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:
September 30, 2003
Commission File Number 1-12506
LUCILLE FARMS, INC.
-------------------
(Exact Name of Registrant as Specified in its charter)
Delaware 13-2963923
------------------------ ---------------------
(State or other Jurisdiction (I.R.S. Employer
of Incorporation) Identification number)
150 River Road, P.O. Box 517
Montville, New Jersey 07045
--------------------- -----
(Address of Principal Executive Offices) (zip code)
(Registrant's Telephone Number, Including Area Code)
(973)334-6030
Former name, former address and former fiscal year, if changed since last
report. N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of Registrant's common stock, par value $.001 per share,
outstanding as of October 31, 2003 was 3,137,937.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, 2003 MARCH 31, 2003
------------------ ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 140,000 $ 4,000
Accounts receivable, net
of allowances of $103,000
at September 30, 2003 and $189,000
at March 31, 2003 4,748,000 3,530,000
Inventories 3,292,000 2,185,000
Prepaid expenses and other
current assets 470,000 616,000
Due from officers -- 101,000
--------------- ---------------
Total current assets 8,650,000 6,436,000
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, NET 9,678,000 10,003,000
--------------- ---------------
OTHER ASSETS:
Deferred costs, net 214,000 215,000
Other 8,000 108,000
--------------- ---------------
Total other assets 222,000 323,000
--------------- ---------------
TOTAL ASSETS $ 18,550,000 $ 16,762,000
=============== ===============
See accompanying notes to consolidated financial statements
2
LUCILLE FARMS,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDER'S EQUITY
SEPTEMBER 30, 2003 MARCH 31, 2003
------------------ ---------------
(UNAUDITED)
CURRENT LIABILITES:
Revolving credit loan $ 3,697,000 $ 2,924,000
Accounts payable 3,835,000 2,425,000
Current portion of long-term debt 695,000 710,000
Accrued expenses 668,000 615,000
--------------- ---------------
Total Current Liabilities 8,895,000 6,674,000
--------------- ---------------
LONG-TERM LIABILITY:
Long-term debt, less current portion 6,516,000 7,143,000
--------------- ---------------
TOTAL LIABILITIES 15,411,000 13,817,000
STOCKHOLDERS' EQUITY:
Preferred stock, $ 0.001 per value,
250,000 shares authorized:
216 shares Series A convertible
issued and outstanding 1,000 1,000
583 shares Series B convertible
issued and outstanding 1,000 1,000
Common stock, $ 0.001 par value,
25,000,000 shares authorized, 3,354,675
shares issued, 3,137,937 outstanding
at September 30, 2003 and 3,284,775 outstanding at
March 31, 2003 3,000 3,000
Additional paid in capital 8,548,000 8,548,000
Accumulated deficit (5,102,000) (5,443,000)
--------------- ---------------
3,451,000 3,110,000
Less cost of 216,738 shares of treasury stock (312,000) (165,000)
--------------- ---------------
Total Stockholders' Equity 3,139,000 2,945,000
--------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 18,550,000 $ 16,762,000
=============== ===============
See accompanying notes to consolidated financial statements
3
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30
2003 2002
--------------- ---------------
SALES $ 10,839,000 $ 9,198,000
COST OF SALES 9,892,000 8,733,000
--------------- ---------------
GROSS PROFIT 947,000 465,000
--------------- ---------------
OTHER EXPENSE/(INCOME):
SELLING 180,000 171,000
GENERAL AND ADMINISTRATIVE 267,000 216,000
INTEREST INCOME -- (3,000)
INTEREST EXPENSE 180,000 205,000
--------------- ---------------
TOTAL OTHER EXPENSE 627,000 589,000
--------------- ---------------
INCOME (LOSS) BEFORE INCOME
TAXES 320,000 (124,000)
PROVISION FOR INCOME TAXES 1,000 --
--------------- ---------------
NET INCOME (LOSS) $ 319,000 $ (124,000)
--------------- ---------------
EARNINGS (LOSS) PER SHARE
BASIC:
$ .10 $ (.04)
--------------- ---------------
DILUTED: $ .10 $ (.04)
--------------- ---------------
WEIGHTED AVERAGE SHARES
