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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITITES AND
EXCHANGE ACT OF 1934
For the Quarterly Period Ended:
December 31, 2003
Commission File Number 1-12506
LUCILLE FARMS, INC.
------------------
(Exact Name of Registrant as Specified in its charter)
Delaware 13-2963923
------------------------ ---------------------
(State or other Jurisdiction (I.R.S. Employer
of Incorporation) Identification number)
150 River Road, P.O. Box 517
Montville, New Jersey 07045
--------------------- -----
(Address of Principal Executive Offices) (zip code)
(Registrant's Telephone Number, Including Area Code)
(973)334-6030
Former name, former address and former fiscal year, if changed since last
report. N/A
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 and 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 [ ]
The number of shares of Registrant's common stock, par value $.001 per share,
outstanding as of February 20, 2004 was 3,137,937.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, 2003 MARCH 31, 2003
----------------- ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 4,000 $ 4,000
Accounts receivable, net of allowances of $151,000 at December 31, 2003 and
$189,000 at March 31, 2003 4,072,000 3,530,000
Inventories 2,697,000 2,185,000
Prepaid expenses and other current assets 602,000 616,000
Due from officers -- 101,000
--------------- ---------------
Total current assets 7,375,000 6,436,000
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, NET 9,602,000 10,003,000
--------------- ---------------
OTHER ASSETS:
Deferred costs, net 209,000 215,000
Other 8,000 108,000
--------------- ---------------
Total other assets 217,000 323,000
--------------- ---------------
TOTAL ASSETS $ 17,194,000 $ 16,762,000
=============== ===============
See accompanying notes to consolidated financial statements
2
LUCILLE FARMS,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, 2003 MARCH 31, 2003
----------------- ---------------
(UNAUDITED)
CURRENT LIABILITES:
Revolving credit loan $ 3,610,000 $ 2,924,000
Accounts payable 3,139,000 2,425,000
Current portion of long-term debt 687,000 710,000
Accrued expenses 466,000 615,000
--------------- ---------------
Total Current Liabilities 7,902,000 6,674,000
--------------- ---------------
LONG-TERM LIABILITY:
Long-term debt, less current portion 6,471,000 7,143,000
--------------- ---------------
TOTAL LIABILITIES 14,373,000 13,817,000
STOCKHOLDERS' EQUITY:
Preferred stock, $ 0.001 per value, 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 1,000
Common stock, $ 0.001 par value, 25,000,000 shares authorized, 3,354,675
shares issued, 3,137,937 outstanding at December 31, 2003 and 3,284,775
outstanding at March 31, 2003 3,000 3,000
Additional paid in capital 8,548,000 8,548,000
Accumulated deficit (5,420,000) (5,443,000)
--------------- ---------------
3,133,000 3,110,000
Less: cost of 216,738 shares of treasury stock (312,000) (165,000)
--------------- ---------------
at December 31, 2003 and 69,900 shares of treasury stock at March 31, 2003,
respectively
Total Stockholders' Equity 2,821,000 2,945,000
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,194,000 $ 16,762,000
=============== ===============
See accompanying notes to consolidated financial statements
3
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31
2003 2002
----------------- ---------------
SALES $ 10,850,000 $ 9,746,000
COST OF SALES 10,493,000 9,374,000
--------------- ---------------
GROSS PROFIT 357,000 372,000
--------------- ---------------
OTHER EXPENSE:
SELLING 239,000 206,000
GENERAL AND ADMINISTRATIVE 230,000 265,000
INTEREST EXPENSE 205,000 196,000
--------------- ---------------
TOTAL OTHER EXPENSE 674,000 667,000
--------------- ---------------
NET LOSS $ (317,000) $ (295,000)
--------------- ---------------
LOSS PER SHARE
BASIC:
$ (.10) $ (.09)
--------------- ---------------
DILUTED: $ (.10) $ (.09)
--------------- ---------------
WEIGHTED AVERAGE SHARES OUTSTANDING USED TO COMPUTE NET LOSS PER SHARE
BASIC: 3,137,937 3,284,775
DILUTED: 3,137,937 3,284,775
See accompanying notes to consolidated financial statements
4
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31
2003 2002
----------------- ---------------
SALES $ 30,199,000 $ 28,262,000
COST OF SALES 28,277,000 27,522,000
--------------- ---------------
GROSS PROFIT 1,922,000 740,000
--------------- ---------------
OTHER EXPENSE/(INCOME):
SELLING 644,000 553,000
GENERAL AND ADMINISTRATIVE 684,000 739,000
