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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12506
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LUCILLE FARMS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 13-2963923
(State of incorporation) (I.R.S. employer identification no.)
150 River Road, P.O. Box 517 (973) 334-6030
Montville, NJ 07045 (Registrant's telephone number)
(Address of principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.001 per share
(Titles of Classes)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 $1,821,110 based on the average bid and asks price as reported by
NASDAQ on May 25, 2004. Shares held by each officer, director, and person who
owns 10% or more of the Registrant's outstanding common stock have been excluded
in that such persons may be deemed to be affiliates. The determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of the Registrant's common stock outstanding as of June 28,
2004 was 3,137,937.
Documents Incorporated by Reference
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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, reduced fat and
non-fat low moisture mozzarella cheese, and pizza cheese, and the shredding of
other cheese and cheese blends. The Company's pizza cheese and reduced fat and
non-fat low-moisture mozzarella cheeses have been developed utilizing
proprietary formulas and processes. The Company also sells whey for animal food,
which is a by-product of its cheese making operation. For the fiscal year ended
March 31, 2004, low moisture mozzarella cheese, shredded cheese and blended
cheese sales accounted for approximately 88.3% of the Company's sales revenues.
Sales of the Company's pizza cheese and reduced fat and non-fat mozzarella
cheese products during the fiscal year ended March 31, 2004, were 1.9%, of the
Company's revenue, and sales from a variety of other cheese purchased by the
Company, including provolone, ricotta and cheddar, were 4.7% of the Company's
revenues. Whey accounted for 3.3% of the Company's revenue and the sale of
surplus ingredients accounted for 1.8%. The Company's low moisture mozzarella
cheese, pizza cheese and reduced fat and non-fat mozzarella cheese products are
manufactured in the Company's production facility in Swanton, Vermont, and are
made of natural ingredients.
The Company's products are sold primarily to the food service and industrial
segments of the cheese market. The food service segment consists of food service
distributors, 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 the Company's products 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 products to the retail sector.
The Company purchases provolone, ricotta, and cheddar 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.
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 standards. During the fiscal years ended March 31, 2004,
2003 and 2002, whole milk and part skim low moisture mozzarella cheese loafs and
shredded cheese and cheese blends accounted for approximately 89.9%, 86.6% and
88%, respectively, of the Company's sales.
(2) Pizza Cheese and Reduced Fat and Non-Fat Low Moisture Mozzarella
Cheese
During the fiscal years ended March 31, 2004, 2003, and 2002, the Company's
pizza cheese and reduced fat and non-fat mozzarella cheese products accounted
for approximately 1.9%, 2.6% and 1%, respectively, of the Company's total sales.
The Company's pizza cheese is positioned as a value alternative to mozzarella
cheese, and the Company's reduced fat and non-fat low moisture mozzarella cheese
products are viewed as having certain health benefits and are considered
"premium" products. These products are for the health and diet conscious
consumer.
These 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, 2004, 2003, and 2002, sales of whey accounted for approximately 3.3%,
5% and 7%, respectively, of the Company's sales.
(4) Provolone, Cheddar and Ricotta
During the fiscal years ended March 31, 2004, 2003 and 2002, sales of these
cheeses accounted for approximately 4.7%, 5.8% and 3%, respectively, of the
Company's sales.
Production Facilities
Currently, the Company produces all of its products at its manufacturing plant
in Franklin County, Swanton, Vermont. Franklin County is Vermont's largest milk
producing area. The plant has 91 full-time employees. The Company has equipment
to shred, dice, vacuum package, gas flush bag package, and label its products.
The Company's facility has the capacity to produce approximately 3,000,000
pounds of cheese product per month and process 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 approval for the possible 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.
The facility dries whey into a product referred to as popcorn whey, which its
mills and sells to companies for mixture with other ingredients as a component
of 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 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 and state
regulations, meet customer specifications and assure consistent product quality.
The Company currently employs three 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
to 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 and industrial
segment 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 the Company's in house sales force and network of non-exclusive food
brokers who then sell to approximately 140 distributors throughout the eastern
United States. For the fiscal years ended March 31, 2004, 2003 and 2002, sales
of the Company's products to the food service segment of the cheese market
accounted for approximately 90.5%, 69% and 69% of revenues, respectively.
Virtually all of such sales were of the Company's low moisture mozzarella and
reduced fat and non-fat low moisture mozzarella cheeses. In the fiscal years
ended March 31, 2004, 2003 and 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 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, 2004,
2003 and 2002, sales of the Company's products to the industrial segment of the
cheese market accounted for approximately 6%, 22% and 22% of revenues,
respectively.
The retail segment of the cheese market consists of product sold to customers
for school promotional kits and chain supermarkets. The retail segment accounted
for approximately 2%, 2% and 2% of total sales in 2004, 2003 and 2002,
respectively.
Sales and marketing
The Company has shifted its sales and marketing efforts to emphasize its three
product groups: low moisture mozzarella cheese, reduced fat and non-fat low
moisture mozzarella cheese and pizza cheese. The Company emphasizes the quality
of its mozzarella cheese products and requests premiums for these products that
reflect their quality. The Company's pizza cheese is marketed to the Company's
value conscious customer.
The Company continues to offer its products to customers requiring a private
label as well as customers choosing to sell the Company's brands.
The Company also sells its cheese products as shredded cheese. These products
range from low moisture mozzarella cheese, reduced fat and non-fat low moisture
mozzarella cheese and pizza cheese to various blended cheese products.
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. 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 non-fat mozzarella cheeses 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 non-fat mozzarella 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 pizza cheese product has been positioned to be an alternative to
premium mozzarella, designed for the value conscious customer who won't
sacrifice performance. The Company's pizza cheese product was created to sell at
prices below traditional 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 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 pizza cheese, cheese and reduced fat and non-fat 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 97 full-time employees. Of the 97 employees, six
are in executive and administrative positions, 86 are in production and
distribution, and five are in clerical positions. Of such employees, 91 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 the 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, 2004, 2003, and 2002, was $10,800, $9,000 and
$9,000 respectively. This lease has a purchase option to purchase the property
at fair market value at the end of the ten-year period. This lease was assigned
to UPS Capital Business Credit in conjunction with the whey plant financing.
