
of accounting for stock-based compensation and also amends FAS 123 disclosure
requirements. FAS 148 is not expected to have a material impact on the Company's
results of operations, financial position or cash flow.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. FIN 46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns or both. The consolidation requirements apply to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to variable interest entities created before February 1,
2003, in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply to financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The Company does not expect FIN 46 to have a material impact on its
financial position or results of operations.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
policies discussed below are considered by management to be critical to an
understanding of our financial statements because their application places the
most significant demands on management's judgment, with financial reporting
results relying on estimation about the effect of matters that are inherently
uncertain. Specific risks for these critical accounting policies are described
in the following paragraphs. For all of these policies, management cautions that
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment.
Revenue Recognition- Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. Revenue is recognized
when goods are shipped from production facilities or outside warehouses to
customers.
Allowance for Doubtful Accounts - We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. Based on historical information, we believe that our
allowance is adequate to cover potential uncollectible accounts. Changes in
general, economic, business and market conditions could result in an impairment
in the ability of our customers to make their required payments; therefore, the
allowance for doubtful accounts is reviewed monthly and changes to the allowance
are updated based on actual collections.
Allowance for Inventory Obsolescence - We maintain an allowance for inventory
obsolescence for losses resulting from inventory items becoming not saleable due
to spoilage or changes in customers' requirements. Based on historical and
projected sales information, we believe that our allowance is adequately stated.
However, changes in general economic, business and market conditions could cause
our customers' purchasing requirements to change. These changes could affect the
sales of our inventory; therefore, the allowance for inventory obsolescence is
reviewed regularly and changes to the allowance are made as new information is
received.
Valuation Allowance for Deferred Tax Assets - We have recorded a valuation
allowance against deferred tax assets because there is a strong likelihood that
we will not be able to generate sufficient future taxable income to realize the
deferred tax assets. However, if these estimates and assumptions change in the
future, we will reduce our valuation allowance and record a deferred tax asset
for an amount that has a strong likelihood to be realized.
Impact of Inflation
Inflationary factor have not had a significant effect on our operations.
Website
The Company's website is www.Lucille-Farms.com. The Company's website enables
users to access its filings with the SEC as soon as reasonably practicable. The
Company makes available, free of charge through its website, its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC.
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 are based on current expectations that
involve 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 Company 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, 2003 and March 31, 2002
amounted to $4,924,000, and $5,744,000, 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 prices 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
Table of Contents
Report of Independent Accountants - Wiss & Company LLP F-2
Independent Auditors' Report - Citrin Cooperman & Company, LLP F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-9
F-1
Report of Independent Accountants
To the Audit Committee of Lucille Farms, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Lucille
Farms, Inc. and Subsidiaries as of March 31, 2003 and the related consolidated
statements of operations, stockholders' equity and cash flows for the period
ended March 31, 2003. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audit.
We conducted our audit 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principals used and significant estimates made by
management, as well as evaluating the overall consolidated financial statements
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lucille Farms, Inc. and Subsidiaries as of March 31, 2003 and the consolidated
results of their operations and their consolidated cash flows for the period
ended March 31, 2003 in conformity with accounting principals generally accepted
in the United States of America.
WISS & COMPANY, LLP
Livingston, New Jersey
June 26, 2003, except for note 14 for
which the date of July 29, 2003.
F-2
Independent Auditors' Report
Board of Directors
Lucille Farms, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheet of Lucille Farms,
Inc. and Subsidiaries as at March 31, 2002 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended March 31, 2002 and 2001. 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 the results of their operations and
their cash flows for the years ended March 31, 2002 and 2001, 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-3
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
2003 2002
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,000 $ 175,000
Accounts receivable, net of allowances
of $189,000 in 2003 and $144,000 in 2002 3,530,000 3,688,000
Inventories 2,185,000 3,169,000
Deferred income taxes -0- 72,000
Prepaid expenses and other current assets 616,000 164,000
Due from officers 101,000 -0-
----------- -----------
Total Current Assets 6,436,000 7,268,000
----------- -----------
Property, Plant and Equipment, net 10,003,000 10,503,000
----------- -----------
Other Assets:
Due from officers -0- 101,000
Deferred income taxes -0- 587,000
Deferred loan costs, net 215,000 250,000
Other 108,000 118,000
----------- -----------
Total Other Assets 323,000 1,056,000
----------- -----------
TOTAL ASSETS $16,762,000 $18,827,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit loan $ 2,924,000 $ 3,744,000
Accounts payable 2,425,000 6,824,000
Current portion of long-term debt 710,000 201,000
Accrued expenses 615,000 384,000
----------- -----------
Total Current Liabilities 6,674,000 11,153,000
----------- -----------
Long-Term Liabilities:
Long-term debt, less current portion 7,143,000 6,771,000
Deferred income taxes -0- 659,000
----------- -----------
Total Long-Term Liabilities 7,143,000 7,430,000
----------- -----------
TOTAL LIABILITIES 13,817,000 18,583,000
F-4
Stockholders' Equity:
Preferred stock, $0.001 per share, 250,000 shares authorized:
216 shares Series A convertible issued and
outstanding 1,000 1,000
583 shares Series B convertible issued and
outstanding 1,000
Common stock, $0.001 par value, 25,000,000 shares
authorized at March 31, 2003 and
10,000,000 authorized at
March 31, 2002; 3,354,675 shares issued, 3,000 3,000
3,284,775 outstanding at March 31, 2003 and
3,021,342 shares issued, 2,951,442 outstanding
at March 31, 2002
Additional paid-in capital 8,548,000 5,001,000
Accumulated deficit (5,443,000) (4,596,000)
------------ ------------
3,110,000 409,000
Less: cost of 69,900 shares in 2003 and 2002
of treasury stock (165,000) (165,000)
------------ ------------
Total Stockholders' Equity 2,945,000 244,000
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 16,762,000 $ 18,827,000
============ ============
See accompanying notes to consolidated financial statements.