GAIN ON DEBT RESTRUCTURING, NET -- $ 875,000
INTEREST INCOME -- (5,000)
INTEREST EXPENSE 570,000 603,000
--------------- ---------------
TOTAL OTHER EXPENSE 1,898,000 1,015,000
--------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES 24,000 (275,000)
PROVISION FOR INCOME TAXES 1,000 1,000
--------------- ---------------
NET INCOME (LOSS) $ 23,000 $ (276,000)
--------------- ---------------
EARNINGS (LOSS) PER SHARE
BASIC: $ .01 $ (.08)
DILUTED: $ .01 $ (.08)
WEIGHTED AVERAGE SHARES OUTSTANDING USED TO COMPUTE NET INCOME (LOSS) PER SHARE
BASIC 3,138,862 3,299,120
DILUTED 3,138,862 3,299,120
See accompanying notes to consolidated financial statements
5
LUCILLE FARMS, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31
2003 2002
----------------- ---------------
Cash flows from operating activities:
NET INCOME (LOSS) $ 23,000 $ (276,000)
Adjustments to reconcile net Income (loss) to net cash provided by operating
activities:
Gain on debt restructuring -- (875,000)
Depreciation and amortization 702,000 638,000
Provision for doubtful accounts 25,000 63,000
(Increase) decrease in assets:
Accounts receivable (567,000) 121,000
Inventories (512,000) 845,000
Prepaid expenses and other current assets (32,000) (515,000)
Other assets 106,000 (131,000)
Increase (decrease) in liabilities:
Accounts payable 714,000 1,520,000
Accrued expenses (149,000) 169,000
--------------- ---------------
Net cash provided by operating activities 310,000 1,559,000
--------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (301,000) (330,000)
--------------- ---------------
Net cash used In investing Activities (301,000) (330,000)
--------------- ---------------
CASH FLOW FROM FINANCING ACTIVITIES:
(Payments of) proceeds from revolving credit loan-net 686,000 (1,001,000)
Principal payments on long-term debt and notes (695,000) (260,000)
--------------- ---------------
Net cash used in financing activities (9,000) (1,261,000)
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS -- (32,000)
CASH AND CASH EQUIVALENTS-BEGINNING 4,000 175,000
--------------- ---------------
CASH AND CASH EQUIVALENTS-ENDING $ 4,000 $ 143,000
--------------- ---------------
See accompanying notes to consolidated financial statements
6
LUCILLE FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Consolidated Balance Sheet as of December 31, 2003, the Consolidated
Statement of Operations for the three and nine month periods ended
December 31, 2003 and 2002 and the Consolidated Statement of Cash Flows
for the nine month periods ended December 31, 2003 and 2002 have been
prepared by the Company without audit. In the opinion of management, the
accompanying consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly the financial position of Lucille Farms, Inc. as of December 31,
2003, the results of its operations for the three and nine months ended
December 31, 2003 and 2002 and its cash flows for the nine months ended
December 31, 2003 and 2002.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Although the Company believes that the
disclosures are adequate to make the information presented not
misleading, it is suggested that these financial statements be read in
conjunction with the year-end financial statements and notes thereto for
the fiscal year ended March 31, 2003 included in the Company's Annual
Report on Form 10-K as filed with the SEC. The Company also suggests that
the Form 8-K's filed with the SEC on October 31, 2003 and November 6,
2003 be read in conjunction with this report.
The accounting policies followed by the Company are set forth in the
notes to the Company's consolidated financial statements as set forth in
its Annual Report on Form 10-K as filed with the SEC.
Recent Accounting Pronouncements
The FASB has issued FIN 46 and related revisions, "Consolidation of Variable
Interest Entities." FIN 46 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 activity without additional subordinated financial support from
other parties. FIN 46 should be applied no later than the end of the first
reporting period that ends after March 15, 2004. The Company does not expect the
adoption of FIN 46 to have a material effect on its financial position, results
of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," for
implementation issues related to the definition of a derivative and other FASB
projects related to financial instruments. SFAS No. 149 requires that contracts
with comparable characteristics be accounted for in a similar fashion. SFAS No.