OUTSTANDING USED TO COMPUTE
NET INCOME PER SHARE
BASIC: 3,137,937 3,284,775
DILUTED: 3,137,937 3,284,775
See accompanying notes to consolidated financial statements
4
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30
2003 2002
--------------- ---------------
SALES $ 19,349,000 $ 18,516,000
COST OF SALES 17,784,000 18,148,000
--------------- ---------------
GROSS PROFIT 1,565,000 368,000
--------------- ---------------
OTHER EXPENSE/(INCOME):
SELLING 404,000 347,000
GENERAL AND ADMINISTRATIVE 454,000 474,000
GAIN ON
DEBT RESTRUCTURING, NET -- $ (875,000)
INTEREST INCOME -- (5,000)
INTEREST EXPENSE 365,000 407,000
--------------- ---------------
TOTAL OTHER EXPENSE 1,223,000 348,000
--------------- ---------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM 342,000 20,000
PROVISION FOR INCOME TAXES 1,000 1,000
--------------- ---------------
NET INCOME $ 341,000 $ 19,000
--------------- ---------------
EARNINGS PER SHARE
BASIC: $ .11 $ .01
DILUTED: $ .11 $ .00
WEIGHTED AVERAGE SHARES
OUTSTANDING USED TO COMPUTE
NET INCOME PER SHARE
BASIC 3,186,394 3,271,341
DILUTED 3,186,394 4,073,351
See accompanying notes to consolidated financial statements
5
LUCILLE FARMS, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30
2003 2002
--------------- ---------------
Cash flows from operating activities:
NET INCOME $ 341,000 $ 19,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on debt restructuring -- (875,000)
Depreciation and amortization 460,000 424,000
Provision for doubtful accounts -- 34,000
(Increase) decrease in assets:
Accounts receivable (1,218,000) (103,000)
Inventories (1,107,000) 318,000
Prepaid expenses and other current
assets 100,000 (320,000)
Other assets 102,000 15,000
Increase (decrease) in liabilities:
Accounts payable 1,410,000 1,585,000
Accrued expenses 53,000 (6,000)
--------------- ---------------
Net cash provided by
operating activities 141,000 1,091,000
--------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (136,000) (278,000)
--------------- ---------------
Net cash used In investing
Activities (136,000) (278,000)
--------------- ---------------
CASH FLOW FROM FINANCING ACTIVITIES:
(Payments of) proceeds from revolving
credit loan-net 773,000 (472,000)
Principal payments on long-term
debt and notes (642,000) (217,000)
--------------- ---------------
Net cash provided by (used in)
financing activities 131,000 (689,000)
--------------- ---------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 136,000 124,000
CASH AND CASH EQUIVALENTS-BEGINNING 4,000 175,000
--------------- ---------------
CASH AND CASH EQUIVALENTS-ENDING $ 140,000 $ 299,000
--------------- ---------------
See accompanying notes to consolidated financial statements
6
LUCILLE FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Consolidated Balance Sheet as of September 30, 2003, the Consolidated
Statement of Income for the three and six month periods ended September
30, 2003 and 2002 and the Consolidated Statement of Cash Flows for the
six month periods ended September 30, 2003 and 2002 have been prepared by
the Company without audit. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
financial position of Lucille Farms, Inc. as of September 30, 2003, the
results of its operations for the three and six months ended September
30, 2003 and 2002 and its cash flows for the six months ended September
30, 2003 and 2002.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with principles generally
accepted in the United States of America have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Although the Company believes that the disclosures
are adequate to make the information presented not misleading, it is
suggested that these financial statements be read in conjunction with the
year-end financial statements and notes thereto for the fiscal year ended
March 31, 2003 included in the Company's Annual Report on Form 10-K as
filed with the SEC. The Company also suggests that the Form 8-K's filed
with the SEC on August 4, 2003 and August 20, 2003 be read in conjunction
with this report.
