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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITITES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended:
December 31, 2004
Commission File Number 1-12506
LUCILLE FARMS, INC.
------------------
(Exact Name of Registrant as Specified in its charter)
Delaware 13-2963923
------------------------ ---------------------
(State or other Jurisdiction (I.R.S. Employer
of Incorporation) Identification number)
150 River Road, P.O. Box 517
Montville, New Jersey 07045
--------------------- -----
(Address of Principal Executive Offices) (zip code)
(Registrant's Telephone Number, Including Area Code) (973)334-6030
Former name, former address and former fiscal year, if changed since last
report. N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of Registrant's common stock, par value $.001 per share,
outstanding as of February 14, 2005 was 3,353,937.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, 2004 MARCH 31, 2004
----------------- --------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 156,000 $ 611,000
Accounts receivable, net
of allowances of $201,000
at December 31, 2004 and $170,000
at March 31, 2004 5,589,000 4,618,000
Inventories 3,119,000 3,234,000
Prepaid expenses and other
current assets 746,000 684,000
----------- -----------
Total current assets 9,610,000 9,147,000
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 9,144,000 9,579,000
----------- -----------
OTHER ASSETS:
Deferred costs, net 667,000 215,000
Other 22,000 19,000
----------- -----------
Total other assets 689,000 234,000
----------- -----------
TOTAL ASSETS $19,443,000 $18,960,000
=========== ===========
See accompanying notes to consolidated financial statements
2
LUCILLE FARMS,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDER'S EQUITY
DECEMBER 31, 2004 MARCH 31, 2004
----------------- --------------
(UNAUDITED)
CURRENT LIABILITIES:
Revolving credit loan -- $ 4,281,000
Accounts payable 2,274,000 3,970,000
Current portion of long-term debt 681,000 711,000
Accrued expenses 505,000 568,000
---------- ----------
Total Current Liabilities 3,460,000 9,530,000
---------- ----------
LONG-TERM LIABILITIES:
Revolving credit loan 5,090,000 --
Long-term debt 6,808,000 6,423,000
Long-term accounts payable 1,500,000 --
------------ ------------
13,398,000 6,423,000
------------ ------------
TOTAL LIABILITIES 16,858,000 15,953,000
STOCKHOLDERS' EQUITY:
Preferred Stock $0.001 par value
250,000 shares authorized:
216 shares Series A convertible
issued and outstanding at March 31, 2004 -- 1,000
583 shares Series B convertible
issued and outstanding 1,000 1,000
Common stock, $ 0.001 par value,
25,000,000 shares authorized, 3,570,675
shares issued, 3,353,937 outstanding
at December 31, 2004 and 3,354,675 shares
issued and 3,137,937 outstanding at March 31, 2004 4,000 3,000
Additional paid in capital 8,548,000 8,548,000
Accumulated deficit (5,656,000) (5,234,000)
------------ ------------
2,897,000 3,319,000
Less cost of 216,738 shares of treasury stock (312,000) (312,000)
------------ ------------
Total Stockholders' Equity 2,585,000 3,007,000
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 19,443,000 $ 18,960,000
============ ============
See accompanying notes to consolidated financial statements
3
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31
2004 2003
---- ----
SALES $ 11,628,000 $ 10,850,000
COST OF SALES 11,473,000 10,493,000
------------ ------------
GROSS PROFIT 155,000 357,000
------------ ------------
OTHER EXPENSE:
SELLING 335,000 239,000
GENERAL AND ADMINISTRATIVE 180,000 230,000
INTEREST EXPENSE 237,000 205,000
------------ ------------
TOTAL OTHER EXPENSE 752,000 674,000
------------ ------------
NET LOSS $ (597,000) $ (317,000)
------------ ------------
LOSS PER SHARE
BASIC: $(.18) $(.10)
------------ ------------
DILUTED: $(.18) $(.10)
------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING USED TO COMPUTE
NET INCOME PER SHARE
BASIC: 3,353,937 3,137,937
DILUTED: 3,353,937 3,137,937
See accompanying notes to consolidated financial statements
4
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31
2004 2003
---- ----
SALES $ 36,344,000 $ 30,199,000
COST OF SALES 34,548,000 28,277,000
------------ ------------
GROSS PROFIT 1,796,000 1,922,000
------------ ------------
OTHER EXPENSE:
SELLING 775,000 644,000
GENERAL AND ADMINISTRATIVE 728,000 684,000
INTEREST EXPENSE 714,000 570,000
------------ ------------
TOTAL OTHER EXPENSE 2,217,000 1,898,000
------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES (421,000) 24,000
PROVISION FOR INCOME TAXES 1,000 1,000
------------ ------------
NET INCOME (LOSS) $ (422,000) $ 23,000
------------ ------------
EARNINGS (LOSS) PER SHARE
BASIC: $(.13) $.01
------------ ------------
DILUTED: $(.13) $.01
------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING USED TO COMPUTE