The Company leases a building for administrative offices and warehouse space for
dry goods across the street from the Vermont facility. The lease is for one year
beginning December 11, 2003 and expires on December 31, 2004, with the right to
renew said lease for an additional term of one year subject to all of the terms
and conditions set forth in the lease. The lease amount is $43,200 per year,
payable in equal monthly installments of $3,600, in advance on the 11th day of
each month. The Company has the right to purchase the premises for the sum of
$610,000 at anytime during the initial term or, if the Company exercises its
option for a renewal term, the renewal term of the lease.
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, 2004, 2003 and 2002, 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, 2004, 2003 and 2002.
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, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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, 2004:
First Quarter 1.190 .820
Second Quarter 1.490 .740
Third Quarter 1.580 1.010
Fourth Quarter 1.420 .840
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
The above quotations represent prices between dealers, do not include retail
mark-ups, markdowns or commissions and do not necessarily reflect actual
transactions.
As of June 28, 2004 there were approximately 470 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.
Issuer Purchase of Equity Securities
The following table sets forth, for each of the months indicated, the
total number of shares purchased by us or on our behalf or by any affiliated
purchaser, the average price paid per share, the number of shares purchased as
part of a publicly announced repurchase plan or program, the maximum number of
shares or approximate dollar value that may yet be purchased under the plan or
programs.
Total Number of Shares Maximum Number of
Purchased as Part of Shares that May Yet
Total Number of Average Price Paid Publicly Announced Be Purchased Under
Period Shares Purchased per Share Plans or Programs the Plan or Programs
---------------- --------- ----------------- --------------------
January 2004 -- -- -- --
February 2004 -- -- -- --
March 2004 -- -- -- --
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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2004 2003 2002 2001 2000
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Net Sales ..................... $ 42,174 $36,691 $44,915 $41,374 $ 42,810
Net income (loss) ............. 209 (847) (1,540) (1,477) 71
Net income (loss) per share.... .07 (.26) (.52) (.50) .02
Weighted average common
and common equivalent
shares outstanding ............ 3,162,410 3,229,220 2,961,392 2,971,342 2,971,342
Balance Sheet Data (in thousands)
March 31
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2004 2003 2002 2001 2000
------ ------ ------ ------ -------
Total assets ................... $18,960 $16,762 18,827 $17,194 $15,223
Long-term debt and capital
Lease obligations .............. 6,423 7,143 6,771 9,250 7,970
Total liabilities .............. 15,953 13,817 18,583 15,924 12,486
Working capital ................ (383) (238) (3,885) 1,103 1,945
Stockholders' equity............ 3,007 2,945 244 1,270 2,737
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 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, 2004 compared to the year ended March 31, 2003
Sales for the year ended March 31, 2004 increased to $42,174,000 from
$36,691,000 for the comparable period in 2003, an increase of $5,483,000 (or
14.9%). Approximately $6,143,000 (or 112%) of such increase was due to an
increase in the average selling price for cheese. The increase in average
selling price was the result of an increase in the CME Block Market prices
resulting in a higher selling price per pound of cheese. This increase was
partially offset by a decrease in the number of pounds of cheese sold reducing
sales by approximately $277,000 or (5%). The remaining $383,000 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, 2004
and March 31, 2003, approximately 27,000,000 and 27,200,000 pounds of cheese and
10,100,000 and 12,160,000 pounds of whey were sold, respectively.
During the fiscal year, ended March 31, 2004, the average quarterly selling
price ranged from approximately $1.22 to $1.64. During the fiscal year ended,
March 31, 2003, the average quarterly selling price ranged from approximately
$1.24 to $1.34. 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, 2004 and March 31, 2003, sales of whey amounted to
$1,412,000 and $1,795,000, respectively.
Cost of sales and gross profit margin for the year ended March 31, 2004 were
$39,287,000 (or 93.1% of sales) and $2,887,000 (or 6.9% of sales), respectively,
compared to a cost of sales and gross profit margin of $35.786,000 (or 97.5% of
sales) and $905,000 (or 2.5% of sales), respectively, for the comparable period
in 2003. Higher selling prices offset the increase in milk prices along with
large reductions in labor costs, freight charges and repairs and maintenance.
This increase was partially offset by an increase in whey removal, insurance
expense and parts and supplies for the why plant.
Selling, general and administrative expenses for the year ended March 31, 2004
amounted to $1,932,000 (or 4.7% of sales) compared to $1,813,000 (or 5.0 % of
sales) for the comparable period in 2003.
Selling expenses are mainly variable in nature. The most significant component
of selling expense is sales commission expense, which was $330,000 and $302,000
in 2004 and 2003, respectively. The increase resulted from an increase in
commissionable sales in the year ended March 31, 2004. Advertising expense also
increased over the previous year to $50,000 in 2004 compared to $28,000 in 2003.
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:
2004 2003
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Professional fees $ 268,000 $166,000
Payroll 346,000 280,000
Provision for bad debts 43,000 145,000
The increase in professional fees of $92,000 can be attributed to expenses
associated with improving the efficiency of production and implementing good
manufacturing procedures. The increase in payroll costs is the result of adding
a chief financial officer.
Interest expense for the year ended March 31, 2004 amounted to $800,000 compared
to $812,000 for the year ended March 31, 2003, a decrease of $12,000. This
decrease is the result of lower interest rates and the repayment of $500,000 on
our term loan with Co-Bank.
The provision for income tax for the years ended March 31, 2004 and 2003 of
$1,000 and $7,000 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 profit of $209,000 for 2004 was $2,004,000 more than the loss
of $1,795,000 for the comparable period in 2003. 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, 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 (or18.3%).
Approximately $6,937,000 (or 84.4%) of such decrease was due to a decrease in
the average selling price of 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 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
------- -------
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.
