SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly period Ended: December 31, 2002
Commission File Number 1-12506
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LUCILLE FARMS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 13-2963923
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(State or other Jurisdiction (I.R.S. Employer
Of Incorporation) Identification No.)
150 River Road, P.O. Box 517
Montville, New Jersey 07045
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(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 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 whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act. YES NO x
--- ---
The number of shares of Registrant's common stock, par value $.001 per share,
outstanding as of February 12, 2003 was 3,284,775.
Item 1. Financial Statements
LUCILLE FARMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, 2002 MARCH 31, 2002
----------------- ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash $ 143,000 $ 175,000
Accounts receivable, net of allowances of
$107,000 at December 31, 2002 and
$144,000 at March 31, 2002 3,504,000 3,688,000
Inventories 2,324,000 3,169,000
Deferred income taxes 72,000 72,000
Prepaid expenses and other current assets 679,000 164,000
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Total Current Assets 6,722,000 7,268,000
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PROPERTY, PLANT AND EQUIPMENT, NET 10,194,000 10,503,000
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OTHER ASSETS:
Due from officers 101,000 101,000
Deferred loan costs, net 396,000 250,000
Other 103,000 118,000
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Total Other Assets 600,000 469,000
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TOTAL ASSETS $ 17,516,000 $ 18,240,000
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See notes to consolidated financial statements
2
LUCILLE FARMS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, 2002 MARCH 31, 2002
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(UNAUDITED)
CURRENT LIABILTIES:
Revolving credit loan $ 2,742,000 $ 3,744,000
Accounts payable 2,845,000 6,824,000
Current portion of long-term debt 726,000 201,000
Accrued expenses 552,000 384,000
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Total Current Liabilities 6,865,000 11,153,000
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LONG-TERM LIABILITIES:
Long-term debt, net of current portion 7,186,000 6,771,000
Deferred income taxes 72,000 72,000
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Total Long-term Liabilities 7,258,000 6,843,000
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TOTAL LIABILITIES 14,123,000 17,996,000
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STOCKHOLDERS' EQUITY:
Preferred Stock- face 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 --
Common stock, $ 0.001 per value,
25,000,000 shares authorized 3,284,775 shares issued 3,000 3,000
at December 31, 2002 and 3,021,342 shares issued at
March 31, 2002
Additional paid-in capital 8,425,000 5,001,000
Accumulated deficit (4,872,000) (4,596,000)
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3,558,000 409,000
Less: 69,900 shares of treasury stock, at cost (165,000) (165,000)
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Total Stockholders' Equity 3,393,000 244,000
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 17,516,000 $ 18,240,000
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See notes to consolidated financial statements
3
LUCILLE FARMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
2002 2001
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SALES $ 28,262,000 $ 34,698,000
COST OF SALES 27,522,000 33,381,000
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GROSS PROFIT 740,000 1,317,000
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EXPENSE (INCOME):
SELLING 553,000 482,000
GENERAL AND ADMINISTRATIVE 739,000 742,000
INTEREST INCOME (5,000) (7,000)
INTEREST EXPENSE 603,000 646,000
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TOTAL EXPENSE (INCOME) 1,890,000 1,863,000
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(LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (1,150,000) (546,000)
(PROVISION) FOR INCOME TAXES (1,000) (2,000)
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(LOSS) BEFORE EXTRAORDINARY ITEM (1,151,000) (548,000)
EXTRAORDINARY ITEM: GAIN ON DEBT RESTUCTURING NET 875,000 --
--------------- ---------------
NET LOSS $ (276,000) $ (548,000)
NET INCOME (LOSS)PER SHARE
BASIC AND DILUTED:
Income (loss) before extraordinary item $ (.35) $ (.18)
Extraordinary item $ .27 --
Net loss $ (.08) $ (.18)
WEIGHTED AVERAGE SHARES
OUTSTANDING USED TO COMPUTE
NET INCOME PER SHARE
: BASIC 3,299,120 2,964,709
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: DILUTED 3,299,120 2,964,709
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See notes to consolidated financial statements
4
LUCILLE FARMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
2002 2001
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SALES $ 9,746,000 $ 9,568,000
COST OF SALES 9,374,000 9,861,000
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GROSS PROFIT 372,000 (293,000)
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OTHER EXPENSE (INCOME):
SELLING 206,000 195,000
GENERAL AND ADMINSTRATIVE 265,000 251,000
INTEREST INCOME 0 (1,000)
INTEREST EXPENSE 196,000 197,000
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TOTAL OTHER EXPENSE (INCOME) 667,000 642,000