F-5
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Sales $ 36,691,000 $ 44,915,000 $ 41,374,000
Cost of sales 35,786,000 43,897,000 40,448,000
------------ ------------ ------------
Gross profit 905,000 1,018,000 926,000
------------ ------------ ------------
Other expense (income):
Selling 713,000 728,000 856,000
General and administration 1,100,000 944,000 716,000
Interest income (5,000) (12,000) (12,000)
Interest expense 812,000 896,000 841,000
------------ ------------ ------------
Total other expense (income) 2,620,000 2,556,000 2,401,000
------------ ------------ ------------
(Loss) before income taxes and (1,715,000) (1,538,000) (1,475,000)
extraordinary item
Provision for income taxes 7,000 2,000 2,000
------------ ------------ ------------
(Loss) Before Extraordinary
Item (1,722,000) (1,540,000) (1,477,000)
Extraordinary Item:
Gain On Debt Restructuring, Net 875,000 -- --
------------ ------------ ------------
Net Loss $ (847,000) $ (1,540,000) $ (1,477,000)
============ ============ ============
Net Income (Loss) per share:
Basic and Diluted:
Income (loss) before
Extraordinary item
$ (0.53) $ (0.52) $ (0.50)
============ ============ ============
Extraordinary item $ .27 $ -- $ --
============ ============ ============
Net loss $ (.26) $ (0.52) $ (0.50)
============ ============ ============
Weighted average shares outstanding
used to compute net income per share:
Basic 3,229,220 2,961,392 2,971,342
============ ============ ============
Diluted 3,229,220 2,961,392 2,971,342
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
Additional
Preferred Stock Common Stock Paid-in Accumulated Treasury Stock
Shares Amount Shares Amount capital Deficit Shares Amount Total
--------- ---------- ---------- --------- ------------ ------------ --------- ------------ ------------
Balance,
March 31,
2000 3,021,342 $ 3,000 $ 4,438,000 ($ 1,579,000) 50,000 ($ 125,000) $ 2,737,000
Net loss (1,477,000) (1,477,000)
Issuance
of warrants 10,000 10,000
--------- ---------- ---------- --------- ------------ ------------ --------- ------------ ------------
Balance,
March 31,
2001 3,021,342 3,000 4,448,000 (3,056,000) 50,000 (125,000) 1,270,000
Preferred
stock
issued 216 $ 1,000 539,000 540,000
Net loss (1,540,000) (1,540,000)
Issue of
options for
services 14,000 14,000
Purchase
of treasury
stock 19,900 (40,000) (40,000)
--------- ---------- ---------- --------- ------------ ------------ ---------- ------------ ------------
Balance,
March 31,
2002 216 1,000 3,021,342 3,000 5,001,000 (4,596,000) 69,900 (165,000) 244,000
Preferred
Stock
Issued 583 1,000 333,333 -0- 3,548,000 3,548,000
Net loss (847,000) (847,000)
--------- ---------- ---------- --------- ------------ ------------ ---------- ------------ ------------
Balance,
March 31,2003 799 $ 2,000 3,354,675 $ 3,000 $ 8,548,000 $(5,443,000) 69,900 $ (165,000) $ 2,945,000
========= ========== ========== ========= ============ ============ ========== ============ ============
See accompanying notes to consolidated financial statements
F-7
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
----------- ----------- -----------
Cash Flows from Operating Activities:
Net loss $ (847,000) $(1,540,000) $(1,477,000)
Adjustments to reconcile net loss
to net cash flow from operations
Depreciation and amortization 950,000 741,000 619,000
Provision for doubtful accounts 145,000 12,000 78,000
Deferred income taxes 72,000 -0- -0-
Inventory evaluation allowance 257,000 -0- -0-
Non-cash compensation 5,000 14,000 10,000
Extraordinary gain (875,000) -0- -0-
(Decrease) increase in assets:
Accounts receivable 13,000 914,000 (1,570,000)
Inventories 727,000 (1,006,000) 12,000
Prepaid expense and other current assets (452,000) (44,000) (12,000)
Other assets 10,000 (21,000) (3,000)
Increase (decrease) in liabilities:
Accounts payable 1,119,000 1,309,000 1,959,000
Deferred income taxes (72,000) -0- -0-
Accrued expenses 231,000 (6,000) 83,000
----------- ----------- -----------
Cash flow provided (used) by operating activities 1,283,000 373,000 (301,000)
----------- ----------- -----------
Cash Flows from Investing Activities:
(Increase) repayment of officers' loans -0- (8,000) 11,000
Purchase of property, plant and equipment (432,000) (1,673,000) (1,146,000)
----------- ----------- -----------
Net cash used by investing activities (432,000) (1,681,000) (1,135,000)
----------- ----------- -----------
Cash Flows from Financing Activities:
Repayments of
revolving credit loan (820,000) (523,000) 1,150,000
Proceeds from long-term debt -0- 2,000,000 204,000
Principal payments of long-term debt (119,000) (183,000) (147,000)
Increase in loan costs (83,000) (23,000) (6,000)
----------- ----------- -----------
Net cash provided (used) by financing activities (1,022,000) 1,271,000 1,201,000
----------- ----------- -----------
Net decrease in cash and cash equivalents (171,000) (37,000) (235,000)
Cash and cash equivalents - beginning 175,000 212,000 447,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 4,000 $ 175,000 $ 212,000
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 789,000 $ 850,000 $ 819,000
Income taxes 7,000 2,000 5,000
Non-Cash Investing and Financing Activities
Additions to property, plant and equipment
acquired by debt issue 142,000
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-8
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 the food service and industrial segments of the cheese market
through independent distributors and the Company's sales staff, respectively.