Liquidity and Capital Resources
The Company has available a $5,000,000 revolving credit facility that is to
expire on November 30, 2004 (with St. Albans Cooperative participating therein
to the extent of $4,000,000 and the Vermont Economic Development Authority
insuring $1,000,000 of mortgage insurance). The rate of interest on amounts
borrowed against the revolving credit facility is based upon the New York prime
rate plus 3% (6.00% at March 31, 2004 and 5.25% at March 31, 2003). 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. 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, 2004, the Company had negative working capital of ($354,000) 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 March 31, 2004, $4,281,000 was outstanding under such revolving credit line
of credit and $219,000 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 as
of March 31, 2004 and the balance is repayable in three consecutive annual
installments of $500,000.00 due on May 1, 2004, May 1, 2005 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 any further 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, 2004, cash provided by operating activities was
$397,000. Net income of $209,000 increased cash. In addition, a decrease in
other assets and an increase in accounts payable provided cash while an increase
in accounts receivable, inventory, prepaid expenses and a decrease in accrued
expenses decreased cash.
Net cash used by investing activities was $428,000 for March 31, 2004, which
represented $428,000 of purchases for plant and equipment.
Net cash provided by financing activities was $638,000 for the year ended March
31, 2004, which represented an increase in borrowing against the revolver loan
account, but was partially offset by payments against long term debt.
New 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 adoption of FIN 46 has not
had 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
adoption of SFAS No. 149 has not had 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 liablity 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 adoption of
SFAS No. 150 has not had material effect on its financial position, results of
operations or cash flows.
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.
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.
Off Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements.
Contractual Obligations
Payment due by period
Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years
Long Term Debt Obligations $7,134,000 $711,000 $2,439,000 $395,000 $3,589,000
Capital Lease Obligations -- -- -- -- -0-
Operating Lease Obligations 680,000 108,000 324,001 24,000 124,000
Purchase Obligations -0- -0- -0- -0- -0-
Other Long Term Liabilities Reflected on the
Registrant's Balance Sheet under GAAP -0- -0- -0- -0- -0-
Total 7,814,000 819,000 2,763,001 419,000 3,713,000
Safe Harbor Statement
This Annual Report on Form 10-K (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, 2004 and March 31, 2003
amounted to $5,781,000, and $4,924,000, respectively. In as much as this 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 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 Registered Public Accounting Firm -
Mahoney Cohen & Company, CPA, P.C. F-2
Independent Auditors' Report - Wiss & Company, LLP F-3
Independent Auditors' Report - Citrin Cooperman & Company, LLP F-4
Consolidated Balance Sheets F-5
Consolidated Statements of Operations F-7
Consolidated Statements of Stockholders' Equity F-8
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-10
F-1
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of Lucille Farms,
Inc. and Subsidiaries as of March 31, 2004, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lucille Farms, Inc. and
Subsidiaries at March 31, 2004, and the results of its operations and its cash
flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
June 17, 2004
F-2
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.
/s/ WISS & COMPANY, LLP
Livingston, New Jersey
June 26, 2003, except for note 14 for which the date of July 14, 2003
F-3
Independent Auditors' Report
Shareholders
Lucille Farms, Inc.
and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Lucille Farms, Inc. and Subsidiaries for
the year ended March 31, 2002. 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 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the results of operations and cash flows of
Lucille Farms, Inc. and Subsidiaries for the year ended March 31, 2002 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-4
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
2004 2003
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 611,000 $ 4,000
Accounts receivable, net of allowances of
$170,000 in 2004 and $189,000 in 2003 4,618,000 3,530,000
Inventories 3,234,000 2,185,000
Prepaid expenses and other current assets 684,000 616,000
Due from officers -- 101,000
----------- -----------
Total Current Assets 9,147,000 6,436,000
----------- -----------
Property, Plant and Equipment, net 9,579,000 10,003,000
----------- -----------
Other Assets:
Deferred loan costs, net 215,000 215,000
Other 19,000 108,000
----------- -----------
Total Other Assets 234,000 323,000
----------- -----------
TOTAL ASSETS $18,960,000 $16,762,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit loan 4,281,000 $ 2,924,000
Accounts payable 3,970,000 2,425,000
Current portion of long-term debt 711,000 710,000
Accrued expenses 568,000 615,000
----------- -----------
Total Current Liabilities 9,530,000 6,674,000
----------- -----------
Long-Term Liabilities:
Long-term debt, less current portion 6,423,000 7,143,000
----------- -----------
TOTAL LIABILITIES 15,953,000 13,817,000
F-5
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 1,000
Common stock, $0.001 par value, 25,000,000
shares authorized, at March 31, 2004 and
March 31, 2003, respectively; 3,354,675 shares
issued, 3,137,937 outstanding at March 31, 2004
and 3,354,675 shares issued, 3,284,775
outstanding at March 31, 2003. 3,000 3,000
Additional paid-in capital 8,548,000 8,548,000
Accumulated deficit (5,234,000) (5,443,000)
----------- -----------
3,319,000 3,110,000
Less: cost of 216,238 shares in 2004 and 69,900
shares in 2003 of treasury stock (312,000) (165,000)
----------- -----------
Total Stockholders' Equity 3,007,000 2,945,000
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $18,960,000 $16,762,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-6
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
2004 2003 2002
------------ ------------ ------------
Sales $ 42,174,000 $ 36,691,000 $ 44,915,000
Cost of sales 39,287,000 35,786,000 43,897,000
------------ ------------ ------------
Gross profit 2,887,000 905,000 1,018,000
------------ ------------ ------------
Other expense (income):
Selling 915,000 713,000 728,000
General and administration 1,017,000 1,100,000 944,000
Gain on debt restructuring -- (875,000) --
Other income (55,000) (5,000) (12,000)
Interest expense 800,000 812,000 896,000
------------ ------------ ------------
Total other expense (income) 2,677,000 1,745,000 2,556,000
------------ ------------ ------------
Income (Loss) before income
taxes 210,000 (840,000) (1,538,000)
Provision for income taxes 1,000 7,000 2,000
------------ ------------ ------------
Net Income (Loss) $ 209,000 $ (847,000) (1,540,000)
------------ ------------ ------------
Net Income (Loss) per Share:
Basic and Diluted: $ .07 $ (.26) $ (0.52)
============ ============ ============
Weighted average shares outstanding
used to compute net income (loss) per share:
Basic and Diluted 3,162,410 3,229,220 2,961,392
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