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INCOME(LOSS) BEFORE INCOME TAXES (295,000) (935,000)
(Provision) for income taxes 0 (1,000)
---------------
NET LOSS $ (295,000) $ (934,000)
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NET INCOME(LOSS)PER SHARE
: Basic $ (.09) $ (.32)
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: Diluted $ (.09) $ (.32)
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WEIGHTED AVERAGE SHARES
OUTSTANDING USED TO COMPUTE
NET INCOME PER SHARE
:Basic 3,284,775 2,951,442
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:Diluted 3,284,775 2,951,442
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See notes to consolidated financial statements
5
LUCILLE FARMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
-----------------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITES:
NET INCOME(LOSS) $ (276,000) $ (548,000)
Adjustments to reconcile net (loss)/
income to net cash (used) by
operating activities:
Gain on debt restructuring (875,000) --
Value of options issued for service -- 6,000
Depreciation and amortization 638,000 533,000
Provision for doubtful accounts 63,000 16,000
(Increase) decrease in assets:
Accounts receivable 121,000 1,092,000
Inventories 845,000 (972,000)
Prepaid expenses and other current assets (515,000) 2,000
Other assets (131,000) (35,000)
Increase (decrease) in liabilities
Accounts payable 1,520,000 324,000
Accrued expenses 169,000 (46,000)
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Net cash provided (used) by operating activities 1,559,000 372,000
--------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant equipment (330,000) (1,187,000)
--------------- ---------------
Net Cash (used by) Investing Activities (330,000) (1,187,000)
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CASH FLOW FROM FINANCING ACTIVITIES:
(Payments of) proceeds from revolving credit loan-net (1,001,000) (961,000)
(Payments of) proceeds from long-term debt and notes - net (260,000) 1,801,000
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Net Cash (Used) Provided by Financing Activities (1,261,000) 840,000
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NET INCREASE IN CASH (32,000) 25,000
CASH -BEGINNING 175,000 212,000
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CASH -ENDING $ 143,000 $ 237,000
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See notes to consolidated financial statements
6
LUCILLE FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Consolidated Balance Sheet as of December 31, 2002,the Consolidated
Statement of Operations for the three and nine month periods ended
December 31, 2002 and 2001 and the Consolidated Statement of Cash Flows
for the nine month periods ended December 31, 2002 and 2001 have been
prepared by the Company without audit. In the opinion of management,
the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary
to present fairly the financial position of Lucille Farms, Inc. as of
December 31, 2002, the results of its operations for the three months
and nine months ended December 31, 2002 and 2001 and its cash flows for
the nine months ended December 31, 2002 and 2001.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principals 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, 2002 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
filed with the SEC on July 11, 2002, 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.
2. The results of operations for the three and nine months ended December
31, 2002 are not necessarily indicative of the results to be expected
for the entire fiscal year.
3. Inventories are summarized as follows:
December 31, 2002 March 31,2002
Finished goods $1,347,000 $2,244,000
Raw Materials 502,000 281,000
Supplies and Packaging 475,000 644,000
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$2,324,000 $3,169,000
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4. In May 2001, the Company obtained a $2,000,000 bank loan. The loan
collateralized by the Company's plant and equipment, bears interest at
1% above the bank's national variable rate. The loan is due in annual
principal installments of $500,000 beginning May 2003. Interest is
payable monthly. The first installment, due May 2003, has been
classified as a current liability at December 31, 2002.
The Company is presently seeking to replace its $4,000,000 secured
revolving credit line, the maturity of which has been extended to June
1, 2003. Should the Company not be able to secure alternative financing
by the extended due date it will request an additional extension of
this maturity until such financing is secured. However, there can be no
assurance that such financing can be secured or the extension granted.
Should the Company be unable to secure such financing or receive such
extension it will result in a significant negative effect on the
Company's liquidity.
5. Income (loss) per share of common stock was computed by dividing net
income (loss) by the weighted average number of common shares
outstanding during the period in accordance with the provisions of the
Statement of Financial Accounting Standards No. 128. Basic and diluted
per share amounts are the same for the three and nine months periods
ended December 31, 2002, since the effect of stock options would be
antidilutive and therefore not taken into consideration. Conversion of
preferred stock was not taken into consideration since the effect would
be antidilutive.