The Company's cheese products are commodity items and as such the Company is
unable to predict pricing trends that 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.
Cash Equivalents
The Company considers temporary investments with a maturity of three months or
less to be cash equivalents.
Concentration of Credit Risk - The Company maintains its cash balances at
several financial institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At times, cash balances
may exceed insured limits.
Revenue Recognition
The Company follows the guidelines of the S.E.C Accounting Bulletin No. 101,
"Revenue Recognized in Financial Statements". Revenues are recognized at the
time products are shipped to the customer. Allowances are made for estimated
returns and allowances. Sales of whey, $1,795,000, $3,082,000 and $2,392,000 for
2003, 2002 and 2001, respectively, are also recognized at time of shipment to
customers.
Advertising
Advertising is expensed as incurred. Advertising expense was $28,000, $15,000
and $14,000 for 2003, 2002 and 2001, respectively.
Inventories
Inventories are stated at the lower of cost or market determined on a first in,
first out method of accounting. We maintain an allowance for inventory
obsolescence for losses resulting from inventory items becoming not saleable due
to spoilage or changes in customer's requirements (see Note 3).
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
Long-Lived Asset Impairment
Pursuant to Financial Accounting Standards Board Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed of," impairment of
long-lived assets, including intangibles related to such assets, is recognized
whenever events or changes in circumstances indicate that the carrying amount of
the asset, or related group of assets, may not be fully recoverable from
estimated future cash flows and the fair value of the related assets is less
than their carrying value. Financial Accounting Standards Board Statement No.
144, "Accounting for the Impairment of Disposal of Long-Lived Assets" (FAS 144)
clarified when a long-lived asset held for sale should be classified as such. It
also clarifies previous guidance under FAS 121. The adoption of FAS 144 did not
F-9
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
affect the company's consolidated operations, financial position or cash flows.
The company, based on current circumstances, does not believe any indicators of
impairment are present.
Deferred Loan Costs
Costs of obtaining term facilities were deferred and are being amortized on a
straight-line basis over the term of the loans.
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 are 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, outstanding warrants, and convertible preferred
stock. Basic and diluted earnings per share were the same for 2003, 2002, and
2001 since options and warrants were not included in the calculation because
their effect would have been antidilutive. For 2003 and 2002 conversion of
preferred stock was not taken into consideration since the effect would be
antidilutive. No preferred stock was outstanding in 2001.
Accounting for Stock-Based Compensation
The Company follows the intrinsic method of Accounting Principals Board Opinion
No. 25, "Accounting for Stock Issued Employees" (APB 25) and related
Interpretations in accounting for it's employee stock options because, as
discussed below, Financial Accounting Standards Board Statement No.
123,"Accounting for Stock-Based Compensation" (FAS 123) requires use of option
valuation models that were not developed for use in valuing employee stock
options. FAS 123, permits a Company to elect the intrinsic method of APB 25
rather than the alternative fair value accounting provided under FAS 123 but
requires pro forma net income and earnings per share disclosures as well as
various other disclosures not required under APB 25 for companies following APB
25. The Company has adopted the disclosure provisions required under Financial
Accounting Standards Board Statement No. 148, "Accounting for Stock-Based
Compensation -Transition and Disclosure" (FAS 148). Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock at the date of grant, no compensation expense was recognized.
See "New Pronouncements".
Sales concentration
In the fiscal years ended March 31, 2003 and 2001, one customer accounted for
approximately 14% and 10% of the Company's revenue, respectively. In 2002, no
one customer accounted for more than 10% of sales.
Vendor concentration
The Company purchases milk from one vendor. Management believes that if this
supplier should discontinue production of the respective products, there are
other suppliers of milk in the region, and new sources would be readily
available.
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (FAS 146), which will be effective for exit or
disposal activities initiated after December 31, 2002, is not expected to have a
material impact on the company's results of operation, financial position or
cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which elaborates on the existing
disclosure requirements for most guarantees and clarifies that at the time a
company issues a guarantee, it must recognize a liability for the fair value of
the obligations it assumes under the guarantee and must disclose that
information in its interim and annual financial statements. The disclosure
requirements of FIN 45 are effective for financial statements ending after
December 15, 2002. The initial recognition and measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company does not expect FIN 45 to have a material impact
on its financial position or results of operations.
F-10
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure"
(FAS 148), which amends FAS 123, "Accounting for Stock-Based Compensation",
transition requirements when voluntarily changing to the fair value based method
of accounting for stock-based compensation and also amends FAS 123 disclosure
requirements. FAS 148 is not expected to have a material impact on the company's
results of operations, financial position or cash flow.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. FIN 46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns or both. The consolidation requirements apply to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to variable interest entities created before February 1,
2003, in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply to financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The Company does not expect FIN 46 to have a material impact on its
financial position or results of operations.