Preferred Stock Common Stock Additional Accumulated Treasury Stock
Shares Amount Shares Amount Paid-in capital Deficit Shares Amount Total
------ ------ ------ ------ --------------- ------- ------ ------ -----
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 service 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 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
Purchase
of treasury stock 146,838 (147,000) (147,000)
Retirement of
treasury stock (53,237) -- (53,000) (53,237) 53,000 --
Net Income 209,000 209,000
Balance
March 31, --- ------ --------- ------ ---------- ----------- ------- --------- ----------
2004 799 $2,000 3,301,438 $3,000 $8,495,000 $(5,234,000) 163,501 $(259,000) $3,667,050
=== ====== ========= ====== ========== =========== ======= ========= ==========
See accompanying notes to consolidated financial statements
F-8
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
2004 2003 2002
------ ------ ------
Cash Flows from Operating Activities:
Net income/(loss) $ 209,000 $ (847,000) $(1,540,000)
Adjustments to reconcile net income/(loss)
to net cash flow from operations
Depreciation and amortization 852,000 950,000 741,000
Provision for doubtful accounts 43,000 145,000 12,000
Deferred income taxes -0- 72,000 -0-
Inventory evaluation allowance (350,000) 257,000 -0-
Non-cash compensation -0- 5,000 14,000
Gain on Debt Restructuring -0- (875,000) -0-
(Decrease) increase in assets:
Accounts receivable (1,131,000) 13,0009 14,000
Inventories (699,000) 727,000 (1,006,000)
Prepaid expense and other current assets (114,000) (452,000) (44,000)
Other assets 89,000 10,000 (21,000)
Increase (decrease) in liabilities:
Accounts payable 1,544,000 1,119,000 1,309,000
Deferred income taxes -0- (72,000) -0-
Accrued expenses (46,000) 231,000 (6,000)
----------- ---------- ---------
Cash flow provided by operating activities 397,000 1,283,000 373,000
----------- ---------- ---------
Cash Flows from Investing Activities:
(Increase) of officers' loans -- -0- (8,000)
Purchase of property, plant and equipment (428,000) (432,000) (1,673,000)
----------- ---------- ----------
Net cash used by investing activities (428,000) (432,000) (1,681,000)
----------- ---------- ----------
Cash Flows from Financing Activities:
Repayments of
revolving credit loan 1,357,000 (820,000) (523,000)
Proceeds from long-term debt -0- -0- 2,000,000
Principal payments of long-term debt (719,000) (119,000) (183,000)
Increase in loan costs -0- (83,000) (23,000)
----------- ---------- ---------
Net cash provided (used) by financing activities 638,000 (1,022,000) 1,271,000
----------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents 607,000 (171,000) (37,000)
Cash and cash equivalents - beginning 4,000 175,000 212,000
----------- ---------- ---------
CASH AND CASH EQUIVALENTS - ENDING $ 611,000 $ 4,000 $ 175,000
----------- ---------- ---------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 824,000 $ 789,000 $ 850,000
Income taxes 1,000 7,000 2,000
Non-Cash Investing and Financing Activities
Additions to Property, plant and equipment -- -- --
Acquired by preferred stock issued -- -- 540,000
Treasury Stock acquired in settlement loan
and accrued interest 147,000 -- 40,000
See accompanying notes to consolidated financial statements
F-9
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Lucille Farms, Inc. and its wholly owned subsidiaries (the "Company") are
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 sold in a highly competitive
market place 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 an original 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. 104,
"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.
Advertising
Advertising is expensed as incurred. Advertising expense was $41,000, $28,000
and $15,000 for 2004, 2003 and 2002, respectively.
Inventories
Inventories are stated at the lower of cost or market determined on a first in,
first out method of accounting.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization
is being provided on a straight-line basis over the estimated useful lives of
the assets as follows:
Plant 35 years
Equipment 3-10 years
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
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.
F-10
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company provides for deferred income taxes resulting from temporary
differences in reporting certain income and expense items (principally
depreciation) for income tax and financial reporting purposes.
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. No potentially dilutive securities were included in the diluted earnings
per share computation for 2003 and 2002 as a result of the net losses and to
include them would be anti-dilutive.
The Company had various potentially dilutive securities during the periods
presented, including stock options and warrants. See Note 12.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price at the date of the grant over the amount an employee must
pay to acquire the stock. Because the Company grants options at a price equal to
the market price of the stock at the date of grant, no compensation expense is
recorded. As required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), the Company discloses
pro forma net income and earnings per share as if the fair value method had been
applied (see Note 12). 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).
Sales concentration
In the fiscal years ended March 31, 2004, 2003 and 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
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 liablity 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 material effect on its financial
position, results of operations or cash flows.
F-11
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 and carries credit
insurance on large and mid-sized accounts.
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, 2004 March 31, 2003
------------------- -------------------
Finished goods $2,164,000 $1,695,000
Raw materials 691,000 440,000
Supplies and packaging 379,000 400,000
---------- ----------
3,234,000 $2,535,000
Less: Reserve for Obsolescence -0- 350,000
---------- ----------
$3,234,000 $2,185,000
---------- ----------
The Company recognized a reserve for inventory obsolescence that totaled
$350,000 in 2003 of which inventory was sold in 2004.
F-12
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, 2004 March 31, 2003
---------------- ------------------
Land $ 25,000 $ 25,000
Plant 4,867,000 4,728,000
Equipment 10,814.000 10,528,000
Whey facility 2,143,000 2,139,000
----------- -----------
$17,849,000 $17,420,000
Less: accumulated
depreciation and
amortization 8,270,000 7,417,000
----------- -----------
$ 9,579,000 $10,003,000
----------- -----------
..
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. During
2004, $146,838, of principal and accrued interest, was repaid by the Company
acquiring shares of its common stock from the officers.
NOTE 6 - REVOLVING CREDIT LOAN
The Company had a $4,500,000 revolving credit facility at March 31, 2004. The
loan was to expire on May 31, 2004. The bank has increased the amount of the
loan to $5,000,000, and has extended the loan's maturity to November 30, 2004 at
which time the outstanding principal is due. The rate of interest on amounts
borrowed against the revolving credit facility is based upon the prime rate plus
3% (7.0% at March 31, 2004 and 5.25% at March 31, 2003). 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, 2004, the
Company was in default of its debt coverage ratio covenant. On April 6, 2004,
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. This loan is secured by
substantially all of the Company's assets.