6. For the nine months ended December 31, 2002, non-cash investing and
financing activities were $5,500,000 for accounts payable restructuring
for a value ascribed to common stock, preferred stock, warrants and
debt issued in connection with the restructuring of $4,500,000.
For the nine months ended December 31, 2001, non-cash investing and
financing activities were $540,000 for preferred stock issued for
equipment.
The Company paid interest of approximately $603,000 and $646,000 for
the nine months ended December 31, 2002 and 2001, respectively.
The company paid no income taxes for the nine months ended December 31,
2002 and 2001.
7
7. We adopted FAS 144 "accounting for the Impairment of Disposal of
Long-Lived Assets", on April 1, 2002. FAS 144 supersedes FAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The primary objectives of FAS 144 are to
develop on accounting model based on the framework established in FAS
121 for long-lived assets to be disposed of by sale, and to address
significant implementation issues. Our adoption of FAS 144 did not have
a material impact on our financial position or results of operations.
In June 2002, the Financial Accounting Standards Board (or FASB) issued
FAS 146, "Accounting for Costs Associated with Exit or Disposal
Activities", which addresses accounting for restructuring, discontinued
operation, plant closing, or other exit or disposal activity. FAS 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. FAS 146 is to be applied
prospectively to exit or disposal activities initiated after December
31, 2002. The adoption of FAS 146 is not expected to have a significant
impact on our financial position and results of operations.
8. In May 2002, the Company restructured $5,500,000 of accounts payable
from its main supplier thorough the issuance of 333,333 shares of
common stock, 583 shares of Series B Preferred Stock with a detachable
10-year warrant and a $1,000,0000 convertible note payable in April
2005, 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.
9. In June 2002, the Company issued a 10-year warrant to B & W Investment
Associates, a partnership in which a director 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.
10. In October 2002, the Company entered into an employment agreement with
its chief executive officer which included a ten year option to
purchase 250,000 shares of common stock at $3.00 per share, which vest
over a four-year period.
11. On November 1, 2002 the 2002 Stock Option Plan ("Plan") became
effective. The Plan allows a maximum of 1,000,000 shares of common
stock to be issued of which options to purchase 275,000 shares have
been granted.
The Plan authorizes the granting of incentive stock options to the
Company's employees and non-statutory stock options to the Company's
employees, directors and certain consultants and advisors. The options
to be granted are intended to receive incentive stock option tax
treatment pursuant to section 422 of the Internal Revenue Code.
The Plan provides that the Board of Directors, or committee of the
Board, shall administer the Plan, and shall have the authority to
interpret and prescribe, amend and rescind the rules and regulations
relating thereto. Unless previously terminated in certain
circumstances, the Plan will terminate on October 30, 2012.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERTAIONS
Results of Operations
General
The Company's conventional cheese product's, which account for substantially all
of the Company's sales, are commodity items. The Company prices its conventional
cheese products competitively with others in the industry, which pricing, since
May 1997, is referenced to the Chicago Mercantile Exchange block cheddar price
(and was formerly referenced to the Wisconsin Block Cheddar Market). The price
the Company pays for fluid milk, a significant component of cost of goods sold,
is not determined until the month after its cheese has been sold. Regulatory
factors effecting our milk suppliers such as dairy subsidies and price supports
may have an effect on our raw material costs, but that impact cannot be
predicted. Milk is generally sold above the subsidy price, which is established
by government regulation. The subsidy price generally establishes a floor for
such costs. While the Company generally can anticipate a change in the price of
milk, it cannot anticipate the extent thereof. There is no corresponding floor
on the Chicago Mercantile Exchange block cheddar price. Therefore, if the block
cheddar price, to which our selling price is referenced, changes at a different
rate than the price of milk our margins are affected. By virtue of the pricing
structure for our cheese, the delay in the determination of the cost, and the
competitive nature of the marketplace, the Company cannot pass along to the
customer the changes in the cost of fluid milk in the price of its conventional
cheese. As a consequence thereof, the Company's gross profit margin for such
cheese is subject to fluctuation, which fluctuation, however slight, can have a
significant effect on the Company's profitability and cash flows.