149 applies prospectively to contracts entered into or modified after September
30, 2003 and for hedging relationships designated after September 30, 2003. The
Company does not expect the adoption of SFAS No. 149 to have a material effect
on its financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that financial instruments within the scope of SFAS No. 150 be
classified as a liability or an asset. SFAS No. 150 is effective for all
financial instruments entered into after May 31, 2003 or otherwise, the
beginning of the first interim period after September 15, 2003. The Company does
not expect the adoption of SFAS No. 150 to have a material effect on its
financial position, results of operations or cash flows.
7
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock options and rewards. Accordingly, no compensation costs for
stock options are included in operating results since all awards were made at
exercise prices at or above their fair value on the dates of grants.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure", amending FASB Statement No. 123,
"Accounting for Stock Based Compensation." This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. The Company has elected not to change to the fair value method of
accounting. It also amends the disclosure provisions of SFAS No. 123 to require
that, where no election is made to change to the fair value method, prominent
disclosure about the effects on operating results of an entity's accounting
policy decisions with respect to stock-based employee compensation must be made
in the footnotes to the financial statements. SFAS No. 148 also amends APB
Opinion No. 128, "Interim Financial Reporting" to require disclosure about those
effects in interim financial information. We adopted the disclosure provisions
for the year ended March 31, 2003. The following table illustrates the effect on
results of operations if the Company had applied the fair value recognition
provisions of SFAS No. 123 for the nine-month periods ended December 31, 2003
and 2002 (unaudited).
8
3-Mos. ended 9-Mos. ended
December 31, December 31,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net (loss) Income as reported $ (317,000) $ (295,000) $ 23,000 $ (276,000)
Deduct: Total stock-based Employee Compensation
determined under fair value method for stock
options, net of tax -- -- -- --
=============== =============== =============== ===============
Pro forma income (loss) applicable to common
stockholders $ (317,000) $ (295,000) $ 23,000 $ (276,000)
=============== =============== =============== ===============
Basic income (loss) per share, as reported $ (0.10) $ (0.09) $ 0.01 $ (0.08)
=============== =============== =============== ===============
Basic income (loss) per share, pro forma $ (0.10) $ (0.09) $ 0.01 $ (0.08)
=============== =============== =============== ===============
Diluted income (loss) per share, as reported $ (0.10) $ (0.09) $ 0.01 $ (0.08)
=============== =============== =============== ===============
Diluted income (loss) per share, pro forma $ (0.10) $ (0.09) $ 0.01 $ (0.08)
=============== =============== =============== ===============
2. Inventories are summarized as follows:
December 31, 2003 March 31, 2003
----------------- ---------------
Finished goods $ 2,089,000 $ 1,345,000
Raw Materials 248,000 440,000
Supplies and Packaging 360,000 400,000
--------------- ---------------
$ 2,697,000 $ 2,185,000
=============== ===============
9
3. The Company has a $ 4,000,000 revolving credit facility at December 31,
2003. The loan was to expire on September 16, 2003. The bank has extended
the loan's maturity to May 30, 2004 at which time the outstanding
principal is due. 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 ability to fund
operational requirements.
4. 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. Potential common shares issuable upon the
exercise of stock options and warrants are excluded from diluted earnings
loss per share for the three months ended December 31, 2003, and the nine
months ended December 31, 2002 because they would be antidilutive. For
2003 and 2002 conversion of preferred stock was not taken into
consideration since the contingency for conversion was not met and the
effect would be antidilutive.
At December 31, 2003 and 2002, 1,219,333 and 1,169,333 potential common
shares, issuable upon the exercise of stock options and warrants,
respectively, are excluded from the determination of diluted net loss per
share as the effect on such shares is antidilutive.
Three-Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
December 31, 2003 December 31, 2002 December 31,2003 December 31,2002
----------------- ----------------- ---------------- ----------------
Numerator:
Net income (loss)- basic $ (317,000) $ (295,000) $ 23,000 $ (276,000)
--------------- --------------- --------------- ---------------
Net Income (loss)-diluted $ (317,000) $ (295,000) $ 23,000 $ (276,000)
--------------- --------------- --------------- ---------------
Denominator
Denominator for basic earnings per share
Weighted avg. shares 3,137,937 3,284,775 3,138,862 3,284,775
Effect of dilutive securities
Stock options -- -- -- --
--------------- --------------- --------------- ---------------
Denominator for diluted earnings per share 3,137,937 3,284,775 3,138,862 3,284,775
Earnings (loss) per share
Basic: $ (0.10) $ (0.09) $ 0.01 $ (.08)
--------------- --------------- --------------- ---------------
Diluted: $ (0.10) $ (0.09) $ 0.01 $ (.08)
--------------- --------------- --------------- ---------------
10
5. For the nine months ended December 31, 2002, non-cash investing and
financing activities were $5,500,000 for restructuring accounts payable
for a value ascribed to common stock, preferred stock, warrants and debt
issued in connection with the restructuring of $4,500,000 (See Note 7).