F-13
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following:
March 31, 2004 March 31, 2003
------------------- -------------------
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 $3,536,000 $3,639,000
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 896,000 919,000
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% at March 31, 2004). Interest 1,500,000 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 1,100,000
Equipment notes payable in monthly installments
ranging from $972 to $3,006, including interest at
rates of 9.75% to 11%, through September 2005.
The notes are collateralized by equipment with a
net book value of $314,000 at March 31, 2004 102,000 195,000
Discounted obligations under capital leases -- 58,000
---------- ----------
7,134.000 7,853.000
Less: current portion 711,000 710,000
---------- ----------
TOTAL 6,423,000 $7,143,000
As of March 31, 2004 long-term debt matures as follows:
2005 711,000
2006 1,775,000
2007 664,000
2008 181,000
2009 214,000
Thereafter 3,589,000
----------
7,134,000
F-14
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, 2004 March 31, 2003
--------------------- --------------------
Deferred Deferred
Deferred Tax Deferred Tax
Tax Asset Liability Tax Asset Liability
------------ ----------- ---------- ------------
Depreciation $ -- $821,000 $ $725,000
Provision for doubtful accounts 65,000 72,000
Reserve for obsolescence -- 98,000
Reserve for compensated absences 14,000 22,000
Operating loss carryforwards 3,227,000 3,021,000
Contribution carryforwards 2,000 2,000
------------ ----------- ---------- --------
3,308,000 821,000 3,215,000 725,000
Valuation allowance 2,487,000 -- 2,490,000
------------ ----------- ---------- --------
$ 821,000 $821,000 $725,000 $725,000
------------ ----------- ---------- --------
The net change in the valuation allowance for the periods presented were as
follows:
March 31,
-------------------------------
2004 2003 2002
------ ------ ------
Valuation allowance increase/
(decrease) $(3,000) $441,000 $598,000
The provision for income taxes represents the provision for minimum state taxes.
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,
-------------------------------
2004 2003 2002
------ ------ ------
Expected tax at U.S. Statutory Rate 34.0% (34.0)% (34.0)%
State and local income taxes .5% .1 .1
Permanent differences and other -- (.6) (4.9)
Prior year tax adjustment (32.6) -- --
Valuation allowance for operating loss
Carryforwards (1.4) 34.6 38.9
------ ------ ------
0.5% .1 % .1%
------ ------ ------
Federal operating loss carry forwards totaled $8,491,000 as of March 31, 2004
and expire on March 31, of the following years:
2009 $ 77,000
2011 913,000
2013 2,122,000
2015 269,000
2016 1,562,000
2022 1,674,000
2023 1,274,000
2024 600,000
----- ----------
Total $8,491,000
==========
F-15
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 $17,000 and $19,000 in the years ended
March 31, 2004 and 2003, respectively. Future minimum payments under the leases
are approximately $17,000 at March 31, 2004.
The Company leases a building for administrative offices and warehouse space for
dry goods with a purchase option (subject to terms and conditions). The lease
expires December 31, 2004 with the right to renew for an additional year. The
lease amount is $43,200 per year in equal monthly installments.
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, 2004, 2003 and 2002 was $10,800, $9,000
and $9,000 respectively, 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 $24,868,000 for 2004, $21,290,000 for
2003 and $28,454,000 for 2002, 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, 2004, 2003 and 2002.
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, 2004, 2003 and 2002.
The Company owes approximately $140,000 of legal fees to 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-16
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 shareholders
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 expired 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
have been calculated, on the date of grant using the Black Scholes
option-pricing model with the following assumptions:
F-17
March 31, 2003
----------------------
Options Warrants
---------- ----------
Expected dividend yield -0-% -0-%
Risk free interest rate 4.0% 4.0%
Expected stock volatility 112.6% 111.0%
Expected option life 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 125
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" (FAS123). Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock date of grant, no compensation expense was recognized. See "New
Pronouncements".
Years Ended March 31,
---------------------------------------------
2004 2003 2002
---------- ----------- ----------
Net income (loss):
As reported $209,000 $(847,000) $(1,540,000)
Pro forma 135,000 $(924,000) $(1,546,000)
Net earnings (loss) per share:
As reported $.07 $(.26) $ (.52)
Pro forma .04 $(.29) $(.52)
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 2004 2003 2002
----------------- --------- ---------- --------
Outstanding - beginning $1.50 to $4.00 370,000 105,000 245,000
Issued $1.80 and $3.9375 -0- 275,000 10,000
Terminated $3.9375 and $4.00 50,000 10,000 150,000
----------------- ------- ------- --------
Outstanding - ending $1.50 to $4.00 320,000 370,000 105,000
F-18
The following table summarizes information about stock options outstanding at
March 31,2004:
Range of Number Weighted Average Remaining Weighted Average
Exercise Prices Outstanding Life (in years) Exercise Price
-------------------- -------------- -------------------------- ---------------------------
$ 1.50 - 3.00 300,000 8.0 $ 2.83
$ 3.01 - 4.00 20,000 4.0 $ 3.82
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.
On June 1, 2003, the Company acquired 146,838 shares of its common stock valued
at $1.00 per share, in payment of loans, due from three of its officers.
Preferred Share Purchase Rights
On June 2, 1997, the Board of Directors declared a dividend distribution of one
preferred share purchase right on each outstanding share of common stock. The
rights will be exercisable only if a person or group acquires 20% or more of the
Company's common stock or announces a tender offer the consummation of which
would result in ownership by a person or group of 20% or more of the common
stock. Each right will entitle stockholders to buy one one-hundredth of a share
of a new series of preferred stock at an exercise price of $8.00. In the event
of an acquisition, merger, or other business combination transaction after a
person has acquired 20% or more of the Company's outstanding common stock, each
right will entitle its holder to purchase, at the right's then-current exercise
price, a number of the acquiring company's common shares having a market value
of twice such price. In addition, if a person or group acquires 20% or more of
Company's outstanding common stock, each right will entitle its holder (other
than such person or members of such group) to purchase, at the right's
then-current price, a number of the Company's common shares having a market
value of twice such price. Following the acquisition by a person or group of
beneficial ownership of 20% or more of the Company's common stock and prior to
an acquisition of 50% or more of the common stock, the Board of Directors may
exchange the rights (other than rights owned by such person or group), in whole
or in part, at an exchange ratio of one share of common stock (or approximately
one one-hundredth of a share of the new series of junior participating preferred
stock) per right. Prior to the acquisition by a person or group of beneficial
ownership 20% or more of the Company's common stock, the rights are redeemable
for one tenth of one cent per right at the option of the Board of Directors. In
May 2002 the Board of Directors amended the rights agreement to exclude the
financing with St. Albans Cooperative Creamery, Inc. and to provide for the
expiration of the rights upon consummation of the financing.