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 an allowance for doubtful accounts
for accounts receivable, which are potentially uncollectable.
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 allowance for doubtful accounts in 2003 was increased due to the bankruptcy
of one of the Company's largest customers, Lisanti Foods. The Company had credit
insurance on this company and has collected part of the balance the customer
owed with the remaining part applied against the deductible of $48,000.
NOTE 3 - INVENTORIES
Inventories consist of the following:
March 31, 2003 March 31, 2002
----------- -----------
Finished goods $ 1,695,000 $ 2,337,000
Raw materials 440,000 281,000
Supplies and packaging 400,000 644,000
----------- -----------
$ 2,535,000 $ 3,262,000
Less: Reserve for Obsolescence 350,000 93,000
----------- -----------
$ 2,185,000 $ 3,169,000
----------- -----------
The Company recognizes a reserve for inventory obsolescence that totaled
$350,000 and $93,000 for 2003 and 2002, respectively. No allowance was
recognized in 2001.
F-11
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, 2003 March 31, 2002
----------- -----------
Land $ 25,000 $ 25,000
Plant 4,728,000 4,649,000
Equipment 10,528,000 10,191,000
Whey facility 2,139,000 2,124,000
----------- -----------
17,420,000 16,989,000
Less: accumulated
depreciation and
amortization 7,417,000 6,486,000
----------- -----------
$10,003,000 $10,503,000
----------- -----------
NOTE 5 - DUE FROM OFFICERS
Amounts due from officers reflect advances and loans which effective June 1,
1992 were converted to promissory notes bearing interest at 9% per annum.
Interest is payable annually thereafter, with the principal originally due on
June 1, 2000 was extended to June 1, 2003. Interest income on these notes was
$15,000, $11,000 and $11,000 for the years ended March 31, 2003, 2002, and 2001
respectively. During 2002, $39,800 of the debt was repaid by the Company
acquiring shares of its common stock as a settlement.
NOTE 6 - REVOLVING CREDIT LOAN
The Company has a $4,000,000 revolving credit facility at March 31, 2003. The
loan was to expire on June 16, 2003. The bank has extended the loan's maturity
to September 15, 2003 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% (5.25% at March 31, 2003 and 5.75% at March
31, 2002). Advances under this facility are limited to 50% of inventory (with a
cap on inventory borrowings of $1,000,000) and 80% of accounts receivable as
defined in the agreement. The commitment contains various restrictive covenants.
At March 31, 2003, the Company was in default of its debt coverage ratio
covenant. On July 29, 2003, the lender provided a waiver of that covenant
violation. In addition, the Company is required to generate an increase in its
dollar amount of net worth annually. 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 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 14). This loan is secured by substantially all of the Company's assets.
F-12
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following:
March 31, 2003 March 31, 2002
-------------- --------------
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 $3,639,000 $3,738,000
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 919,000 940,000
Loan payable to bank due in annual installments 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 (5.25% at March 31, 2003). Interest 2,000,000 2,000,000
is payable monthly
Promissory note to St. Albans Cooperative Creamery due April 14, 2005. The note
bears interest at the applicable federal rate, paid annually in arrears on each
anniversary date of the note
1,100,000 -0-
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, 2003 168,000 236,000
Discounted obligations under capital leases (Note 9) 27,000 58,000
---------- ----------
7,853,000 6,972,000
Less: current portion 710,000 201,000
---------- ----------
TOTAL $7,143,000 $6,771,000
========== ==========
As of March 31, 2003 long-term debt matures as follows:
2004 $ 710,000
2005 711,000
2006 1,675,000
2007 664,000
2008 181,000
Thereafter 3,912,000
----------
$7,853,000
==========
Substantially all of the Company's property, plant and equipment are pledged as
collateral for these obligations.
F-13
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, 2003 March 31, 2002
-------------------------- ------------------------
Deferred Deferred
Deferred Tax Deferred Tax
Tax Asset Liability Tax Asset Liability
----------- ----------- ----------- ---------
Depreciation $ - $725,000 $ $ 659,000
Provision for doubtful accounts 72,000 54,000
Reserve for obsolescence 98,000
Reserve for compensated absences 22,000 18,000
Operating loss carryforwards 3,021,000 2,536,000
Contribution carryforwards 2,000 2,000
----------- ----------- ----------- ---------
3,215,000 725,000 2,610,000 659,000
Valuation allowance (2,490,000) (1,951,000)
----------- ----------- ----------- ---------
$ 725,000 $ 725,000 $659,000 $659,000
----------- ----------- ----------- ---------
The net change in the valuation allowance for the periods presented were as
follows:
March 31,
---------------------------------------
2003 2002 2001
-------- -------- --------
Valuation allowance increase $441,000 $598,000 $486,000
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,
----------------------------------
2003 2002 2001
-------- -------- --------
Expected tax at U.S. Statutory Rate (34.0)% (34.0)% (34.0)%
State and local income taxes .1 .1 .1
Permanent differences and other (.6) (4.9) .3
Valuation allowance for operating loss
carryforwards 34.6 38.9 33.7
-------- -------- --------
.1% .1% .1%
======== ======== ========
Operating loss carry forwards totaled $7,951,000 as of March 31, 2003 and expire
on March 31, of the following years:
2011 $ 77,000
2012 913,000
2013 2,122,000
2015 268,000
2016 1,562,000
2022 1,731,000
2023 1,278,000
----------
Total $7,951,000
==========
F-14
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - LEASE COMMITMENTS
The Company leases automobiles for two of its officers under lease arrangements
classified as operating leases. The leases expire in November 2005 and April
2006. Rent expense was approximately $19,000 and $19,000 in the years ended
March 31, 2003 and 2002 respectively. Future minimum payments under the leases
are approximately $17,000 at March 31, 2003.