The Company is unable to predict any future increase or decrease in the prices
in the Chicago Mercantile Exchange as such markets are 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 block
cheddar price on the Chicago Mercantile Exchange, the extent of such movement
and the timing thereof is not predictable as it is subject to government control
and support. As a result of these factors, the Company is unable to predict
pricing trends.
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2001.
Sales for the three months ended December 31, 2002 increased to $9,746,000 from
$9,568,000 for the comparable period in 2001, an increase of $178,000 (or 1.9%).
Approximately $370,000 (or 207.8%) of such increase was due to an increase in
the number of pounds of cheese sold while a decrease in the sale of whey
accounted for $192,000 (or 107.8%).
During the three month period ended December 31, 2002, the average quarterly
selling price of cheese was approximately $1.31. During the three month period
ended December 31, 2001, the average quarterly selling price was approximately
$1.37. There is no way to predict the trend of block cheddar prices on the
Chicago Mercantile Exchange and, therefore, we can provide no guidance as to the
future range of selling prices for commodity cheese.
9
With respect to its gross profit margin, the Company is continuing its efforts
to increase sales of its value-added products which are less dependent on the
block cheddar price on the Chicago Mercantile Exchange. The Company has now
positioned itself to co-pack private label retail products. However, there can
be no assurance as to whether such sales can be achieved or maintained. In
addition, the Company has continued to upgrade its equipment to enable it to
reduce costs and add product lines with greater margins.
In the three month period ended December 31, 2002, and December 31, 2001, sales
of whey amounted to $577,000 and $769,000, respectively.
Cost of sales and gross profit margin for the three months ended December 31,
2002 were $9,374,000 (or 96.2% of sales) and $372,000 (or 3.8% of sales),
respectively, compared to a cost of sales and gross profit margin of $9,861,000
(or 103.1% of sales) and $(293,000) (or 3.1% of sales), respectively, for the
comparable period in 2001. The cost of sales and corresponding increase in gross
profit margin for 2002 as a percentage of sales was the result of lower raw
material costs and a reduction of payroll costs for the period.
Selling, general and administrative expenses for the three month period ended
December 31, 2002 amounted to $471,000 (or 4.8% of sales) compared to $446,000
(or 4.7% of sales) for the comparable period in 2001. The company is currently
classifying all freight expense as a component of cost of sales and has
reclassified prior years to conform.
Selling expenses are mainly variable in nature. The most significant amount in
selling expense is sales commission expense, which was $73,000 and $108,000 in
2002 and 2001, respectively. The decrease resulted from a decrease in
commissionable sales in the period ended December 31, 2002. General and
administrative expenses were up slightly due to increased professional fees.
Interest expense (net) for the period ended December 31, 2002 amounted to
$196,000 compared to $197,000 for the period ended December 31, 2001, virtually
the same for each period.
The provision for income tax for the periods ended December 31, 2002, and 2001
of $0.00 and ($1,000), 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 period based on the
results of the operations.
The Company's net loss of $295,000 for the three month period ended December 31,
2002, represents a decrease of $639,000 from the net loss of $934,000 for the
comparable period in 2001. The primary factors contributing to these changes are
discussed above.
NINE MONTHS ENDED DECEMBER 31, 2002, COMPARED TO NINE MONTHS ENDED DECEMBER 31,
2001.
Sales for the nine months ended December 31, 2002 were $28,262,000 down from
$34,698,000 for the comparable period in 2001, a decrease of $6,436,000 (or
18.5%). Approximately $6,172,000 (or 95.7%) of such amount was due to a decrease
in the average selling price of cheese. This was offset by $708,000 (or 11.0%)
increase of pounds of cheese sold. Whey sales decreased to $1,426,000 from
$2,408,000, a decline of approximately $982,000 (or 15.3%) due to falling prices
and less volume.
Cost of sales and gross profit margins for the nine months ended December 31,
2002, was $27,522,000 (or 97.4%) of sales and $740,000 (or 2.6%) of sales
respectively, compared to a cost of sales and gross profit margin of $33,381,000
(or 96.2%) of sales and $1,317,000 (or 3.8%) of sales respectively for the
comparable period in 2001. The increase in the cost of sales and corresponding
decrease in gross profit margin in 2002 was primarily due to a decline in the
cheddar block market.
