SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[Mark One]
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-12506
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LUCILLE FARMS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 13-2963923
(State of incorporation) (I.R.S. employer identification no.)
12 Jonergin Drive, P.O. Box 125 (802) 868-7051
Swanton, VT 05488 (Registrant's telephone number)
(Address of principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.001 per share
(Titles of Classes)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $2,571,382 based on the average bid and asks price as reported by
NASDAQ on June 24, 2005. Shares held by each officer, director, and person who
owns 10% or more of the Registrant's outstanding common stock have been excluded
in that such persons may be deemed to be affiliates. The determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of the Registrant's common stock outstanding as of June 28,
2005 was 3,353,937.
Documents Incorporated by Reference
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None
PART I
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ITEM 1. BUSINESS
General
Lucille Farms, Inc. (the "Company") is engaged in the manufacture, processing,
shredding and marketing of low moisture mozzarella cheese (including whole milk,
part skim and reduced fat low moisture mozzarella cheese), pizza cheese (a
product made with low moisture mozzarella cheese and other natural ingredients)
and square provolone, and the shredding of other cheese and cheese blends. The
Company's pizza cheese and reduced fat low-moisture mozzarella cheese have been
developed utilizing proprietary formulas and processes. The Company also sells
whey, a by-product of its cheese making operation, for animal food. For the
fiscal year ended March 31, 2005, sales of low moisture mozzarella cheese,
shredded cheese and blended cheese accounted for approximately 85.2% of the
Company's sales revenues. Sales of the Company's pizza cheese and square
provolone products during the fiscal year ended March 31, 2005, were 5.5% of the
Company's revenue, and sales from a variety of other cheese purchased by the
Company, including round provolone, ricotta and cheddar, were 3.0% of the
Company's revenues. Whey accounted for 3.6% of the Company's revenue and the
sale of surplus ingredients accounted for 2.7%. The Company's low moisture
mozzarella cheese, pizza cheese and square provolone products are manufactured
in the Company's production facility in Swanton, Vermont, and are made of
natural ingredients.
The Company's products are sold primarily to the food service and industrial
segments of the cheese market. The food service segment consists of food service
distributors, pizza chains and independent pizzerias, restaurants, recreational
facilities, business feeders, health care facilities, schools and other
institutions, which prepare food for on-premises consumption. The Company's
products are sold into this marketplace by distributors who deal directly with
the Company's in house sales staff and brokers. The industrial segment includes
manufacturers that utilize the Company's products as an ingredient in processed
foods and frozen entrees and side dishes. Products are sold into this
marketplace by the Company's in-house sales staff and brokers.
The Company purchases round provolone, ricotta, and cheddar cheese from
co-packers. These cheeses are all natural cheese that meets or exceeds all
federal and industry standards for purity, freshness, taste, appearance and
texture.
Products
The Company's products include the following:
(1) Low Moisture Mozzarella Cheese (including whole milk, part skim and
reduced fat)
The Company's all natural low moisture mozzarella cheese meets or exceeds all
federal standards. During the fiscal years ended March 31, 2005, 2004 and 2003,
low moisture mozzarella cheese loafs (including whole milk, part skim and
reduced fat) and shredded cheese and cheese blends accounted for approximately
85.2%, 91.6% and 89.2%, respectively, of the Company's sales.
(2) Pizza Cheese and Square Provolone
During the fiscal years ended March 31, 2005, 2004, and 2003, the Company's
pizza cheese and square provolone accounted for approximately 5.5%, 1.0% and
0.2%, respectively, of the Company's total sales.
These products are made using the formulas and processes developed by the
Company, which are believed to be proprietary.
(3) Round Provolone, Cheddar and Ricotta
During the fiscal years ended March 31, 2005, 2004 and 2003, sales of these
cheeses accounted for approximately 3.0%, 2.8% and 3.1%, respectively, of the
Company's sales.
1
(4) Whey
The Company dries whey, a by-product of cheese making, in its Company owned
whey-drying facility, for sale as animal feed. During the fiscal years ended
March 31, 2005, 2004, and 2003, sales of whey accounted for approximately 3.6%,
3.3% and 5%, respectively, of the Company's sales.