NET INCOME (LOSS) PER SHARE
BASIC: 3,277,748 3,138,862
DILUTED: 3,277,748 3,138,862
See accompanying notes to consolidated financial statements
5
LUCILLE FARMS, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31
2004 2003
---- ----
Cash flows from operating activities:
NET INCOME (LOSS) $ (422,000) $ 23,000
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 717,000 702,000
Provision for doubtful accounts 31,000 25,000
(Increase) decrease in assets:
Accounts receivable (1,002,000) (567,000)
Inventories 115,000 (512,000)
Prepaid expenses and other current
assets (62,000) (32,000)
Other assets (21,000) 106,000
Increase (decrease) in liabilities:
Accounts payable (196,000) 714,000
Accrued expenses (63,000) (149,000)
----------- -----------
Net cash provided by (used in)
operating activities (903,000) 310,000
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (282,000) (301,000)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from revolving
credit loan-net 809,000 686,000
Principal payments on long-term
debt and notes 355,000 (695,000)
Loan financing fees (434,000) --
----------- -----------
Net cash provided by (used in)
financing activities 730,000 (9,000)
----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (455,000) --
CASH AND CASH EQUIVALENTS-BEGINNING 611,000 4,000
----------- -----------
CASH AND CASH EQUIVALENTS-ENDING $ 156,000 $ 4,000
----------- -----------
NON-CASH FINANCING ACTIVITIES:
Conversion of 216 Series A Convertible
Preferred Stock into 216,000 Shares of
Common Stock $ 1,000 $ --
----------- -----------
Refinancing of Revolving Credit Loans
and Long Term Debt $ 7,281,000 $ --
=========== ===========
See accompanying notes to consolidated financial statements
6
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Consolidated Balance Sheet as of December 31, 2004, the Consolidated
Statement of Operations for the three and nine month periods ended
December 31, 2004 and 2003 have been prepared by the Company without
audit. In the opinion of management, the accompanying consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position
of Lucille Farms, Inc. and subsidiaries as of December 31, 2004, the
results of its operations for the three and nine months ended December
31, 2004 and 2003 and its cash flows for the nine months ended December
31, 2004 and 2003.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Although the Company believes that the
disclosures are adequate to make the information presented not
misleading, it is suggested that these financial statements be read in
conjunction with the year-end financial statements and notes thereto for
the fiscal year ended March 31, 2004 included in the Company's Annual
Report on Form 10-K as filed with the SEC.
The accounting policies followed by the Company are set forth in the
notes to the Company's consolidated financial statements as set forth in
its Annual Report on Form 10-K as filed with the SEC.
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities" (VIE's), an interpretation of Accounting Research Bulletin No. 51. FIN
46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. In December 2003, the FASB
issued FIN 46R (revised December 2003), which delays the effective date of the
application of FIN 46 to non-special purpose VIE's acquired or created before
February 1, 2003, to the interim period ended December 31, 2004, and provides
additional technical clarifications to implementation issues. Management does
not anticipate the adoption of this interpretation will have a material impact
on the consolidated financial statements.
In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based
Payment" ("FAS 123R") that will require compensation costs related to
share-based payment transactions to be recognized in the financial statements.
FAS 123R is effective for public entities that do not file as small business
issuers as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005. Management anticipates that the adoption of this
statement may impact the consolidated statements if future grants of options to
employees are incurred.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock options and rewards. Accordingly, no compensation costs for
stock options are included in operating results since all awards were made at
exercise prices at or above their fair value on the dates of grants.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure", amending FASB Statement No. 123,
"Accounting for Stock Based Compensation." This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure about the effects on operating results of an
entity's accounting policy decisions with respect to stock-based employee
compensation. SFAS No. 148 also amends APB Opinion 128, "Interim Financial
Reporting" to require disclosure about those effects in interim financial
information.