For the nine months ended December 31, 2003, the Company received 146,838
shares of its own stock in full satisfaction of $146,838 of principal and
accrued interest due to the Company from three of its officers. Cash paid
for interest and taxes were $570,000 and $1,000 and $603,000 and $1,000
for the nine months ended December 31, 2003 and 2002, respectively.
6. In May 2002, the Company restructured $5,500,000 of accounts payable from
its main supplier through the issuance of 333,333 shares of common stock,
583 shares of Series B Preferred Stock with a detachable 10-year warrant
and a $1,000,000 convertible note payable in April 2005, the aggregate of
which had an ascribed value of approximately $4,500,000.
The restructuring resulted in a gain of $875,000, net of expenses of
$125,000 and income taxes calculated to be zero due to the offset of net
operating loss carry forwards previously unrealized.
7. In June 2002, the Company issued a 10-year warrant to B & W Investment
Associates, a partnership in which the Chairman of the board of the
Company is a partner, to purchase 500,000 shares of common stock at $3.00
per share. The warrant was issued to satisfy outstanding professional
services in connection with the restructuring of accounts payable.
11
ITEM 2. 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 its customers 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 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.
Three months ended December 31, 2003 compared to the three months ended December
31, 2002
Sales for the three months ended December 31, 2003 increased to $10,850,000 from
$9,746,000 for the comparable period in 2002, an increase of $1,104,000 or
(11.3%). Approximately $1,576,000 or (142%) was due to an increase in the
average selling price per pound of cheese from $1.26 for the three month period
ended December 31, 2002 to $1.49 for the three month period ended December 31,
2003. This increase was offset by a decrease in the number of pounds sold from
7,159,000 pounds in 2002 to 6,853,000 pounds in 2003, a decrease of 306,000
pounds or (4.3%) year to year and a decrease in the sale of whey of
approximately $223,000 or (38.6%). The increase in the average selling price per
pound of cheese was the result of a higher CME block cheddar price during the
quarter, an average price of $1.46 compared to last year's average of $1.15.
Cost of sales and gross profit margin for the three month period ended December
31, 2003 were $10,493,000 or (96.7% of sales) and $357,000 or (3.3% of sales),
respectively, compared to a cost of sales and gross profit margin of $9,374,000
or (96.2% of sales) and $372,000 or (3.8% of sales) respectively for the
comparable period in 2002. The increase in the cost of sales and corresponding
decrease in gross profit margin for 2003 as a percentage of sales were the
result of a falling cheese market and a milk market that did not decline
proportionately, squeezing profit margins along with higher waste removal and
whey removal costs, warehouse storage expenses, depreciation expense and
professional fees. These expenses were partially offset by lower freight costs,
utility costs, insurance expense and equipment parts and supplies.
Selling, general, and administrative expenses for the three-month period ended
December 31, 2003 amounted to $470,000 (or 4.3% of sales) compared to $471,000
(or 4.8% of sales) for the comparable period in 2002. Lower legal and consulting
fees were partially offset by higher officers' salaries and business travel
expenses.
12
Interest expense for the three month period ended December 31, 2003 amounted to
$205,000 compared to $196,000 for the period ended December 31, 2002, an
increase of $9,000. A higher interest rate on our revolver loan accounted for
most of the difference.
The provision for income tax for the period takes advantage of the tax benefits
of operating loss carry fowards being offset by the effect of changes in the
valuation allowance. Such amounts are re-evaluated each period based on the
results of the operation.
The company's net loss of $317,000 for the three month period ended December 31,
2003 is higher than the $295,000 net loss for the comparable period in 2002. The
primary factors contributing to these changes are discussed above.