The sale of surplus ingredients accounted for the balance of sales during the
fiscal years ended March 31, 2005, 2004 and 2003.
Production Facilities
Currently, the Company produces all of its products at its manufacturing plant
in Franklin County, Swanton, Vermont. Franklin County is Vermont's largest milk
producing area. The plant has 73 full-time employees. The Company has equipment
to shred, dice, vacuum package, gas flush bag package, and label its products.
The Company's facility has the capacity to produce approximately 36,000,000
pounds of cheese product per year and shred 24,000,000 pounds of product per
year. In the event additional capacity is required, the Company may either (a)
contract out its excess production to, and/or rent plant time from, other
manufacturers, or (b) further expand its current plant facilities, subject to
appropriate financing and the possible increase in the volume of wastewater it
is licensed to process.
Whey Drying Facility
In 1999, the Company completed construction of, and began operating, a 10,000
square foot whey drying facility adjacent to its Swanton, Vermont cheese plant.
The facility dries whey into a product referred to as popcorn whey, which its
mills and sells to companies for mixture with other ingredients which are a
component of animal feed.
Whey is a byproduct of the cheese making process. It consists of water, protein,
calcium, lactose and other minerals. In the past, whey was regarded as an
environmental pollutant, and its disposal was expensive. Reprocessed, the whey
can be sold as a component of animal feed and for other uses. The whey is priced
based on a formula tied to the price of whey on a commodity market.
Quality Control
The Company is supplied its milk by the largest milk cooperative headquartered
in Vermont. Quality control starts on the local farms, which produce the milk
for the cooperative. The milk is delivered to the Company directly from the
farms on a regular and timely basis. The Company tests all milk received.
Throughout the production process, the Company subjects its products to quality
control inspection and testing in order to satisfy federal and state
regulations, meet customer specifications and assure consistent product quality.
The Company currently employs three persons qualified to perform the necessary
testing as prescribed by state, federal and the Company's quality standards and
specifications. Such tests are performed at the Company's on-site laboratory. On
a regular basis, random samples are sent to qualified independent labs to test
for bacteria and other micro-organisms. Federal and state regulatory agencies
also perform regular inspections of the Company's products and facilities.
Raw Materials
At present, there are adequate supplies of raw materials, primarily milk,
utilized by the Company in manufacturing its products and the Company expects
such adequate supplies to continue to be available. The Company has a milk
supply contract with St. Albans Cooperative Creamery, Inc. and has been able to
purchase as much milk as needed for its production. The Cooperative also sells
to the Company condensed skim milk and dry milk powder.
Markets and Customers
The Company's products are sold primarily to the food service and industrial
segment of the cheese market.
2
The food service segment of the cheese market includes food service
distributors, pizza chains, recreational facilities, business feeders, health
care facilities, schools and other institutions that utilize the Company's
products as ingredients in preparing foods for on premise consumption. The
Company sells its products to the food service segment of the cheese market
through the Company's in house sales force and network of non-exclusive food
brokers who then sell to approximately 140 distributors throughout the eastern
United States. For the fiscal years ended March 31, 2005, 2004 and 2003, sales
of the Company's products to the food service segment of the cheese market
accounted for approximately 94.1%, 90.5% and 69% of revenues, respectively. For
the fiscal year ended March 31, 2005, approximately 93.8% of such sales were of
the Company's low moisture mozzarella type cheeses and 11.4% was pizza cheese.
In fiscal year ended March 31, 2005 one customer accounted for approximately 10%
of sales. In the fiscal years ended March 31, 2004 and 2003, no one customer
accounted for more than 10% of sales.
In the industrial segment of the cheese market, the Company sells its products
to manufacturers for use as an ingredient in processed foods, such as frozen and
refrigerated pizzas, a variety of Italian specialty convenience foods, and
general frozen entrees and side dishes. The majority of the Company's sales of
its cheese products to the industrial market are made directly by the Company's
in-house sales staff and its brokers. For the fiscal years ended March 31, 2005,
2004 and 2003, sales of the Company's products to the industrial segment of the
cheese market accounted for approximately 5.9%, 6% and 22% of revenues,
respectively.
The Company discontinued sales to the retail segment of the cheese market in
2005. In 2004 and 2003, the retail segment accounted for approximately 2% and 2%
of total sales.