7
In April 2004, ten-year options to purchase 5,000 shares of the Company's common
stock were granted to six directors of the Company at an exercise price of $3.00
per share. Such options vest immediately. Fair value was determined on the date
of grant using the Black-Scholes option pricing model using an expected dividend
yield of 0; a risk free interest rate of 4.4%, expected stock volatility of
116%, and an expected option life of ten years.
The following table illustrates the effect on results of operations if the
Company had applied the fair value recognition provisions of SFAS No. 123 for
the six-month periods ended September 30, 2004 and 2003 (unaudited).
3-Mos ended 9-Mos. ended
December 31, December 31,
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Net (loss) Income as reported $(597,000) $(317,000) $(422,000) $ 23,000
Deduct: Total stock-based
Employee
Compensation determined
under fair value method for
stock options, net of tax -- -- 42,000 --
========= ========= ========= ==========
Pro forma income (loss) applicable
to common stockholders $(597,000) $ 317,000 $(464,000) $ 23,000
========= ========= ========= ==========
Basic income (loss) per share,
as reported $ (0.18) $ (.10) $ (.13) $ 0.01
========= ========= ========= ==========
Basic income (loss) per share,
pro forma $ (0.18) $ (.10) $ (.13) $ 0.01
========= ========= ========= ==========
Diluted income (loss) per share,
as reported $ (0.18) $ (.10) $ (.14) $ 0.01
========= ========= ========= ==========
Diluted income (loss) per share,
pro forma $ (0.18) $ (.10) $ (.14) $ 0.01
========= ========= ========= ==========
2. The results of operations for the three and nine months ended December
31, 2004 are not necessarily indicative of the results to be expected for
the entire fiscal year.
3. Inventories are summarized as follows:
December 31, 2004 March 31, 2004
----------------- --------------
Finished goods $2,354,000 $2,164,000
Raw Materials 179,000 691,000
Supplies and Packaging 586,000 379,000
---------- ----------
$3,119,000 $3,234,000
========== ==========
8
4. On December 2, 2004, the Company obtained an $11 million borrowing
facility from LaSalle Business Credit, LLC, consisting of:
a. a $7,000,000 revolving loan with interest payable at 1/4 of 1%
over the LaSalle Bank prime lending rate (5.25% at December
31, 2004) to be repaid on December 1, 2009. At December 31,
2004 the outstanding balance due on the revolving loan is
$5,090,000,
b. a $2,000,000, five year, "term loan A," with interest payable
at 1/4 of 1% over the LaSalle Bank prime lending rate, payable
interest only for the first two years with equal monthly
installments of principal of $23,810 (based on a 7 year
amortization schedule) commencing on December 1, 2006 and
continuing thereafter on the first day of each succeeding
calendar month with any unpaid principal balance due on
December 1, 2009. The proceeds of term loan A were used to
repay outstanding loans,
c. a $1,000,000, two year "term loan B," with interest payable at
1.5% over the LaSalle Bank prime lending rate, payable in
equal monthly installments of principal of $41,667 commencing
January 1, 2005. The proceeds of term loan B will be used for
working capital, and
d. capital equipment loans aggregating $1,000,000, with interest
at 1.25% over the LaSalle prime lending rate, the proceeds of
which will be used to purchase equipment as part of the
Company's capital expansion plan. Each capital expenditure
loan will be repaid in equal monthly installments in an amount
sufficient to repay such loan in full by the end of the
sixtieth month following the date of the loan advance. There
was no balance due on the capital equipment loans at December
31, 2004.
The borrowing facility is collateralized by all of the
Company's assets with additional collateral in the form of an
assignment of the proceeds of a life insurance policy insuring the life
of the CEO of the Company in an amount of $1,000,000.
At December 31, 2004, the Company was in default of various covenants
related to its debt with LaSalle Business Credit, LLC. The Company has
received waivers for the existing defaults and amended such covenants
going forward.
5. Earnings per Share
Basic earnings per share is computed by dividing net earnings available
to common shareholders by the weighted average common shares outstanding
for the period. Diluted earnings per share is computed by dividing net
earnings available to common shareholders by the weighted average common
shares outstanding adjusted for the dilutive effect of options granted
under the Company's stock option plans, outstanding warrants, and
convertible preferred stock.