The accounting policies followed by the Company are set forth in the
notes to the Company's consolidated financial statements as set forth in
its Annual Report on Form 10-K as filed with the SEC.
Recent Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The Company has elected not to
change to the fair value method of accounting. SFAS No. 148 also requires that
where no election is made to change to the fair value method, disclosures of the
pro forma effect of using the fair value method of accounting for stock-based
employee compensation are to be displayed more prominently and in tabular format
in the footnotes to the financial statement. Additionally, SFAS No.148 requires
disclosure of the pro forma effect in interim financial statements. The
transition and annual disclosure requirements were effective for our 2003 fiscal
year. The interim disclosure requirements are now effective. The Company is
subject to the expanded disclosure requirements of SFAS No. 148, but does not
expect SFAS No. 148 to otherwise have a material impact on its results of
operations or financial position.
In January 2003, the FASB issued FIN 46, "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
applies to variable interest entities created after January 31, 2003, and is
effective as of July 1, 2003. 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.
7
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that financial instruments within the scope of SFAS No. 150 be
classified as a liability or an asset. SFAS No. 150 is effective for all
financial instruments entered into after May 31, 2003 or otherwise, the
beginning of the first interim period after September 15, 2003. The Company does
not expect the adoption of SFAS No. 150 to have a material effect on its
financial position, results of operations or cash flows.
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (FAS 146), which is effective for exit or disposal
activities initiated after December 31, 2002, is not expected to have a material
impact on the Company's results of operation, financial position, or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others" (FIN 45), which elaborates on the existing disclosure
requirements for most guarantees and clarifies that at the time a Company issues
a guarantee, it must recognize a liability for the fair value of the obligations
it assumes under the guarantees and must disclose that information in its
interim and annual financial statements. The disclosure requirements of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company does not expect FIN 45 to have a material impact
on its financial position or results of operations.
Stock Based Compensation
The Company has elect to follow Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock options and rewards. Accordingly, no compensation costs for
stock options are included in operating results since all awards were made at
exercise prices at or above their fair value on the dates of grants.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure", amending FASB Statement No. 123,
"Accounting for Stock Based Compensation." This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. The Company has elected not to change to the fair value method of
accounting. It also amends the disclosure provisions of SFAS No. 123 to require
that where no election is made to change to the fair value method, prominent
disclosure about the effects on operating results of an entity's accounting
policy decisions with respect to stock-based employee compensation in the
footnotes to the financial statements. SFAS No. 148 also amends AP 28, "Interim
Financial Reporting" to require disclosure about those effects in interim
financial information. We adopted the disclosure provisions for the year ended
March 31, 2003. The following table illustrates the effect on results of
operations if the Company had applied the fair value recognition provisions of
SFAS No. 123 for the six-month periods ended September 30, 2003 and 2002
(unaudited).
8
3-Mos ended 6-Mos. ended
September 30, September 30,
=================================== ===================================
2003 2002 2003 2002
=============== =============== =============== ===============
Net (loss) Income as reported $ 319,000 $ (124,000) $ 341,000 $ 19,000
Deduct: Total stock-based
Employee Compensation determined
under fair value method for
stock options, net of tax -- -- -- --
=============== =============== =============== ===============
Pro forma income (loss) applicable
to common stockholders $ 319,000 $ (124,000) $ 341,000 $ 19,000
=============== =============== =============== ===============
Basic income (loss) per share,
as reported $ 0.10 $ (0.04) $ 0.11 $ 0.01
=============== =============== =============== ===============
Basic income (loss) per share,
pro forma $ 0.10 $ (0.04) $ 0.11 $ 0.01
=============== =============== =============== ===============
Diluted income (loss) per share,
as reported $ 0.10 $ (0.04) $ 0.11 $ 0.00
=============== =============== =============== ===============
Diluted income (loss) per share,
pro forma $ 0.10 $ (0.04) $ 0.11 $ 0.00
=============== =============== =============== ===============
2. The results of operations for the three and six months ended September
30, 2003 are not necessarily indicative of the results to be expected for
the entire fiscal year.