Sales and marketing
The Company has shifted its sales and marketing efforts to emphasize its four
product groups: low moisture mozzarella cheese pizza cheese, provolone and
shredded cheeses. The shredded cheese products range from low moisture
mozzarella cheese, and pizza cheese to various blended cheese products The
Company's reduced fat low moisture mozzarella cheese has been positioned for the
health conscious consumer. The Company's pizza cheese product has been
positioned to be an alternative to mozzarella cheese, designed for the value
conscious customer who is looking for a lower cost alternative to mozzarella
cheese.
The Company continues to offer its products to customers desiring a private
label solution as well as customers choosing to sell the Company's brands.
Competition
The Company faces intense competition. Its whole milk and part skim low moisture
mozzarella cheese and square provolone are commodity products. These are price
sensitive products sold by numerous small local, medium-sized regional and large
national competitors. National manufacturers include Sorrento Cheese Company
Inc. and Saputo. Also, there are a number of national dairy cooperatives, D.F.A.
Inc. and Land O' Lakes, Inc., which compete in the Company's marketplace. Many
of these competitors have significantly greater resources (financial and other)
than the Company.
The Company has positioned its reduced fat low moisture mozzarella cheese as a
premium product within the low moisture mozzarella cheese category.
The Company's pizza cheese product was created to sell at prices below
traditional mozzarella cheese. In this field the company competes with other
manufacturers of pizza cheese, including Leprino and D.F.A. Inc.
The Company believes that the principal competitive factors in the marketing of
its products are quality, performance characteristics, consistency, customer
service, and price. The Company believes that its products compete favorably
with respect to these factors in its primary market segments.
Trademarks and Patents
The Company has the trademarks Smart Cheese (TM), Salerno (TM), Select(TM),
Monte Carlo(TM), Mozzi-RITE(TM), and Tasty-Lite Cheese(TM) for its products. The
Company believes these trademarks are an important means of establishing
customer recognition for the Company and its products. However, there can be no
assurance as to the degree that these trademarks offer protection to the
Company, or that the Company will have the financial resources to engage in
litigation against any infringement of its trademarks, or as to the outcome of
any litigation if commenced.
3
Although the Company believes its formulas, processes and technology for its
pizza cheese and reduced fat cheese products are proprietary, the Company has
not sought and does not intend to seek patent protection for such technology. In
not seeking patent protection, the Company is instead relying on the complexity
of its technology, trade secrecy laws and employee confidentiality agreements.
However, there can be no assurance that other companies will not acquire
information which the Company considers to be proprietary or will not
independently develop equivalent or superior products or technology and obtain
patents or similar rights with respect thereto. Although the Company believes
that its technology has been independently developed and does not infringe upon
the patents of others, certain components of the Company's manufacturing
processes could infringe existing or future patents, in which event the Company
may be required to modify its processes or obtain a license. No assurance can be
given that the Company will be able to do so in a timely manner or upon
acceptable terms and conditions, and the failure to do either of the forgoing
could have a material adverse effect on the Company.
Government Regulation
The dairy industry is subject to extensive federal, state and local government
regulation, including the Food and Drug Administration ("FDA"), the United
States Department of Agriculture, the State of Vermont Department of Agriculture
and the Vermont Environmental Protection Agency, regarding the quality, purity,
manufacturing, marketing, advertising, labeling and distribution of food
products. The Company's plant is subject to regulation and inspection by these
agencies and failure to comply with one or more regulatory requirements can
result in fines and sanctions, including the closing of all or a portion of the
facility until brought back into compliance.
Food products are also subject to "standard of identity" requirements mandated
by both federal and state agencies to determine the permissible qualitative and
quantitative ingredient content of foods. The Company believes that all of its
products subject to FDA standard of identity requirements meet those
requirements.
The Company's manufacturing plant is believed to be operating in compliance with
all regulations, and has all the necessary licenses, permits and approvals
required to operate. The Company currently operates a facility for the purpose
of pre-treating the wastewater generated from the Company's manufacturing
facility. The Company entered into an agreement with the State of Vermont to
make significant improvements in its wastewater facility. The improvements have
been completed and the Company believes the facility is in compliance with all
regulatory requirements.