9
At December 31, 2004 and 2003, 1,166,666 and 799,333 potential common
shares, respectively, issuable upon conversion of preferred stock and
exercise of warrants are excluded from the determination of diluted
earnings per share as the related contingencies have not been met. The
dilutive effect of the 496,667 and 120,000 potential common shares at
December 31, 2004 and 2003, respectively, are outlined in the following
schedule:
Three-Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
December 31, 2004 December 31, 2003 December 31, 2004 December 31, 2003
Numerator:
Net income (loss)- basic $ (597,000) $ (317,000) $ (422,000) $ 23,000
----------- ----------- ----------- -----------
Net Income (loss)-diluted $ (597,000) $ (317,000) $ (422,000) $ 23,000
----------- ----------- ----------- -----------
Denominator
Denominator for basic earnings
per share
Weighted avg. shares 3,353,937 3,137,937 3,277,748 3,138,862
Effect of dilutive securities
Stock options -- -- -- --
----------- ----------- ----------- -----------
Denominator for diluted
earnings per share 3,353,937 3,137,937 3,277,748 3,138,862
Earnings (loss) per share
Basic: $ (.18) $ (.10) $ (.13) $ .01
----------- ----------- ----------- -----------
Diluted: $ (.18) $ (.10) $ (.13) $ .01
----------- ----------- ----------- -----------
6. Long Term Accounts Payable
In connection with the Company's borrowing facility with LaSalle
Business Credit, LLC, St. Albans Cooperative Creamery, Inc., the Company's milk
supplier, agreed to subordinate to LaSalle a $1,500,000 outstanding trade
account payable due from the Company to St. Albans, on which trade account
payable the Company is paying interest at the Bank North short-term repo rate.
Pursuant to the terms of the subordination, St. Albans may receive, so long as
no default exists with respect to the LaSalle borrowing facility (a) regularly
scheduled payments of interest and principal, on a current basis, up to a
maximum of $75,000 in any fiscal year of the Company (the "Basic Payment"), and
(b) commencing with the Company's fiscal year ended March 31, 2006, a prepayment
in an amount equal to 10% of the Company's Excess Cash Flow (as defined in the
LaSalle lending documents) for the fiscal year, minus the amount of the Basic
Payment made to St. Albans during the fiscal year, and (c) if LaSalle elects to
defer all or a portion of its right to be paid 25% of the Company's Excess Cash
Flow for any fiscal year (the "Deferred Amount"), St. Albans may receive an
additional payment not to exceed the Deferred Amount, provided, however that the
payments contemplated by clauses (b) and (c) may only be paid to St. Albans as
long as and to the extent that at the time of and at all times during the thirty
(30) day period immediately preceding such payments and after giving effect to
such payments, the Company has Excess Availability (as defined in the LaSalle
lending documents) of at least $300,000. Also, St. Albans may receive, toward
the payment of such trade account payable, fifty percent (50%) of the amount of
new equity capital raised by the Company in excess of six million dollars
($6,000,000).
7. Deferred Costs
The Company incurred approximately $434,000 in costs in December 2004
associated with the LaSalle Business Credit LLC borrowing facility that is being
amortized over the life of the loan (5 years).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
General
The Company's low moisture mozzarella cheese, which accounts for more than a
majority of the Company's sales, is a commodity item. The Company prices this
product competitively with others in the industry, which pricing is based on the
Chicago Mercantile Exchange Block Cheddar Market (CME Block Market). The price
the Company pays for fluid milk and condensed skim milk solids, a significant
component of cost of goods sold, is not determined until the month after its
cheese has been sold. The price of milk is based upon the raw milk components
and a weighted average of a number of market components. While the Company
generally can anticipate a change in the price of milk because of changes in the
CME Block Market, it cannot anticipate the full extent thereof. Therefore, if
the CME Block Market price to which our selling price is referenced changes at a
different rate than the price of milk our margins are affected accordingly. By
virtue of the pricing structure in the industry the Company cannot readily pass
along to its customers the changes in the cost of milk. As a consequence
thereof, the Company's gross profit margin for its products is subject to
fluctuation, which fluctuation, however slight, can have a significant effect on
profitability.
10
The Company is unable to predict any future increase or decrease in prices in
the CME Block Market as such market is subject to fluctuation based on factors
and commodity markets outside of the control of the Company. Although the cost
of fluid milk does tend to move correspondingly with the CME Block Market, the
extent of such movement and the timing thereof is not predictable. As a result
of these factors, the Company is unable to predict pricing trends.