NOTE 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.
F-19
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, a gain
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-20
Schedule II
Valuation and Qualifying Accounts:
- --------------------------------------------------------------------------------
COL A COL B COL C COL D COL E
- ----- ----- ----- ----- -----
Additions
Balance At Additions (Deductions) Other Changes Balance
Beginning Charged (Credited) to Add (Deduct) at End of
Classification Of Period Cost and Expenses Described Period
- -------------- --------- ----------------- --------- ------
YEAR ENDED March 31, 2004
Reserves and allowances deducted
From asset account:
Allowance for uncollectible accounts 189,000 43,000 (62,000) 170,000
Reserve on inventory 350,000 (350,000) (350,000) --
Valuation for deferred tax asset 2,490,000 (3,000) 2,487,000
----------- ---------- --------- -----------
3,029,000 (310,000) (62,000) (2,657,000)
YEAR ENDED MARCH 11, 2003:
Reserves and allowances deducted
From asset account:
Allowance for uncollectible accounts 144,000 145,000 (100,000) 189,000
Reserve on Inventory 93,000 257,000 350,000
Valuation for deferred tax asset 1,951,000 539,000 2,490,000
----------- ---------- --------- -----------
$ 2,188,000 $ 941,000 $(100,000) $ 3,029,000
YEAR ENDED MARCH 31, 2002:
Reserves and allowances deducted
From asset account:
Allowance for uncollectible 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
--------- ------- ----------
$1,485,000 703,000 $2,188,000
(1) uncollectible accounts written off, net of revenues
F-21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At the stockholders' meeting on March 31, 2004, the shareholders approved
Mahoney Cohen & Co., CPA, PC as the Company's independent accounting firm for
the year ended March 31, 3004, replacing our former accounting firm Wiss &
Company LLP.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by 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.
The Company and its auditors have identified deficiencies within its internal
control framework which, if left uncorrected could result in a material control
weakness. Our internal control deficiencies relate to the account reconciliation
process and lack of compliance with established procedures for monitoring and
adjusting balances relating to certain accruals and provisions. As a result of
the above actions, considerable improvements in the Company's internal controls
including a reorganization and centralization of its accounting department are
currently being implemented.
ITEM 9B OTHER INFORMATION
None.
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 64 Chairman of the Board of Directors
Jay M. Rosengarten 59 Chief Executive Officer and Director
Alfonso Falivene 60 President and Director
Carl Millerick 58 Vice President-Operations
Albert N. Moussab 51 Chief Financial Officer
George Bell 59 Director
Ralph Singer 54 Director
Frank DiPasquale 47 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, and BioLife
Solutions, Inc., a publicly held company engaged in the research, development
and sale of products for use in low temperature medicine.
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. Millerick, Vice President-Operations, has worked for the Company from April,
2002 to the present. From 1988 to 2002, Mr. Milerick was the president and owner
of Milerick Associates, a consulting firm providing advisory services to the
dairy industry.
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. Mr. Frank Di Pasquale.
Mr. Frank DiPasquale has worked for the National Grocers Association since 1997,
where he is Senior Vice President. Mr. DiPasquale was the head of human
resources management and operational services for all of Kmart's Super Kmart
Centers from 1992 to 1997. Mr. DiPasquale has a B.B.A. in Marketing Management
from Iona College in New York, a Graduate Degree in Leadership Development from
Hartford University in Connecticut and a Master's of Arts in Human Resource
Management/Organizational Development from Marist College in New York. He is on
the Advisory Board of Second Harvest, the National Skills Standards and Western
Michigan University's Food Marketing Program and the Editorial Board at St.
Joseph's University Food Marketing Program.
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.
BOARD COMMITTEES
Audit Committee. The Board of Directors has an Audit Committee which operates
under a written charter adopted by the Board of Directors. A copy of the Audit
Committee Charter is attached to this Proxy Statement as Exhibit A. The Audit
Committee held one meeting during the year ended March 31, 2004. The Audit
Committee is comprised of Messrs. Breslow, Bell and Singer. Messrs. Bell and
Singer are "independent directors" as defined under NASDAQ rules. Mr. Bell is
qualified as an audit committee financial expert within the meaning of the SEC
regulations.
Compensation Committee. Management compensation for fiscal year 2004 was
determined by the entire Board and reviewed and approved by the independent
members of the Board. Subsequent to such determination, the Board of Directors
formed a Compensation Committee which did not meet during 2004. The role of the
Compensation Committee is to evaluate the performance of the Company's executive
officers, and to determine and approve their compensation. The Compensation
Committee is comprised of Messrs. Breslow, Bell and Singer.
Nominating Committee. The Board of Directors has no standing nominating
committee. The Company believes that obtaining input from all of its directors
in connection with Board nominations enhances the nomination process. The
Company currently does not have a charter with regard to the nomination process.
The nominations of the directors standing for election or re-election at the
Meeting were unanimously recommended for selection by the independent directors,
and were unanimously approved by the Board of Directors.
The Company does not have a formal policy concerning stockholder recommendations
of nominees to the Board of Directors. The need for such a policy has not arisen
since, to date, the Company has not received any recommendations from
stockholders requesting that the Board of Directors consider a candidate for
inclusion among the Board's slate of nominees in the Company's proxy statement.