Selling, general and administrative expenses for the nine months ended December
31, 2002, amounted to $1,292,000 (or 4.6% of sales) compared to $1,224,000 (or
3.5% of sales) for the comparable period in 2001. The increase in selling,
general and administrative expenses were primarily due to an increase in sales
promotion expense, commissionable sales, and business travel expenses.
Interest expense (net) for the nine months ended December 31, 2002, amounted to
$598,000 compared to $639,000 for the nine months ended December 31, 2002, a
decrease of $41,000.
The provision for income tax for the nine month period ended December 31, 2002,
of $1000 and December 31, 2001 of $2,000 reflect minimum state taxes. Charges
for federal taxes were offset by changes in the valuation allowances for the
nine months ended December 31, 2002, and December 31, 2001. Such amounts are
re-evaluated each quarter based in the results of operations.
The company's net loss of $276,000 for the nine months ended December 31, 2002,
represents a decrease of $272,000 from the net loss of $548,000 for the
comparable period in 2001. The primary factors contributing to these changes are
discussed above, including the restructuring of $5,500,000 of accounts payable
resulting in an extraordinary gain of $875,000 during May 2002.
10
Liquidity and Capital Resources
The Company had available a $5,000,000 revolving credit facility at December 31,
2002 that was to expire on June 1, 2002 and had been extended to February 1,
2003. The bank has provided an additional extension of the facility to June 1,
2003, and has reduced the maximum amount available from $5,000,000 to
$4,000,000, at which time the outstanding principal is due. The rate of interest
on amounts borrowed against the revolving credit facility is based upon the New
York prime rate plus 1% (5.25% at December 31, 2002). Advances under this
facility are limited to 50% of inventory (with a cap on inventory borrowings of
$1,000,000) and 80% of receivables as defined in the agreement. The commitment
contains various restrictive covenants, the most significant of which relates to
limitations on capital expenditures ($1,000,000 annually without bank consent).
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 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 or
receive such extension will result in a significant negative effect in the
Company's liquidity.
At December 31, 2002, the Company had negative working capital of $(243,000) as
compared to negative working capital of ($3,885,000) at March 31, 2002. The
Company's revolving bank line of credit is available for the Company's working
capital requirements.
At December 31, 2002, $2,742,000 was outstanding under such revolving credit
line and $740,000 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 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, a $2,000,000 bank loan agreement was signed. The loan is
collateralized by a second position of the Company's plant and equipment.
Provisions of the loan are as follows:
A promissory note with interest payable at 1% above the rate of
interest established by the bank as its national variable rate and
principal repayable in four consecutive annual installments of $500,000
with the first such installment due on May 1, 2003 and the last such
installment due on May 1, 2006.
Proceeds of the new loan were used for working capital.
11
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. However, there is no assurance that
replacement of the revolving line or an extension thereof can be secured and
failure to secure such replacement financing or extension can have a significant
negative effect on the Company's liquidity.
Accounts receivable turnover is directly related to the sales volume in the
month preceding the statement date. Therefore, any change in turnover rate is
not attributable to rate of collections or changes in customer base.
For the nine-month period ended December 31, 2002, cash provided by operating
activities was $1,559,000. A loss from operations before extraordinary item of
$1,151,000 decreased cash. In addition, decreases in accounts receivable and
inventory and increases in accounts payable and accrued expenses provided cash
of $2,536,000 in the period. Increases in prepaid expenses and other assets of
$527,000 used cash in the period.
Net cash used by investing activities was $330,000 for the period ended December
31, 2002, which represented purchase of property, plant and equipment.
Net cash used by financing activities was $1,261,000 for the period ended
December 31, 2002. Payments of the revolving credit loan of $1,001,000 decreased
cash. Payments of long-term debt and notes of $160,000 provided cash in the
period.
12
The Company presently is seeking to replace its $5,000,000 secured revolving
credit line, the maturity of which has been extended to June 1, 2003. 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 at least 12 months. Failure to secure such
financing or receive such extension will result in a significant negative effect
on the Company's liquidity.
The Company's website is www.lucille-farms.com. The Company is in the process of
updating of its website to enable users to access its filings with the SEC as
soon as reasonably practicable. When updated, the Company will make 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. Until such time as the website is updated,
the Company will provide electronic or paper copies free of charge upon request.