3. Inventories are summarized as follows:
September 30, 2003 March 31, 2003
------------------ --------------
Finished goods $ 2,504,000 $ 1,345,000
Raw Materials 400,000 440,000
Supplies and Packaging 388,000 400,000
------------ ------------
$ 3,292,000 $ 2,185,000
============ ============
9
4. The Company has a $ 4,000,000 revolving credit facility at September 30,
2003. The loan was to expire on September 16, 2003. The bank has extended
the loan's maturity to May 30, 2004 at which time the outstanding
principal is due. The Company is seeking alternative financing to replace
this loan. Should it not be able to secure alternative financing by the
extended due date, it will request an additional extension of the loan's
due date. However, there is no assurance that such financing can be
secured or the extension granted. Failure to secure such financing can
have a significant negative effect on the Company's ability to fund
operational requirements.
5. Earnings per Share
Basic earnings per share are computed by dividing net earnings available
to common shareholders by the weighted average common shares outstanding
for the period. Diluted earnings per share is computed by dividing net
earnings available to common shareholders by the weighted average common
shares outstanding adjusted for the dilutive effect of options granted
under the Company's stock option plans, outstanding warrants, and
convertible preferred stock. Basic and diluted earnings per share were
the same for 2003 and 2002 since options and warrants were not included
in the calculation because their effect would have been antidilutive. For
2003 and 2002 conversion of preferred stock was not taken into
consideration since the effect would be antidilutive.
Three-Months Three Months Six Months Six Months
Ended Ended Ended Ended
September 30, 2003 September 30, 2002 September 30,2003 September 30,2002
------------------ ------------------ ----------------- -----------------
Numerator:
Net income (loss)- basic $ 319,000 $ (124,000) $ 341,000 $ 19,000
--------------- --------------- --------------- ---------------
Net Income (loss)-diluted $ 319,000 $ (124,000) $ 341,000 $ 19,000
--------------- --------------- --------------- ---------------
Denominator
Denominator for basic earnings
per share Weighted avg. shares 3,137,937 3,284,775 3,186,394 3,271,341
Effect of dilutive securities
Stock options -- -- -- 802,010
--------------- --------------- --------------- ---------------
Denominator for diluted
earnings per share 3,137,937 3,284,775 3,186,394 4,073,351
Earnings (loss) per share
Basic: $ 0.10 $ (0.04) $ 0.11 $ .01
--------------- --------------- --------------- ---------------
Diluted: $ 0.10 $ (0.04) $ 0.11 $ .00
--------------- --------------- --------------- ---------------
10
6. For the six months ended September 30, 2002, non-cash investing and
financing activities were $5,500,000 for restructuring accounts payable
for a value ascribed to common stock, preferred stock, warrants and debt
issued in connection with the restructuring of $4,500,000 (See Note 7).
For the six months ended September 30, 2003 the company received 146,838
shares of the company's stock at a market value of $146,838 in full
satisfaction of $146,838 of principal and accrued interest due to the
Company. Cash paid for interest and taxes were $365,000 and $1,000 and
$407,000 and $1,000 for the six months ended September 30, 2003 and 2002
respectively.
7. In May 2002, the Company restructured $5,500,000 of accounts payable from
its main supplier through the issuance of 333,333 shares of common stock,
583 shares of Series B Preferred Stock with a detachable 10-year warrant
and a $1,000,000 convertible note payable in April 2005, the aggregate of
which had an ascribed value of approximately $4,500,000.
The restructuring resulted in an extraordinary gain of $875,000, net of
expenses of $125,000 and income taxes calculated to be zero due to the
offset of net operating loss carry forwards previously unrealized.