The Company leases equipment under operating leases expiring through January
2004. Minimum monthly lease payments under these leases total $1,000. Minimum
annual lease payments are $12,000 for the year ending March 31, 2004.
The Company also leases 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 $44,000 is included in property, plant
and equipment at March 31, 2003.
Future minimum lease payments under capital leases are as follows:
2004 35,000
2005 9,000
--------
Total minimum lease payments 44,000
Less amount representing interest 17,000
---------
Present value of net minimum payments 27,000
Less: current portion 26,000
--------
Long-term obligation $ 1,000
========
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company leases a parcel of land adjacent to its production 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, 2003, 2002 and 2001 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 purchases all of its milk supplies from one of its stockholders (see
Note 12). Purchases totaled approximately $21,290,000 for 2003, $28,454,000 for
2002 and $20,669,000 for 2001, respectively.
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, 2003, 2002 and 2001.
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 for the Company's office facility in New Jersey was $9,000 for each of
the years ended March 31, 2003, 2002 and 2001.
The Company paid the Chief Executive Officer $33,000 for marketing consulting
services prior to him joining the Company.
The Company has incurred approximately $245,000 of legal fees from the law firm
of Breslow and Walker, LLP. The Chairman of the Board of Directors is a partner
of that firm.
On June 10, 2002, B&W Investment Associates, a partnership of which Howard S.
Breslow, Chairman of the Board, is a partner, acquired for $25,000, a ten year
warrant to purchase 500,000 shares of Common Stock at $3.00 per share.
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-15
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. The 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. The 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.
On May 16, 2002, the Company entered into an agreement with St Albans
Cooperative Creamery to sell 583 shares of Lucille Farms' Series B Convertible
Redeemable Preferred stock, which is convertible into 583,333 shares of common
stock, and a 10-year warrant to purchase 583,333 shares (subject to adjustment)
of common stock at $.01 per share, for an aggregate price of $3,500,000, to
cancel accounts payable owed to St Albans.
On December 20, 2002, the shareholders of the Company voted on and approved the
2002 stock option plan authorizing the issue of 1,000,000 shares of common
stock, par value $.001, per share upon the exercise of options, which may be
granted from time to time in accordance with the plan.
NOTE 12 - OTHER EVENTS
Employment Agreements
On November 1,2002, the Company entered into an employment agreement with Jay
Rosengarten, the Chief Executive Officer, for a 5 year term. Among other items,
the employment agreement provides for the granting of a 10-year option to
purchase 250,000 shares of the Company's common stock at $3 per share. Subject
to accelerated vesting in the case of certain change of control event, the
options vest 50,000 shares on November 1, 2002 and 50,000 shares on each of the
next four anniversary dates.
2002 Stock Option Plan
On October 24, 2002, the 2002 Stock Option Plan became effective. An aggregate
of 1,000,000 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.
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 November 2002, options to purchase 250,000 shares
were granted to the CEO of the Company for an exercise price of $3.00 per share,
and options to purchase 50,000 shares were granted to an employee of the Company
for an exercise price of $3.00 per share.
1993 Stock Option Plan
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. 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 canceled in May 2002. All values calculated, on the date of grant using the
Black Scholes option-pricing model with the following assumptions:
F-16
NOTE 12 - OTHER EVENTS (CONTINUED)
March 31, 2003 March 31, 2002
---------------------- -------------------
Options Warrants Options Options
-------- --------- -------- --------
Expected dividend yield -0-% -0-% -0-% -0-%
Risk free interest rate 4.0% 4.0% 5.0% 5.0%
Expected stock volatility 112.6% 111.0% 62.4% 62.6%
Expected option life 10 years 10 years 10 years 10 years
The Company follows the intrinsic method of Accounting Principals Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
directed below, Financial Accounting Standards Board Statement No.
123,"Accouting for Stock-Based Compensation" (FAS 123) requires use of option
valuation models that were not developed for use in valuing employee stock
options. FAS 123, permits a Company to elect to the intrinsic method of APB 25
rather than the alternative fair value accounting provided under FAS 123 but
requires pro forma net income and earnings per share disclosures as well as
various other disclosures not required under APB 25 for companies following APB
25. The Company has adopted the disclosure provisions required under Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation-Transition and Disclosure" (FAS 123). Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock at the date of grant, no compensation expense was recognized.
See "New Pronouncements".
Years Ended March 31,
-----------------------------------------------
2003 2002 2001
----------- ----------- -----------
Net income (loss):
As reported $ (847,000) $(1,540,000) $(1,477,000)
Pro forma $ (924,000) $(1,546,000) $(1,572,000)
Net earnings
(loss) per share:
As reported $ (.26) $ (.52) $ (.50)
Pro forma $ (.29) $ (.52) $ (.53)
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 2003 2002 2001
----------------- --------- ---------- --------
Outstanding - beginning $1.50 to $4.00 105,000 245,000 95,000
Issued $1.80 and $3.9375 275,000 10,000 150,000
Terminated $3.9375 and $4.00 10,000 150,000 7,500
-------- -------- -------
Outstanding - ending $ 1.50 to $4.00 370,000 105,000 245,000
======== ======== =======
At March 31, 2003 options for 128,000 shares were exercisable at a weighted
average exercise price of $3.13.