The absence of such a policy does not mean, however, that a recommendation would
not have been considered had one been received. The Company will consider
director candidates recommended by stockholders. Any stockholder desiring to
make such a recommendation should send the recommendation, in writing, to the
Corporate Secretary at the address of the Company set forth on the first page of
this Proxy Statement, no later than the date by which stockholder proposals for
action must be submitted. The recommendation should include the recommended
candidate's biographical data, and should be accompanied by the candidate's
written consent to nomination and to serving as a director, if elected.
The Company's goal is to assemble a Board of Directors that brings to the
Company a variety of perspectives and skills derived from business and
professional experience. The Company does not have any formal rules or policies
regarding minimum qualifications for nominees, but expects that its candidates
be of the highest ethical character, share the values of the Company, have
reputations, both personal and professional, consistent with the image and
reputation of the Company, be highly accomplished in their respective field, and
possess the relevant expertise and experience necessary to assist the Board and
the Company to increase stockholder value.
The Board of Directors identifies nominees by first evaluating the current
members of the Board of Directors willing to continue in service. Current
members of the Board with skills and experience that are relevant to the
Company's business and who are willing to continue in service are considered for
re-nomination, balancing the value of continuity of service by existing members
of the Board with that of obtaining a new perspective. If any member of the
Board does not wish to continue in service or if the Board of Directors decides
not to re-nominate a member for re-election, the Board of Directors will seek to
identify nominees that possess the characteristics outlined above. Current
members of the Board of Directors are polled for suggestions. Research also may
be performed to identify qualified individuals. To date, the Company has not
engaged third parties to identify, evaluate, or assist in identifying potential
nominees, although the Company reserves the right in the future to retain a
third party search firm, if necessary.
In evaluating director nominees, the Board of Directors may consider the
following factors:
o the appropriate size and the diversity of the Company's Board of
Directors;
o the needs of the Company with respect to the particular talents and
experience of its directors;
o the knowledge, skills and experience of nominees, including experience
in technology, business, or finance,
o in light of prevailing business conditions and the knowledge, skills
and experience already possessed by
o other members of the Board;
o familiarity with national and international business matters;
o experience with accounting rules and practices; and
o the need to satisfy governance and other standards set by the SEC and
NASDAQ.
The Board of Directors may also consider such other factors as it may deem to be
in the best interests of the Company and its stockholders.
COMMUNICATING WITH DIRECTORS
Stockholders may contact any of our directors or our Board as a group by writing
to them c/o Lucille Farms, Inc., 150 River Road, P.O. Box 517, Montville, New
Jersey 07045, Att: Al Moussab. All communications will be received, processed
and forwarded to the directors by the Corporate Secretary. You will receive a
written acknowledgement from the Corporate Secretary upon receipt of your
communication if you include a return address.
AUDIT COMMITTEE REPORT
The Company's management is responsible for preparing the Company's financial
statements, and the independent auditors are responsible for auditing those
financial statements. The Audit Committee is responsible for monitoring and
reviewing these processes on behalf of the Board of Directors.
The Audit Committee has reviewed and discussed the audited financial statements
with management. Management represented to the Audit Committee that the
Company's consolidated financial statements were prepared in accordance with
generally accepted accounting principles.
The Audit Committee discussed with the independent auditors matters required to
be discussed by Statement on Auditing Standards No. 61 (Communication With Audit
Committees). In addition, the Audit Committee has received the written
disclosures and the letter from the independent auditors required by
Independence Standards Board Standard No. 1 (Independence Discussions With Audit
Committees), and has discussed with the independent auditors the auditors'
independence from the Company and its management. In concluding that the
auditors are independent, the Audit Committee considered, among other factors,
whether the nonaudit services provided by auditors were compatible with their
independence.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors (and the Board subsequently
approved the recommendation) that the audited financial statements be included
in the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
2004 for filing with the Securities and Exchange Commission.
Audit Committee
Howard S. Breslow
George Bell
Ralph Singer
CODE OF ETHICS
The Company has a Code of Ethics that is applicable to all employees of the
Company, including the Company's executive officers. The Company will provide an
electronic or paper copy of the Code of Ethics free of charge upon request.
Requests may be made by calling Investor Relations at (973) 334-6030, or by
writing to Investor Relations at 150 River Road, P.O. Box 517, Montville, New
Jersey 07045.
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.
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, 2004.
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------
Name and Principal Fiscal Other Annual
Positions Year Salary Bonus Compensation(1)
- ------------------------ ----------- --------- --------- -----------------------
Jay Rosengarten 2004 $211,000 -- $11,000
Chief Executive Officer 2003 56,000 -- --
2002 50,000(2) -- --
Alfonso Falivene 2004 $106,000 $11,000
President 2003 106,000 -- 9,000
2002 106,000 -- 9,000
Gennaro Falivene 2004 106,000 -- 6,000
Executive Vice 2003 106,000 -- 6,000
President -- Quality 2002 106,000 -- 7,000
Control
(1)Represents health insurance, automobile allowances and/or automobile lease
payments for the benefit of such employee.
(2) Represents consulting fees.
OPTION/SAR GRANTS IN YEAR-ENDED MARCH 31, 2004
In the fiscal year ended March 31, 2004, the Company issued options to purchase
shares of Common Stock to each of the Named Executive Officers, as follows:
Percent of Potential Realized Value
Number of Total at Assumed Annual Rates
Securities Options/SARs of Stock Price
Underlying granted to Appreciation for Option
Options/SAR's Employees in Exercise or Base Expiration Term
Name and Principal Positions granted (#)(1) Fiscal Year Price ($/Sh) Date 5% 10%
- ---------------------------- -------------- ------------- ---------------- ----------- --- ---
Jay M. Rosengarten,
Chief Executive Officer 250,000 91% $3.00 10/24/2012 $549,752 $875,388
Alfonso Falivene,
President - - - - - -
Gennaro Falivene,
Executive Vice President - - - - - -
- -------------------------------------------------------------------------------
(1) Options to acquire shares of Common Stock.
AGGREGATED OPTIONS/SAR EXERCISES AND OPTION/SAR VALUES FOR THE FISCAL YEAR ENDED
MARCH 31, 2004
The following table provides information related to options exercised by
each of the Named Executive Officers during the year ended March 31, 2004 fiscal
year and the number and value of options held at March 31, 2004. The Company
does not have any outstanding stock appreciation rights. None of the options
were in the money at year ended March 31, 2004.