Three months ended December 31, 2004 compared to the three months ended December
31, 2003
Sales for the three months ended December 31, 2004 increased to $11,628,000 from
$10,850,000 for the comparable period in 2003, an increase of $778,000 or
(7.2%). Approximately $1,394,168.11 or (155.25%) was due to an increase in the
average selling price per pound of cheese from $1.54 for the three month period
ended December 31, 2003 to $1.76 for the three month period ended December 31,
2004. This increase was offset by a decrease in the number of pounds sold from
approximately 6,853,000 pounds in 2003 to 6,521,000 pounds in 2004, a decrease
of 332,000 pounds or (4.8%). Sales for whey amounted to $410,000 in 2004
compared to $354,000 for the same period last year, an increase of $56,000 or
(15.8%). The increase in the average selling price per pound of cheese was the
result of a higher CME block cheddar price during the quarter, an average price
of $1.61 compared to last year's average of $1.46.
Cost of sales and gross profit margin for the three month period ended December
31, 2004 were $11,473,000 (or 98.7% of sales) and $155,000 (or 1.3% of sales)
respectively, compared to a cost of sales and gross profit margin of $10,493,000
(or 96.7% of sales) and $357,000 (or 3.3% of sales) respectively, for the
comparable period in 2003. The increase in the cost of sales and corresponding
decrease in gross profit margin for 2004, as a percentage of sales, were the
result of the selling price per pound of cheese dropping dramatically while the
price of milk remained high, thus putting pressure on our gross margins. Cost of
sales was also affected by higher natural gas costs, payroll expenses and parts
and supplies expense.
Selling, general and administrative expenses for the three month period ended
December 31, 2004 amounted to $515,000 (or 4.4% of sales) compared to $470,000
(or 4.3% of sales) for the comparable period in 2003. Higher promotional
expenses, commission costs, advertising expenses, bank charges and franchise
taxes accounted for most of the increase in expenses.
Interest expense for the three month period ended December 31, 2004 amounted to
$237,000 compared to $205,000 for the same period last year, an increase of
$32,000. Higher balances and the increases in the prime rate thus raising our
rate charged on our revolver and term loans were partially offset by the
refinancing of our new revolver loan with the interest rate charge of 1% over
the prime rate compared to the previous charge of 3% over prime.
The provision for income tax for the period takes advantage of the tax benefits
of operating loss carry forwards being offset by the effect of changes in the
valuation allowance. Such amounts are re-evaluated each period based on the
results of the operations.
The Company's net loss was $597,000 for the three months ended December 31,
2004, compared to net income of $317,000 for the comparable period in 2003. The
primary factors contributing to these changes are discussed above.
11
Nine months ended December 31, 2004 compared to nine months ended December 31,
2003
Sales for the Nine months ended December 31, 2004 increased to $36,344,000 from
$30,199,000 for the comparable period in 2003, an increase of $6,145,000 (or
20.4%). Approximately $6,980,000 (or 113.6%) was due to an increase in the
average selling price per pound of cheese from $1.49 last year to $1.85 this
year. This increase was partially offset by a decrease in the number of pounds
sold from 20,061,000 pounds in 2003 to 19,390,000 in 2004, a decrease of 671,000
pounds (or 3.3%) year to year. Sales for whey amounted to $1,365,000 in 2004
compared to $1,032,000 for the same period last year, an increase of $333,000
(or 32.3%).
Cost of sales and gross profit margin for the nine months ended December 31,
2004 were $34,548,000 (or 95.1% of sales) and $1,796,000 (or 4.9% of sales)
compared to a cost of sales and gross profit margin of $28,277,000 (or 93.6% of
sales) and $1,922,000 (or 6.4% of sales), respectively, for the comparable
period in 2003. The increase in the cost of sales and decrease in gross profit
margins can be attributed to higher milk costs, labor costs, higher natural gas
costs, repairs and maintenance expenses and equipment parts and supplies.
Selling, general and administrative expenses for the nine months ended December
31, 2004 amounted to $1,503,000 (or 4.1% of sales) compared to $1,328,000 (or
4.3% of sales) for the comparable period in 2003. Higher commission expenses,
trade show and advertising expenses, promotional allowances and bank charges
accounted for the increase year over year.