The following table summarizes information about stock options outstanding at
March 31, 2003:
Weighted
Average Weighted Average
Range of Number Remaining Remaining
Exercise Prices Outstanding (in years) Exercise Price
- --------------- ----------- ------------ --------------
$ 1.50 - 3.00 300,000 8.9 $ 2.84
$ 3.01 - 4.00 70,000 1.6 $ 3.95
F-17
NOTE 12 - OTHER EVENTS (CONTINUED)
On June 10 2002, B&W Investment Associates, a partnership of which Howard S.
Breslow, Chairman of the Board, is a partner, acquired for $25,000, a ten year
warrant to purchase 500,000 shares of Common Stock at $3.00 per share.
Purchase of Common Stock
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.
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.
F-18
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - RESTRUCTURING
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 (i) converted $1,000,000 of accounts
payable owed by the Company to St. Albans, into 333,333 share of the Company's
common stock, (ii) converted $3,500,000 of accounts payable owed by the Company
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 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 owed by the Company 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.
Accordingly, an extraordinary gain on the Company's troubled debt restructuring
was recognized in the amount of $875,000, net of income taxes that were
calculated to be zero. The Company has recorded the restructured debt issued
pursuant to the restructuring in accordance with the requirements of SFAS 15,
"Accounting by Debtors and Creditors For Troubled Debt Restructurings".
Accordingly, the debt recorded in connection with this transaction included
obligations for future cash payments of principal and interest to the extent
that the total of such cash flows did not exceed the principal amount of the
debt cancelled.
F-19
Note 14-Subsequent Events
The Company was in violation of our debt coverage with UPS Capital Business
Credit, f/k/a First International Bank, for the year ended March 31, 2003.
Subsequently, on July 29, 2003, UPS Capital Business Credit provided a waiver of
the covenant violation.
Schedule 1 - Valuation and Qualifying Accounts:
- ---------------------------------------------------------------------------------------------------------------------------------
COL A COL B COL. C COL. D COL E
- ---------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Additions(Deductions) Charged to Other Changes Balance
Beginning Charged (Credited) to Other Accounts Add (Deduct) at End of
Classification Of Period Cost and Expenses Describe Describe Period
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 2003:
Reserves and
allowances deducted
From asset account:
Allowance for
uncollectable
accounts $ 144,000 $ 145,000 $ (100,000)(1) $ 189,000
Reserve on inventory 93,000 257,000 350,000
Valuation for deferred
tax asset (1,951,000) (441,000) (2,392,000)
------------- ------------ ------------- -------------
$ (1,714,000) $ (39,000) $ (100,000) ($ 1,853,000)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
YEAR ENDED MARCH 31, 2002:
Reserves and allowances deducted
From asset account:
Allowance for uncollectable accounts 132,000 12,000 144,000
Reserve on inventory - 93,000 93,000
Valuation for deferred tax asset (1,353,000) (598,000) (1,951,000)
-------------- ---------- -------------
$ (1,221,000) $ (493,000) $ (1,714,000)
-------------- ---------- -------------
-------------- ---------- -------------
YEAR ENDED MARCH 31, 2001:
Reserves and allowances deducted
From asset account:
Allowance for uncollectable accounts 103,000 29,000 132,000
Valuation for deferred tax asset (867,000) (486,000) (1,353,000)
-------------- ---------- -------------
$ (764,000) $ (457,000) $ (1,221,000)
-------------- ---------- -------------
-------------- ---------- -------------
(1) Uncollectable accounts written off, net of recoveries
The allowance for the doubtful accounts in 2003 was increased due to the
bankruptcy of one of the Company's largest customers, Lisanti Foods. The Company
had credit insurance on this company and has collected part of the balance the
customer owed with the remaining part applied against the deductible of $48,000.
Lucille Farms established a reserve for inventory that did not meet company
standards but was saleable to cheese processors during 2003.
F-20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At the stockholders' meeting on December 20, 2002, the shareholders approved
Wiss & Company LLP as the Company's independent accounting firm for the year
ended March 31, 2003, replacing our former accounting firm Citrin Cooperman &
Company, LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of June 24, 2003 are as
follows:
Name Age Present office or Position
- ------- ----- --------------------------------
Howard Breslow 63 Chairman of the Board of Directors
Jay M. Rosengarten 58 Chief Executive Officer and Director
Alfonso Falivene 60 President and Director
Gennaro Falivene Executive Vice President-Quality Control
Albert N. Moussab 50 Chief Financial Officer
George Bell 59 Director
Ralph Singer 54 Director
Mr. Howard S. Breslow has been a director of the Company since April
1993. On October 24, 2002, he was elected as the non-employee Chairman of the
Board of Directors. Mr. Breslow 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 Excel Technology, Inc., a
publicly held company engaged in the development and sale of laser products,
BioLife Solutions, Inc., a publicly held company engaged in the research,
development and sale of products for use in low temperature medicine, and
Vikonics, Inc., a non-operating publicly held company.
Mr. Jay Rosengarten was appointed Chief Executive Officer by the Board
of Directors in August 2002 and has been on the Board of Directors since
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 the principal of The Rosengarten Group, a management
consulting firm, a position he has held from 1993 to present.