Safe Harbor Statement
This Quarterly Report on Form 10-Q (and any other reports issued by the Company
from time to time) contains certain forward-looking statements made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on current expectations that
involve numerous risks and uncertainties. Actual results could differ materially
from those anticipated in such forward-looking statements as a result of various
known and unknown factors including, without limitation, future economic,
competitive, regulatory, and market conditions, future business decisions, the
uncertainties inherent in the pricing of cheese on the Chicago Mercantile
Exchange upon which the Company's prices are based, changes in consumer tastes,
fluctuations in milk prices, and those factors discussed above under
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Words such as "believes," "anticipates," "expects," "intends,"
"may," and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. The
Company undertakes no obligation to revise any of these forward-looking
statements.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The registrant 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, December 31, 2002 and March 31, 2002
amounted to $4,742,000, and $5,744,000, respectively. In as much as this debt is
based upon the Prime Rate plus 1%, the cost of this debt will increase or
decrease accordingly with changes in the prime rate.
The Company has exposure to the commodity price for cheese, dry whey and fluid
milk. We have addressed these exposures in the general paragraph of MD&A Item 2.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Quarterly Report on 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 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. Subsequent to the date of that evaluation, there have been no
significantly changes in the Company's internal controls or in other factors
that could significantly affect internal controls, nor were any corrective
actions required with regard to significant deficiencies and material
weaknesses.
13
Part II - Other Information
Item 4. Controls and Procedures
An annual meeting of Stockholders' was held on December 20, 2002. The matters
voted on at the meeting and the votes cast were as follows:
(a) The following directors were appointed to serve as directors
until the Annual Meeting of Stockholders of the Company to be
held in the year 2003:
VOTES FOR VOTES WITHHELD
--------- --------------
Mr. Alfonso Falivene 2,647,041 1,221,067
Mr. Howard Breslow 2,647,041 1,221,067
Mr. Jay Rosengarten 2,647,041 1,221,067
Mr. Leon Berthiaume 2,647,041 1,221,067
Mr. George Bell 2,647,041 1,221,067
Mr. Ralph Singer 2,647,041 1,221,067
(b) The approval of the issuance of shares of common stock in
connection with a financing transaction with St. Albans
Cooperative Creamery, Inc.
FOR AGAINST ABSTAIN
--- ------- -------
1,518,092 4,600 200
(c) Approval to amend the Company's Certificate of Incorporation
to increase the authorized shares of common stock from
10,000,000 shares to 25,000,000 shares.
FOR AGAINST ABSTAIN
--- ------- -------
2,642,812 6,850 0
(d) Approval of the 2002 Stock Option Plan.
FOR AGAINST ABSTAIN
--- ------- -------
2,100,172 222,000 0
(e) The selection of Wiss & Company as independent auditors for
the year ending March 31, 2003 was ratified.
FOR AGAINST ABSTAIN
--- ------- -------
2,648,941 900 100
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification of Periodic Report dated February 14, 2003
Exhibit 99.2 Certification of Periodic Report dated February 14, 2003
Exhibit 99.3 Certification of Periodic Report dated February 14, 2003
(b) Reports on Form 8-K
Current Report on Form 8-K filed November 11, 2002, relating to the
transaction between the Company and St. Albans Cooperative Creamery,
Inc.
Current Report on Form 8-K filed November 21, 2002, relating to the
transaction between the Company and St. Albans Cooperative Creamery,
Inc.
Current Report on Form 8-K filed December 5, 2002, relating to the
transaction between the Company and St. Albans Cooperative Creamery,
Inc.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
February 14, 2003
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
(Principal Financial Officer)
CERTIFICATION
I, Jay Rosengarten, Chief Executive Officer of Lucille Farms, Inc.
(the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The Company's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: February 14, 2003
By: /s/ Jay M. Rosengarten
--------------------------
Jay Rosengarten
Chief Executive Officer
CERTIFICATION
I, Albert N. Moussab, Chief Financial Officer of Lucille Farms, Inc.
(the "Company"), certify that:
5. I have reviewed this quarterly report on Form 10-Q of the Company;
6. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
7. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
8. The Company's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: February 14, 2003
By: /s/ Albert N. Moussab
-------------------------
Albert N. Moussab
Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Description of Exhibit
--------------- -------------------------------------------------------------
99.1* Certification of Periodic Report dated February 14, 2003
99.2* Certification of Periodic Report dated February 14, 2003
* Filed herewith