8. In June 2002, the Company issued a 10-year warrant to B & W Investment
Associates, a partnership in which the Chairman of the board of the
Company is a partner, to purchase 500,000 shares of common stock at $3.00
per share. The warrant was issued to satisfy outstanding professional
services in connection with the restructuring of accounts payable.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
General
The Company's low moisture mozzarella cheese, which accounts for more than a
majority of the Company's sales, is a commodity item. The Company prices this
product competitively with others in the industry, which pricing is based on the
Chicago Mercantile Exchange Block Cheddar Market (CME Block Market). The price
the Company pays for fluid milk and condensed skim milk solids, a significant
component of cost of goods sold, is not determined until the month after its
cheese has been sold. The price of milk is based upon the raw milk components
and a weighted average of a number of market components. While the Company
generally can anticipate a change in the price of milk because of changes in the
CME Block Market, it cannot anticipate the full extent thereof. Therefore, if
the CME Block Cheddar price to which our selling price is referenced changes at
a different rate than the price of milk our margins are affected accordingly. By
virtue of the pricing structure in the industry the Company cannot readily pass
along to its customers the changes in the cost of milk. As a consequence
thereof, the Company's gross profit margin for its products is subject to
fluctuation, which fluctuation, however slight, can have a significant effect on
profitability.
The Company is unable to predict any future increase or decrease in prices in
the CME Block Market as such market is subject to fluctuation based on factors
and commodity markets outside of the control of the Company. Although the cost
of fluid milk does tend to move correspondingly with the CME Block Market, the
extent of such movement and the timing thereof is not predictable. As a result
of these factors, the Company is unable to predict pricing trends.
Three months ended September 30, 2003 compared to the three months ended
September 30, 2002
Sales for the three months ended September 30, 2003 increased to $10,839,000
from $9,198,000 for the comparable period in 2002, an increase of $1,641,000 (or
17.8%). Approximately $2,264,000 (or 13.8%) was due to an increase in the
average selling price per pound of cheese from $1.27 last year to $1.63 this
year. This increase was offset by a decrease in the number of pounds sold from
6,751,000 pounds in 2002 to 6,289,000 pounds in 2003, a decrease of 462,000
pounds or 6.8% year to year, and a year to year decrease in the sale of whey of
approximately $98,500 (22.5%). The increase in the average selling price per
pound of cheese was the result of an increase in the CME block cheddar price
during the quarter, which price started at $1.24 per pound and rose to $1.60 per
pound at the end of the quarter.
Costs of sales and gross profit margin for the three-month period ended
September 30, 2003 were $9,892,000 (or 91.3% of sales) and $947,000 (or 8.7% of
sales), respectively, compared to a cost of sales and gross profit margin of
$8,733,000 (or 95% of sales) and $465,000 (or 5.0% of sales), respectively for
the comparable period in 2002. The decrease in the cost of sales and
corresponding increase in gross profit margin for 2003 as a percentage of sales
were the result of a higher ending inventory value as a result of a rising
cheese market.
Selling, general, and administrative expenses for the three-month period ended
September 30, 2003 amounted to $447,000 (or 4.1% of sales) compared to $387,000
(or 4.2% of sales) for the comparable period in 2002. Higher salary and wages,
due to the addition of a Chief Executive Officer and a salesman, along with
higher business and travel expenses and legal fees were partially offset by
lower consultant fees, accounting fees, and advertising expenses.
12
Interest expense (net) for the three-month period ended September 30, 2003
amounted to $180,000 compared to $202,00 for the period ended September 30,
2002, a decrease of $22,000. Lower interest rates and the repayment of $500,000
on our term loan with Co Bank accounted for the decrease.
The provision for income tax for the period ended September 30, 2003 reflects a
minimum state tax, with the tax benefits of operation losses 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 income was $319,000 for the three months ended September 30,
2003, an increase of $443,000 over the net loss of ($124,000) for the comparable
period in 2002. The primary factors contributing to these changes are discussed
above.
Six months ended September 30, 2003 compared to six months ended September 30,
2002
Sales for the six months ended September 30, 2003 increased to $19,349,00 from
$18,516,000 for the comparable period in 2002, an increase of $833,000 (or
4.5%). Approximately $1,695,000 (or 103.5%) was due to an increase in the
average selling price per pound of cheese from $1.30 last year to $1.43 this
year. This increase was offset by a decrease in the number of pounds sold from
13,110,000 pounds in 2003 to 13,580,000 in 2002, a decrease of 470,000 pounds or
3.5% year to year, and a year to year decrease in the sale of whey of
approximately $176,000 (20.8%).