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. On November 1, 2002, Mr. Falivene resigned the position
of Chief Executive Officer.
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. Albert N. Moussab was appointed the Chief Financial Officer of the
Company in August 2002. Prior to this position, he was the Company's Controller
since joining the Company in March 2001. From January 2000 until March 2001, Mr.
Moussab was the Controller for Fink Baking Company, a New York based producer of
bread supplying the New York metropolitan area restaurants and New York School
system. From 1996 until the end of 1999, Mr. Moussab served as the Controller of
the Academy Bus Company, the largest privately held bus company in the
Northeast.
Mr. George Bell has been a director of the Company since August 2002.
Mr. Bell has been the President of National Provisions, Inc. a national
specialty food processing company based Florida, since June 2001 and the
President of Florida Deli Pickle Company, Inc. since 1993. Mr. Bell previously
spent over 25 years with Hebrew National, an internationally renowned meat
processing company, especially known for their frankfurters. His last position
was Sr. V.P. of Operations for the company.
Mr. Ralph Singer has been a director of the Company since August 2002.
Mr. Singer has been the Chairman of the Board of National Provisions, Inc. since
June 2001, and the Chairman of Florida Deli Pickle Company Inc. since February
2001. He is a former Deputy Chairman of the Board of The Stirling Group, PLC in
the U.K. Mr. Singer brings over twenty years experience as a successful
entrepreneur.
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 Beneficial 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 Al Falivene was late in filing a Form 4 and Leon Berthiaume was late
in filing a Form 4.
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 who received salary and bonus payments in excess of $100,000 during the
year ended March 31, 2003.
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------------------------
Name and Principal Fiscal Other Annual
Positions Year Salary Bonus Compensation(1)
- ------------------------- ------- -------- --------- ---------------------
Jay Rosengarten 2003(2) $ 56,000 $3,768
Chief Executive Officer
Alfonso Falivene 2003 $106,000 -- 9,000
President 2002 106,000 -- 9,000
2001 106,000 -- 9,000
Gennaro Falivene 2003 106,000 -- 6,000
Executive Vice 2002 106,000 -- 7,000
President -- Quality 2001 106,000 -- 5,000
Control
(1) Represents automobile allowances and/or automobile lease payments for
the benefit of such employee.
(2) Represents compensation from August 19, 2002 through March 31, 2003.
Employment Agreements
On October 24, 2002, the Company entered into an employment agreement with Jay
Rosengarten, pursuant to which Mr. Rosengarten was employed as the Company's
Chief Executive Officer, initially, and for a period of approximately three (3)
months (the "Wind Down Period"), on a part-time basis, during which period of
time Mr. Rosengarten is to wind down his consulting practice and devote not less
than three (3) week days per week to the business of the Company, and thereafter
on a full-time basis, provided, however, that Mr. Rosengarten is permitted to
retain, as consulting clients, two food industry related trade associations (the
"Trade Associations") and two food industry related trade clients (the "Trade
Clients") and devote, on average, not more than an aggregate of two (2) days per
month in connection with such clients. During the Wind Down Period, Mr.
Rosengarten will receive a salary at the rate of $150,000 per annum. Thereafter,
until such time as he terminates his consulting relationship with the Trade
Clients (at which time he can devote, on average, not more than an aggregate of
one (1) day per month in connection with the Trade Associations), his salary
will be at the rate of $200,000 per annum. At such time as Mr. Rosengarten
terminates his consulting relationship with the Trade Clients, his salary shall
be at the rate of $250,000 per annum. Pursuant to the terms of the employment
agreement, in addition to his salary, the Company has granted to Mr.
Rosengarten, under the Company's 2002 Stock Option Plan (the "Plan") a 10-year
option to purchase 250,000 shares of the Company's Common Stock at $3.00 per
share, which option vests to the extent of 50,000 shares upon the commencement
of employment and 50,000 shares on each of the next four anniversary dates
thereof; provided, however, that such vesting accelerates and all options vest
in the event of a sale of all or substantially all of the assets or all of the
shares of capital stock of the Company or the merger or consolidation of the
Company with another entity where the Company is not the surviving entity or
becomes a wholly owned subsidiary of another entity ( a "Change of Control
Event"). In the event Mr. Rosengarten's employment is terminated on account of
his death, disability, or resignation or for cause, the Company shall be
obligated to pay his salary only up to the date of termination. In the event his
employment is terminated by the Company without cause, the Company shall be
required to continue to pay his salary for a period of six (6) months and that
portion of any bonus which has accrued to the date of termination; provided,
however, that Mr. Rosengarten shall have the affirmative obligation to seek
employment or reactivate his consulting business and mitigate the Company's
damages-i.e. to the extent that he earns monies from his employment or
consulting business, the same shall be applied to reduce the payment to be made
to Mr. Rosengarten under his employment agreement; and provided further that if
such termination takes place within two (2) years after a Change of Control
Event, then the Company shall be required to continue to pay his salary for a
period of twelve (12) months.
Effective July 14, 2003, there are no other employment agreements with named
executive officers.
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, 2003, Messrs. Jay Rosengarten and Alfonso
Falivene were each officers of the Company as well as directors of the Company
who participated in deliberations of the Company's Board of Directors. Reference
is made to Item 13 "Certain Relationships and Related Transactions".