Nine months ended December 31, 2003 compared to nine months ended December 31,
2002
Sales for the nine months ended December 31, 2003 increased to $30,199,000 from
$28,262,000 for the comparable period in 2002, an increase of $1,937,000 or
(6.9%). Approximately $3,272,000 or (168.9%) was due to an increase in the
average selling price per pound of cheese from $1.29 for the nine month period
ended December 2002 to $1.45 for the nine month period ended December 2003. This
increase was offset by a decrease in the number of pounds sold to 19,963,000
pounds in 2003 from 20,738,000 in 2002, a decrease of 775,000 pounds or (3.7%)
year to year and a year to year decrease in the sale of whey of approximately
$394,000 or (27.6%).
Cost of sales and gross profit margin for the nine month period ended December
31, 2003 were $28,277,000 or (93.6% of sales) and $1,922,000 or (6.4% of sales)
compared to a cost of sales and gross profit margin of $27,522,000 or (97.4% of
sales) and $740,000 or (2.6% of sales), respectively, for the comparable period
in 2002. The improvement in our gross profit margin can be attributed to lower
transportation costs, labor costs, cleaning supplies, and packaging costs. These
lower expenses were partially offset by higher ingredient costs, insurance
expense, whey removal, depreciation expense and warehouse storage costs.
Selling, general and administrative expenses for the nine months ended December
31, 2003 amounted to $1,328,000 or (4.3% of sales) compared to $1,292,000 or
(4.6% of sales) for the comparable period in 2002. Higher wages, business travel
expense and promotional allowances were offset by lower professional and
consulting fees.
Interest expense (net) for the nine months ended December 31, 2003 amounted to
$570,000 compared to $598,000 for the nine months ended December 31, 2002, a
decrease of $28,000. The repayment of $500,000 on our term loan with CoBank
accounted for the decrease but was partially offset by an increase in the rate
on our revolver loan.
The provision for income tax for the nine month periods ended December 31, 2003
and December 31, 2002 of $1,000 reflects minimum state taxes. Charges for
federal income taxes were offset by changes in the valuation allowances for the
nine months ended December 31, 2003 and December 31, 2002. Such amounts are
re-evaluated each quarter based on the results of operations.
The company's net income of $23,000 for the nine months ended December 31, 2003
represents an increase of $299,000 from the net loss of $276,000 for the
comparable period in 2002. The primary factors contributing to this change are
discussed above.
Liquidity and Capital Resources
The Company had available a $4,000,000 revolving credit facility at December 31,
2003, which matures on May 30, 2004 (with St. Albans Cooperative Creamery, Inc.
participating therein to the extent of $3,000,000) at which time the outstanding
principal balance is due. The rate of interest on amounts borrowed against the
revolving credit facility is based upon the New York prime rate plus 2% (6% at
December 31, 2003). Advances under this facility are limited to 50% of inventory
(with a cap on inventory borrowing of $1,000,000) and 80% of receivables, as
defined in the agreement. The commitment contains various restrictive covenants
including requiring the Company to generate an increase in its dollar amount of
net worth annually. The Company is seeking alternative financing to replace this
facility. Should the Company not be able to secure alternative financing by the
due date, it will request an extension until such financing is secured. However,
there is no assurance that such financing can be secured or that the extension
will be granted. Failure to secure such financing or extension can have a
significant negative effect on the Company's ability to fund operational
requirements.
13
At December 31, 2003, the Company had negative working capital of ($527,000) as
compared to negative working capital of ($238,000) at March 31, 2003. The
Company's revolving bank line of credit is available for the Company's working
capital requirements.
At December 31, 2003, $3,610,000 was outstanding under the revolving credit line
and $160,000 was available for additional borrowing.
On February 8, 1999, a $4,950,000 bank loan agreement was signed. The loan is
collateralized by the Company's plant and equipment and guaranteed by the USDA.
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 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 maturity in February
2019.
On May 23, 2001, the Company entered into a new term loan with Co 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 with the next installment due on May 1, 2004. The loan is
collateralized by the Company's plant and equipment and was used for working
capital.
On May 16, 2002, the Company entered into an agreement 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 shares of 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 $8.00 or higher for 30 consecutive trading days,
and (2) may be redeemed by the Company 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, the Company's common stock is
$8.00 or higher for 30 consecutive trading days, and, (3) in the event the
Company's 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 the Company 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 the Company, 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 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. The applicable
period for the milk and milk by-products pricing structure expired in May 2003.
Thereafter, St. Albans maintained the pricing structure through June 30, 2003.
Commencing July 2, 2003, and again as of September 1, 2003, the pricing
structure was modified to progressively decrease the benefits accruing to the
Company in light of the profitability of the Company.