Number of Securities Underlying Value of Unexercised in the
Unexercised Options/SAR at money Options/SAR At Fiscal
Fiscal Year End (#) Year End ($)(1)
------------------------------- ----------------------------
Shares
Acquired On Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Jay M. Rosengarten - - 100,000 175,000 - -
Alfonso Falivene - - - - - -
Gennaro Falivene - - - - - -
- -------------------
(1) The closing price for the Common Stock as reported on the Nasdaq on March
31, 2003 was $1.05.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
During the fiscal year ended March 31, 2004, the entire Board of
Directors held primary responsibility for determining executive compensation
levels. The goals of the Company's compensation program is to align compensation
with business objectives and performance and to enable the Company to attract,
retain and reward executive officers and other key employees who contribute to
the long term success of the Company.
The Chief Executive Officer's compensation for the fiscal year ended
March 31, 2004 was determined by the Board of Directors (without the vote of Mr.
Jay M. Rosengarten) based on the anticipated performance in fiscal 2004 and the
level of salaries of chief executive officers in a peer group consisting of
cheese manufacturers and/or food processors having sales levels comparable to
the Company.
BOARD OF DIRECTORS
Howard S. Breslow
Alfonso Falivene
Jay Rosengarten
Ralph Singer
George Bell
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.
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, 2004, 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".
Comparison of Cumulative Total Stockholder Return
The following chart compares the percentage change in the cumulative
total stockholder return of the Common Stock during the period form March 31,
1999 through the fiscal year ended March 31, 2004 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, 1999, and in each of
the stocks included in the NASDAQ Composite Index and the Company Peer Group.
[CHART OMITTED]
STOCK PERFORMANCE GRAPH
CRSP Total Return Index for: 03/1999 03/2000 03/2001 03/2002 03/2003 03/2004
-------- -------- -------- ------- ------- -------
Lucille Farms, Inc. 100.0 161.5 73.1 60.6 30.5 37.5
Nasdaq Stock Market (US Companies) 100.0 185.8 74.4 75.0 55.0 81.2
NASDAQ Stocks (SIC 5140-5149 US
Companies) Groceries and Related Products 100.0 84.6 118.6 157.0 130.5 182.0
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 on 3/31/1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table, as of May 24, 2004, 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.
Amount and Nature
of Beneficial Ownership Percent of Class
---------------------- ---------------------
Name and Address of 5% Series B Series B
Owners Common Stock Prfd. Stock Common Stock Pfd. Stock
- ----------------------- ----------------- ----------- ------------------- ----------
Gennaro Falivene 280,652 8.9%
Box 125
Swanton, VT 05488
Alfonso Falivene 419,581(1) 13.4%
150 River Rd., P.O. Box 517
Montville, NJ 07045
The Estate of Philip Falivene 200,017(2) 6.4%
Box 125
Swanton, VT 05488
B&W Investment Associates 693,799(3) 22.1%
c/o Breslow and Walker
100 Jericho Quadrangle
Jericho, NY 11753
Howard S. Breslow 693,799(3) 22.1%
100 Jericho Quadrangle
Jericho, NY 11753
Jay M. Rosengarten 300,000(4) 9.6%
Carl Millerick 10,000 ***
St. Albans Cooperative Creamery, Inc. 333,333(5) 583(6) 10.6% 100%
140 Federal Street
St. Albans, VT 05478
All officers and
directors as a group 2,227,382(7) 71.0%(7)
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 300,000 shares issuable under outstanding options, 100,000 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 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 100,000 shares issuable under outstanding options and 500,000
shares issuable under outstanding warrants. See "-Liquidity and Capital
Resources".
EQUITY COMPENSATION PLAN INFORMATION
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted average exercise under equity compensation plans
outstanding options, warrants price of outstanding options, (excluding securities reflected in
Plan Category and rights. warrants and rights 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
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, 2004, 2003, and 2002, 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, 2002, 2003 and 2004, 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, 2002, 2003 and 2004.
ITEM 14 Principal Accountant Fees and Services
The accounting firm of Mahoney Cohen & Company, CPA, P.C. ("Mahoney") served as
the Company's independent accountants for the fiscal year ending March 31, 2004.
During 2003, Wiss & Company LLP ("Wiss") acted as the independent accountants
for the Company and its subsidiaries. The following table sets forth the
aggregate fees billed by Wiss and Mahoney for audit and review services rendered
in connection with the financial statements and reports and for other services
rendered during the fiscal years ended March 31, 2003 and 2004, respectively, on
behalf of the Company:
2004 2003
---- ----
Audit Fees $37,117 $30,489
Audit-related fees(a) $10,000 $ 3,000
Tax fees -0- -0-
All other fees -0- -0-
---------- --------
Total $47,117 $33,489
(a) Includes assistance with reviews of unaudited financial statements.
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, 2004 and March 31, 2003
Consolidated Statement of Operations for the years ended March 31,
2004, March 31, 2003 and March 31, 2002
Consolidated Statement of Stockholders' Equity for the years ended
March 31, 2004, March 31, 2003 and March 31, 2002
Consolidated Statement of Cash Flows for the years ended March 31,
2004, March 31, 2003 and March 31, 2002
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:
Current Report on Form 8-K, filed February 24, 2004, relating to the
results of operations for the period ended December 31, 2003.
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)
21 List of subsidiaries of the Company (1)
31.1 Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2004 dated June 29, 2004
31.2 Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated June 29, 2004
32.1 Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated June 29, 2004
32.2 Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated June 29, 2004
(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.
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: June 29, 2004
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 June 29, 2004
Howard S. Breslow
/s/Jay Rosengarten Director June 29, 2004
Jay Rosengarten
/s/Al Falivene Director June 29, 2004
Al Falivene
/s/George Bell Director June 29, 2004
George Bell
/s/Ralph Singer Director June 29, 2004
Ralph Singer
/s/Frank Di Pasquale Director June 29, 2004
Frank Di Pasquale
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
31.1* Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated June 29, 2004
31.2* Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated June 29, 2004
32.1* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated June 29, 2004
32.2* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated June 29, 2004
* Filed herewith