Interest expense (net) for the nine months ended December 31, 2004 amounted to
$714,000 compared to $570,000 for the nine months ended December 31, 2003, an
increase of $144,000. The Company refinanced its revolving line of credit with
LaSalle Bank and raised its line to $7,000,000 from $5,000,000. The interest
rate on the new loan is prime rate plus one percent compared to prime rate plus
three percent. In addition, the Company also secured two term loans to
restructure some of the Company's existing debt to provide for a longer payment
period and provide additional working capital.
The provision for income tax for the nine-month periods ended December 31, 2004
and December 31, 2003 of $1,000 reflect minimum state taxes. Charges for federal
income taxes were offset by changes in the valuation allowances for the nine
months ended December 31, 2004 and December 31, 2003. Such amounts are
re-evaluated each quarter based on the results of operations.
The Company's net loss of $422,000 for the nine months ended December 31, 2004
represents a decrease of $445,000 from the net income of $23,000 for the
comparable period in 2003. The primary factors contributing to these changes are
discussed above.
Liquidity and Capital Resources
On December 2, 2004, the Company obtained an $11 million borrowing facility from
LaSalle Business Credit, LLC, consisting of (a) a $7,000,000 revolving loan,
with interest payable at 1/4 of 1% over the LaSalle Bank prime lending rate, to
be repaid on December 1, 2009, (b) a $2,000,000, five year, "term loan A," with
interest payable at 1/4 of 1% over the LaSalle Bank prime lending rate, payable
interest only for the first two years with monthly principal payments of $23,810
(based on a 7 year amortization schedule) beginning in year 3 and continuing
thereafter until December 1, 2009 when the unpaid principal balance becomes due,
the proceeds of which were used to repay outstanding loans, (c) a $1,000,000,
two year "term loan B," with interest payable at 1.5% over the LaSalle Bank
prime lending rate, payable in equal monthly installments of principal of
$41,667 commencing January 1, 2005, the proceeds of which are to be used for
working capital, and (d) capital equipment loans aggregating $1,000,000, with
interest at 1.25% over the LaSalle Bank prime lending rate, the proceeds of
which are to be used to purchase equipment as part of the Company's capital
expansion plan.
12
The revolving loan substantially reduced the interest rate the Company paid on
its then existing revolving loan, increased the Company's borrowing limit by
$2,000,000 to provide for growth, and increased the amount of cash the Company
receives on its accounts receivable and inventory; Term Loan A restructured some
of the Company's then existing debt at a lower interest rate, and provided for a
longer payment period; Term Loan B provided the Company with additional working
capital; and the capital equipment line enhances the Company's goal to further
reduce operating expenses through automation and the installation of more
productive equipment.
At December 31, 2004, the Company was in default of certain covenants under its
borrowing facility, for the test period ended December 31, 2004, relating to (a)
the maintenance of a Tangible Net Worth of not less than 90% of its Tangible Net
Worth at September 30, 2004, and (b) the maintenance of a Fixed Charge Coverage
Ratio of not less than 1.00 x 1.00. On February 14, 2005, LaSalle and the
Company entered into a First Amendment and Waiver to its Loan and Security
Agreement which, among other things, waived the foregoing defaults, amended such
covenants on a going forward basis, and suspended the capital expenditure loans
unless and until (x) on or before February 15, 2006, LaSalle Business Credit,
LLC shall have received the Company's internally-prepared quarterly financial
statements for the fiscal quarter ended December 31, 2005, and (b) the Company
shall have maintained a ratio of its FC Numerator to Fixed Charges of not less
than 1.20 to 1.00 with respect to the twelve (12) month period then ended.
At December 31, 2004, the Company had working capital of $6,150,000 compared to
negative working capital of ($383,000) at March 31, 2004. The Company's
revolving bank line of credit is available for the Company's working capital
requirements.
At December 31, 2004, $5,090,000 was outstanding under the revolving credit
line.
On February 8, 1999, a $4,950,000 bank loan agreement was signed. The loan is
collateralized by the Company's plant and equipment and guaranteed by the USDA.
Provisions of the loan are as follows:
A $3,960,000 commercial term note with interest fixed at 9.75 percent
having an amortization period of 20 years with maturity in February
2019.
A $990,000 commercial term note with interest fixed at 10.75 percent
having an amortization period of 20 years with maturity in February
2019.