STOCK PERFORMANCE GRAPH
The following chart compares the percentage change in the cumulative total
stockholder return of the Common Stock during the period from March 31, 1998
through the fiscal year ended March 31, 2003 with the cumulative total return on
the NASDAQ Composite Index and the Company Peer Group. The comparison assumes
$100 was invested in the Common Stock on March 31, 1998, and in each of the
stocks included in the NASDAQ Composite Index and the Company Peer Group.
[Chart Omitted]
Legend
CRSP Total Returns Index for: 03/1998 03/1999 03/2000 03/2001 03/2002 03/2003
----------------------------------------------------------------------------------------------------------
LUCILLE FARMS, INC. 100.0 260.0 420.0 190.0 157.6 79.2
Nasdaq Stock Market (US Companies) 100.0 135.1 251.0 100.6 101.3 74.4
Nasdaq Stocks (SIC 5140-5149 US 100.0 89.3 75.5 105.9 140.1 116.5
Companies) Groceries and Related Products
Notes:
A. The lines represent monthly index levels derived from compounded
daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization
on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not
a trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 3/31/1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table, as of June 24, 2003, 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 Officer 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 Stock Pfd. Stock
------------------ ----------- ------------------- ----------
Gennaro Falivene 327,417 10.0%
Box 125
Swanton, VT 05488
Alfonso Falivene 464,917(1) 14.2%
150 River Rd., P.O. Box 517
Montville, NJ 07045
The Estate of Philip Falivene 200,017(2) 6.1%
Box 125
Swanton, VT 05488
B&W Investment Associates 693,799(3) 21.1%
c/o Breslow and Walker
100 Jericho Quadrangle
Jericho, NY 11753
Howard S. Breslow 693,799(3) 21.1%
100 Jericho Quadrangle
Jericho, NY 11753
Jay M. Rosengarten 275,000(4) 2.2%
St. Albans Cooperative Creamery, Inc. 333,333(5) 583(6) 10.1% 100%
140 Federal Street
St. Albans, VT 05478
All officers and
directors as a group 1,561,113(7) 40.4%
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) Represents all of the shares owned by the Estate of Philip Falivene, of
which Alfonso Falivene is executor.
(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 275,000 shares issuable under outstanding options, 75,000 of which
are vested.
(5) Excludes warrants convertible into 583,333 shares (subject to adjustment) of
Common Stock, which may not be exercised until May 16, 2005.
(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) Includes 75,000 shares issuable under outstanding options and 500,000 shares
issuable under outstanding warrants. See "-Liquidity and Capital Resources".
* Less than 1%
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 370,000 $3.05 630,000
Equity compensation
plan not approved by
shareholders 500,000 $3.00 0
Total 870,000 $3.02 630,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At March 31, 2003, Alfonso Falivene and Gennaro Falivene were indebted to the
Company in the amount of $30,167, and $30,166, 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 leases a parcel of land adjacent to the Vermont facility. Messrs
Gennaro Falivene, Alfonso Falivene and the Estate of Philip Falivene own this
parcel. 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 beginning April 1998. 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'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 Falivene, Alfonso Falivene and the
Estate of Philip Falivene, officers, directors, and/or principal stockholders of
the Company, all of who 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. During the fiscal years
ended March 31, 2001, 2002 and 2003, the Company paid approximately $14,000,
$14,000 and $14,000, respectively, towards the rental of such offices. The
Company also leases an additional 900 adjacent square feet for $750 monthly on a
month--to--month basis. Messrs. Alfonso Falivene, Gennaro Falivene, and the
Estate of Philip Falivene also own these premises. 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, 2001, 2002 and 2003.
Prior to being hired on November 1, 2002 as the Chief Executive Officer of the
Company, Mr. Rosengarten was retained by the Company as an independent
consultant at the rate of $50,000 per annum.
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".
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Annual Report on Form 10-K, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the CEO and CFO, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Company's CEO and CFO concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic SEC
filings.
The Company does not expect that its disclosure controls and procedures will
prevent all error and all fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any control
procedure also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.
Subsequent to the date of the Company's evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could affect internal controls, nor were any corrective actions required with
regard to significant deficiencies and material weaknesses.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-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.
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)
10.1 1993 Stock Option Plan (1)
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)
(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.
99.1 Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated July 31, 2003
99.2 Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated July 31, 2003
99.3 Certification of Periodic Report pursuant to Section 402 of
the Sarbanes-Oxley Act of 2002, dated July 31, 2003
99.4 Certification of Periodic Report pursuant to Section 402 of
the Sarbanes-Oxley Act of 2002, dated July 31, 2003
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.
----------------------
(Registrant)
By:/s/ Jay M. Rosengarten
------------------
Jay M. Rosengarten
Chief Executive Officer
By:/s/ Albert N. Moussab
------------------
Albert N. Moussab
Chief Financial Officer
Date: July 31, 2003
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/Howard S. Breslow Director July 31, 2003
Howard S. Breslow
/s/Jay Rosengarten Director July 31, 2003
Jay Rosengarten
/s/Al Falivene Director July 31, 2003
Al Falivene
/s/George Bell Director July 31, 2003
George Bell
/s/Ralph Singer Director July 31, 2003
Ralph Singer
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- -------------------------------------------------------------
99.1* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated July 31, 2003
99.2* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated July 31, 2003
99.3* Certification of Periodic Report pursuant to Section 402 of
the Sarbanes-Oxley Act of 2002, dated July 31, 2003
99.4* Certification of Periodic Report pursuant to Section 402 of
the Sarbanes-Oxley Act of 2002, dated July 31, 2003
* Filed herewith