14
The Company's major source of external working capital financing has been the
revolving line of credit. For the foreseeable future, assuming the line is
replaced, the Company believes that the Company's revolving line of credit will
continue to represent the major source of working capital financing besides
income generated from operations. However, failure to secure such replacement
financing or an extension of such line of credit can have a significant negative
effect on the Company's liquidity.
For the nine-month period ended December 31, 2003, cash provided by operating
activities was $310,000. A profit from operations of $23,000 increased cash. In
addition, increases in accounts payable of $714,000 and decreases in other
assets of $106,000 provided cash while increases in accounts receivable of
$567,000 and inventory of $512,000 decreased cash.
Net cash used by investing activities was $301,000 for the period ended December
31, 2003, which represented purchase of property, plant and equipment.
Net cash used in financing activities was $9,000 for the period ended December
31, 2003. Payments of the first installment to Co Bank of $500,000 decreased
cash.
Safe Harbor Statement
This Quarterly Report on Form 10-Q (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 3. 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 the balance sheet date, December 31, 2003 and March 31,
2003 amounted to $5,110,000, and $4,924,000, respectively. Since the interest
rate on debt is based upon the prime rate plus 1%, or 2%, the cost of this debt
will increase or decrease accordingly with changes in the prime rate.
The Company has exposure to the commodity price for cheese, dry whey and fluid
milk. We have addressed these exposures in the general paragraph of Management's
Discussion and Analysis, Item 2 above.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Form 10-Q, 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 Securities Exchange Act of 1934 Rule 13a-14. Based upon the
evaluation, the Company's CEO and CFO concluded that the Company's disclosure
controls and procedures are effective, except as discussed in the next paragraph
below, in timely alerting them to material information relating to the Company
required to be included in the Company's periodic SEC filings.
15
The Company's independent auditors identified a significant internal control
deficiency which, if left uncorrected could result in a material weakness. Our
significant internal control deficiency related to the failure to record all
March 31, 2003 audit adjustments to our subsidiary ledgers. Due to this
significant deficiency our March 31, 2003 Federal, New Jersey and Vermont tax
returns have not been filed on a timely basis, although all taxes have been paid
timely.
The Company does not expect that its disclosure controls and procedures will
prevent all errors 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 procedures 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. Corrective action will be taken with regard to
significant deficiency noted above.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On May 16, 2002, the Company 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 the Company to St. Albans into 333,333 shares of 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 $8.00 or higher for 30 consecutive trading days, and (2) may
be redeemed by the Company 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, the Company's common stock is
$8.00 or higher for 30 consecutive trading days, and, (3) in the event the
Company's 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 the Company 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 the Company, 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 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. The applicable
period for the milk and milk by-products pricing structure expired in May 2003.
Thereafter, St. Albans maintained the pricing structure through June 30, 2003.
Commencing July 2, 2003, and again as of September 1, 2003, the pricing
structure was modified to progressively decrease the benefits accruing to the
Company in light of the profitability of the Company.
16
On June 10, 2002, B&W Investment associates, a partnership of which Howard S.
Breslow, Chairman of the board 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Loan and Security/Stock Purchase Agreement, dated May 16, 2002, by and
among Lucille Farms, Inc., Lucille Farms of Vermont, Inc. and St Albans
Cooperative Creamery, Inc. Portions have been omitted pursuant to a
request for confidential treatment and have been filed separately with
the Securities and Exchange Commission. (1)
99.1 Certification of Periodic Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated February 20, 2004.
99.2 Certification of Periodic Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated February 20, 2004.
99.3 Certification of Periodic Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated February 20, 2004.
99.4 Certification of Periodic Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated February 20, 2004.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed October 31, 2003, relating to a
change in the Company's independent accoutants.
Current Report on Form 8-K, filed November 6, 2003, relating to the
results of operations for the period ending September 30, 2003.
(1) Incorporated by reference to the Company's Current Report on Form 8-K,
filed July 11, 2002.
17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 20, 2004 Lucille Farms, Inc.
----------------- (Registrant)
By: /s/ Jay Rosengarten
------------------------
Jay Rosengarten,
Chief Executive Officer
By: /s/ Albert Moussab
-----------------------
Albert Moussab,
Chief Financial Officer
(chief financial and accounting officer)
18
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
99.1* Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated February 20, 2004.
99.2* Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated February 20, 2004.
99.3* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated February 20, 2004.
99.4* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated February 20, 2004.
* Filed herewith