On August 26, 2004, the Company entered into a new term loan with St. Albans
Cooperative Creamery for $1,000,000 with interest payable at 1% above the prime
rate. The loan is repayable in two consecutive annual installments of $500,000
with the next installment due on May 1, 2005. The loan is collateralized by the
Company's plant and equipment and is used for working capital. This loan is the
result of St. Albans Cooperative Creamery paying off the term loan owed to
CoBank by Lucille Farms, Inc.
On May 16, 2002, the Company entered into an agreement with St. Albans
Cooperative Creamery, Inc. ("St. Albans"), the Company's primary supplier of raw
materials, pursuant to which St. Albans (i) converted $1,000,000 of accounts
payable owed by the Company to St. Albans into 333,333 shares of common stock,
(ii) converted $3,500,000 of accounts payable owed by the Company to St. Albans
into (A) preferred stock convertible into 583,333 shares of common stock, which
preferred stock (1) automatically converts into such number of shares of common
stock if the common stock is $8.00 or higher for 30 consecutive trading days,
and (2) may be redeemed by the Company for $3,500,000, and (B) a 10-year warrant
to purchase 583,333 shares of common stock (subject to adjustment under certain
circumstances to a maximum of 1,416,667 shares of common stock) at $.01 per
share, which warrant (1) may not be exercised for a period of three-years, (2)
terminates if, during such three-year period, the Company's common stock is
$8.00 or higher for 30 consecutive trading days, and, (3) in the event the
Company's common stock is not $8.00 or higher for 30 consecutive trading days
during such three-year period, may only be exercised on the same basis
percentage wise as the preferred shares are converted, (iii) converted an
additional $1,000,000 of accounts payable owed by the Company to St. Albans into
a convertible promissory note due on April 14, 2005, which note is convertible
into common stock at $6.00 per share at any time by St. Albans and, at the
option of the Company, automatically shall be converted into common stock at
$6.00 per share if the common stock is $8.00 or higher for a period of 30
consecutive trading days, and (iv) provided the Company with a pricing structure
for milk and milk by-products, for a minimum of one-year and a maximum of
four-years (subject to renegotiation at the expiration of the applicable
period), designed to produce profitability for the Company. The applicable
period for the milk and milk by-products pricing structure expired in May 2003.
Thereafter, St. Albans maintained the pricing structure through June 30, 2003.
Commencing July 2, 2003, and again as of September 1, 2003, the pricing
structure was modified to progressively decrease the benefits accruing to the
Company in light of the profitability of the Company.
13
For the nine month period ended December 31, 2004, cash used by operating
activities was $1,337,000. A loss from operations of $422,000 decreased cash
along with an increase in accounts receivable prepaid expenses, and other assets
and a decrease in accounts payable and accrued expenses. A decrease in inventory
provided cash.
Net cash used in investing activities was $282,000 for the period ended December
31, 2004, which represented the purchase of property, plant and equipment.
Net cash provided by financing activities was $1,164,000 for the period ended
December 31, 2004 as a result of the new financing obtained by the Company.
Safe Harbor Statement
This Quarterly Report on Form 10-Q (and any other reports issued by the Company
from time to time) contains certain forward-looking statements made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on current expectations that
involve numerous risks and uncertainties. Actual results could differ materially
from those anticipated in such forward-looking statements as a result of various
known and unknown factors including, without limitation, future economic,
competitive, regulatory, and market conditions, future business decisions, the
uncertainties inherent in the pricing of cheese on the Chicago Mercantile
Exchange upon which the Company's prices are based, changes in consumer tastes,
fluctuations in milk prices, and those factors discussed above under
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Words such as "believes," "anticipates," "expects," "intends,"
"may," and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. The
Company undertakes no obligation to revise any of these forward-looking
statements.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
In September 2004, the Company began to hedge the risks of the prices in the
cheese and milk markets to ensure profitability. The Company has undertaken a
program to sell cheese under long-term contracts and to hedge the transaction
through the purchase of milk futures. Increases and decreases in the price of
milk in the market (resulting in potential losses or profits on the sale of
cheese) would generally be offset by corresponding losses and gains on the
related hedging instruments, resulting in negligible net exposure for such
transactions. To date, the majority of our expense for milk is not hedged.