Cost of sales and gross profit margin for the six month period ended September
30, 2003 were $17,784,000 (or 91.9% of sales) and $1,565,000 (or 8.1% of sales)
compared to a cost of sales and gross profit margin of $18,148,000 (or 98.0% of
sales) and $368,000 (or 2.0% of sales), respectively, for the comparable period
in 2002. The decrease in the cost of sales and increase in gross profit margins
can be attributed to lower transportation costs, labor costs, repairs and
maintenance expenses and packaging costs. These lower expenses were offset by
higher ingredient costs, outside cheese purchases, whey removal expenses and
depreciation costs.
Selling, general and administrative expenses for the six months ended September
30, 2003 amounted to $858,000 (or 4.4% of sales) compared to $821,000 (or 4.4%
of sales) for the comparable period in 2002. Higher wages, due to the addition
of a Chief Executive Officer and a salesperson, along with higher business
travel expenses, legal fees and payroll taxes were offset by lower consulting
fees, commission expenses and accounting fees.
Interest expense (net) for the six months ended September 30, 2003 amounted to
$365,000 compared to $402,000 for the six months ended September 30, 2002, a
decrease of $37,000. Lower interest rates and the repayment of $500,000 on our
term loan with Co Bank accounted for the decrease.
The provision for income tax for the six-month period ended September 30, 2003
and September 30, 2002 of $1,000 reflect minimum state taxes. Charges for
federal income taxes were offset by changes in the valuation allowances for the
six months ended September 30, 2003 and September 30, 2002. Such amounts are
re-evaluated each quarter based on the results of operations.
The Company's net income of $341,000 for the six months ended September 30, 2003
represents an increase of $322,000 from the net income of $19,000 for the
comparable period in 2002. The primary factors contributing to these changes are
discussed above.
13
Liquidity and Capital Resources
The Company had available a $4,000,000 revolving credit facility at September
30, 2003, which matures on May 30, 2004 (with St. Albans Cooperative
participating therein to the extent of $ 3,000,000) at which time the
outstanding principal balance is due. The rate of interest on amounts borrowed
against the revolving credit facility is based upon the New York prime rate plus
2% (6% at September 30, 2003). Advances under this facility are limited to 50%
of inventory (with a cap on inventory borrowing of $1,000,000) and 80% of
receivables as defined in the agreement. The commitment contains various
restrictive covenants including requiring the Company to generate an increase in
its dollar amount of net worth annually. The Company is seeking alternative
financing to replace this facility. Should the Company not be able to secure
alternative financing by the due date, it will request an extension until such
financing is secured. However, there is no assurance that such financing can be
secured or that the extension will be granted. Failure to secure such financing
or extension can have a significant negative effect on the Company's ability to
fund operational requirements.
At September 30, 2003, the Company had negative working capital of ($245,000) 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 September 30, 2003, $3,697,000 was outstanding under the revolving credit
line and $297,000 was available for additional borrowing.
On February 8, 1999, a $4,950,000 bank loan agreement was signed. The loan is
collateralized by the Company's plant and equipment and guaranteed by the USDA.
Provisions of the loan are as follows:
A $3,960,000 commercial term note with interest fixed at 9.75 percent
having an amortization period of 20 years with maturity in February,
2019.
A $990,000 commercial term note with interest fixed at 10.75 percent
having an amortization period of 20 years with maturity in February
2019.
On May 23, 2001, the Company entered into a new term loan with Co Bank for
$2,000,000 with interest payable at 1% above the rate of interest established by
the bank as its national variable rate. $500,000 of such loan has been repaid
and the balance is repayable in three consecutive annual installments of
$500,000 with the next installment due on May 1, 2004. The loan is
collateralized by the Company's plant and equipment and was used for working
capital.
14
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 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.
The Company's major source of external working capital financing has been the
revolving line of credit. For the foreseeable future, assuming the line is
replaced, the Company believes that the Company's revolving line of credit will
continue to represent the major source of working capital financing besides
income generated from operations. However, failure to secure such replacement
financing or an extension of such line of credit can have a significant negative
effect on the Company's liquidity.
For the six-month period ended September 30, 2003, cash provided by operating
activities was $141,000. A profit from operations of $341,000 increased cash. In
addition, increases in accounts payable of $1,410,000 and accrued expenses of
$53,000 and decreases in prepaid expenses of $100,000 and other assets of
$102,000 provided cash while increases in accounts receivable of $1,218,000 and
inventory of $1,107,000 decreased cash.
Net cash used by investing activities was $136,000 for the period ended
September 30, 2003, which represented purchase of property, plant and equipment.
Net cash provided by financing activities was $131,000 for the period ended
September 30, 2003. Payments of the first installment to Co Bank of $500,000
decreased cash.
The Company presently is seeking to replace its $4,000,000 secured revolving
credit line, the maturity of which has been extended to May 30, 2004. The
Company estimates that based on current plans and its ability to replace or
extend the revolving line of credit, its resources, including revenues from
operations and utilization of its revolving credit lines, should be sufficient
to meet anticipated needs for the foreseeable future. Failure to secure such
financing or receive such extension will result in a significant negative effect
on the Company's liquidity.
Safe Harbor Statement
This Quarterly Report on Form 10Q (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.
15
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not utilize market rate sensitive instruments for trading or
other purposes.
The Company is subject to interest rate exposure on variable rate debt. The
amount of that debt at balance sheet date, September 30, 2003 and March 31, 2003
amounted to $5,197,000, and $4,924,000, respectively. Since the interest rate on
debt is based upon the Prime Rate plus 1%, and 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, nor were any corrective actions required with
regard to significant deficiencies and material weaknesses.
16
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On September 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 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 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.
On June 10, 2002, B&W Investment associates, a partnership of which Howard S.
Breslow, Chairman of the board of the Company is a partner, purchased, for
$25,000, a ten year warrant to purchase 500,000 shares of Common Stock at $3.00
per share. This transaction took place in connection with the conversion into
equity and long term debt of outstanding accounts payable owed by the Company to
St. Albans Cooperative Creamery, Inc. and the revision of the pricing structure
for milk and milk by-products.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Loan and Security/Stock Purchase Agreement, dated May 16, 2002, by and
among Lucille Farms, Inc., Lucille Farms of Vermont, Inc. and St Albans
Cooperative Creamery, Inc. Portions have been omitted pursuant to a
request for confidential treatment and have been filed separately with
the Securities and Exchange Commission. (1)
99.1 Certification of Periodic Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated November 12, 2003
99.2 Certification of Periodic Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated November 12, 2003.
99.3 Certification of Periodic Report pursuant to Section 402 of the
Sarbanes-Oxley Act of 2002, dated November 12, 2003.
99.4 Certification of Periodic Report pursuant to Section 402 of the
Sarbanes-Oxley Act of 2002, dated November 12, 2003.
17
(b) Reports on Form 8-K
Current Report on Form 8-K, filed August 4, 2003, relating to the
results of operations for the year ending March 31, 2003 and the filing
of the Company's annual report for its year ended March 31, 2003.
Current Report on Form 8-K, filed August 20, 2003, relating to the
results of operations for the period ending June 30, 2003.
(1) Incorporated by reference to the Company's Current Report on Form 8-K,
filed July 11, 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 12, 2003 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)
19
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
99.1* Certification of Periodic Report pursuant to Section 402 of
the Sarbanes-Oxley Act of 2002, dated November 12, 2003.
99.2* Certification of Periodic Report pursuant to Section 402 of
the Sarbanes-Oxley Act of 2002, dated November 12, 2003.
99.3* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated November 12, 2003.
99.4* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated November 12, 2003.
* Filed herewith
20