In designing a specific hedging program approach, the Company considers several
factors including offsetting exposures, significance of exposures, costs
associated with entering into a particular hedge instrument and potential
effectiveness of the hedge. Our hedging program reduces, but does not entirely
eliminate, the impact of milk price movements. Due primarily to our limited use
of the hedging program to date, the impact of the hedging program on milk
expense fluctuations has not been material to our consolidated financial
statements.
14
The Company is subject to interest rate exposure on variable rate debt. The
amount of that debt at balance sheet date of December 31, 2004 and March 31,
2004 amounted to $8,090,000, and $5,781,000, respectively. Since the interest
rate on debt is based upon the prime rate plus 1% or 1 1/2%, the cost of this
debt will increase or decrease accordingly with changes in the prime rate.
The Company has exposure to the commodity price for cheese, dry whey and fluid
milk. We have addressed these exposures in the general paragraph of Management's
Discussion and Analysis, Item 2 above.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Form 10-Q, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the CEO and CFO, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Securities Exchange Act of 1934 Rule 13a-14. Based upon the
evaluation, the Company's CEO and CFO concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company required to be included in the Company's
periodic SEC filings.
The Company does not expect that its disclosure controls and procedures will
prevent all error and all fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any control
procedure also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.
Subsequent to the date of the Company's evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could affect internal controls.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On June 12, 2001, the Company sold $540,000 of Series A Redeemable Convertible
Preferred Stock to an accredited investor in exchange for roll drying equipment.
The shares were sold pursuant to Section 4(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder. On July 7, 2004, these shares were
converted to 216,000 shares of Lucille Farms common stock per the preferred
stock agreement.
Item 5. Other Information
At December 31, 2004, the Company was in default of certain covenants under its
borrowing facility, for the test period ended December 31, 2004, relating to (a)
the maintenance of a Tangible Net Worth of not less than 90% of its Tangible Net
Worth at September 30, 2004, and (b) the maintenance of a Fixed Charge Coverage
Ratio of not less than 1.00 x 1.00. On February 14, 2005, LaSalle and the
Company entered into a First Amendment and Waiver to its Loan and Security
Agreement which, among other things, waived the foregoing defaults, amended such
covenants on a going forward basis, and suspended the capital expenditure loans
unless and until (x) on or before February 15, 2006, LaSalle Business Credit,
LLC shall have received the Company's internally-prepared quarterly financial
statements for the fiscal quarter ended December 31, 2005, and (b) the Company
shall have maintained a ratio of its FC Numerator to Fixed Charges of not less
than 1.20 to 1.00 with respect to the twelve (12) month period then ended.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Loan and Security Agreement, dated as of December 2, 2004, among
LaSalle Business Credit, LLC, Lucille Farms, Inc., and Lucille Farms of
Vermont, Inc.
10.2 First Amendment and Waiver to Loan and Security Agreement, dated
February 14, 2005, by and among LaSalle Business Credit, LLC, Lucille
Farms, Inc. and Lucille Farms of Vermont, Inc.
31.1 Certification of Periodic Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated February 14, 2005.
31.2 Certification of Periodic Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated February 14, 2005.
32.1 Certification of Periodic Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated February 14, 2005
32.2 Certification of Periodic Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated February 14, 2005.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed November 15, 2004, relating to the
results of operations for the period ended June 30, 2004.
Current Report on Form 8-K, filed December 6, 2004, relating to the new
$11 million borrowing facility from LaSalle Business Credit, LLC.
16
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 14, 2005 Lucille Farms, Inc.
-----------------
(Registrant)
By: /s/ Jay Rosengarten
--------------------
Jay Rosengarten,
Chief Executive Officer
By: /s/ Albert Moussab
--------------------
Albert Moussab,
Chief Financial Officer
(chief financial and accounting officer)
17
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.1* Loan and Security Agreement, dated as of December 2, 2004, among
LaSalle Business Credit, LLC, Lucille Farms, Inc., and Lucille Farms
of Vermont, Inc.
10.2* First Amendment and Waiver to Loan and Security Agreement, dated
February 14, 2005, by and among LaSalle Business Credit, LLC,
Lucille Farms, Inc. and Lucille Farms of Vermont, Inc.
31.1* Certification of Periodic Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated February 14, 2005.
31.2* Certification of Periodic Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated February 14, 2005.
32.1* Certification of Periodic Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated February 14, 2005.
32.2* Certification of Periodic Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated February 14, 2005.
* Filed herewith
18