Employees
The Company currently employs 79 full-time employees. Of the 79 employees, six
are in executive and administrative positions, 68 are in production and
distribution, and five are in clerical positions. The Company recently moved its
headquarters to Swanton Vermont and 73 employees are located at that location.
Four are located at the Company's sales offices in Montville, New Jersey.
Website
The Company's website is www.Lucille-Farms.com. The Company's website enables
users to access its filings with the SEC as soon as reasonably practicable. The
Company makes available, free of charge through its website, its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC.
ITEM 2. PROPERTIES
The Company's Swanton, Vermont manufacturing plant was constructed in 1975 in
conjunction with the Target Area Development Corporation (a non-affiliated
industrial development agency), which was to retain title to the plant during a
fixed lease period expiring on December 31, 1999. Under such lease, the Company
was obligated by the Target Area Development Corporation to finance the cost of
constructing the plant. On July 5, 1994 the Company exercised its right to
purchase the premises for $1.00 plus the unamortized balance of said loans. A
majority of the machinery and equipment located at the plant is also included
under the above arrangement. The Swanton facility is one floor consisting of
approximately 40,000 square feet.
4
The Company currently operates a facility for the purpose of pre-treating the
wastewater generated from the Company's manufacturing facility. The Company
entered into an agreement with the State of Vermont to make significant
improvements in the wastewater facility. The improvements have been completed
and the Company believes the facility is in compliance with all regulatory
requirements.
In 1999 the Company completed construction, and began operating, a 10,000 square
foot whey drying facility adjacent to its Swanton, Vermont cheese plant.
The Company leases a parcel of land adjacent to the Vermont facility. Messrs
Gennaro Falivene, Alfonso Falivene and the Estate of Philip Falivene, an officer
and/or principal stockholder of the Company own this parcel. The space is used
as an employee parking lot and its use was required in conjunction with the
construction of the whey drying facility. The lease is for a ten-year period
beginning April 1998. Rentals are $750 monthly for the first five years and $900
monthly for the additional five-year period. Rent expense for the years ended
March 31, 2005, 2004, and 2003, was $10,800, $10,800 and $9,000 respectively.
This lease has a purchase option to purchase the property at fair market value
at the end of the ten-year period. This lease was assigned to UPS Capital
Business Credit as security in conjunction with the whey plant financing.
The Company leases a building for administrative offices and warehouse space for
dry goods across the street from the Vermont facility. The lease is for
approximately one year beginning December 11, 2003 and expires on December 31,
2004, with the right to renew said lease for an additional term of one year
subject to all of the terms and conditions set forth in the lease. The Company
exercised its right to renew the lease for an additional one year term beginning
January 1, 2005. The lease amount is $43,200 per year, payable in equal monthly
installments of $3,600, in advance on the 11th day of each month. The Company
has the right to purchase the premises for the sum of $610,000 at anytime during
the initial term or, if the Company exercises its option for a renewal term, the
renewal term of the lease.
The Company's sales offices, consisting of approximately 1,900 square feet, are
located in Montville, New Jersey. Approximately 1,000 square feet of such
premises are leased from Messrs. Gennaro Falivene, Alfonso Falivene and the
Estate of Philip Falivene, an officer and/or principal stockholder of the
Company, all of who own the office condominium unit. The Company currently pays
Messrs. Falivene $1,200 per month rent for such premises, which is the fair
market value for such space, on a month-to-month basis. During the fiscal years
ended March 31, 2005, 2004 and 2003, the Company paid approximately $14,000,
$14,000 and $14,000, respectively, towards the rental of such offices. The
Company also leases an additional 900 adjacent square feet for $750 monthly on a
month-to-month basis. Messrs. Alfonso Falivene, Gennaro Falivene, and the Estate
of Philip Falivene also own these premises. This space is primarily used for
marketing operations. Rent expense for this space was $9,000, $9,000 and $9,000,
respectively, for the years ended March 31, 2005, 2004 and 2003.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Common Stock trades on the National Association of Securities Dealers
Automated quotation System ("NASDAQ") under the symbol "LUCY". The following
table sets forth the high and low bid quotations reported on NASDAQ for the
Common Stock for the periods indicated.
High Low
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Year Ended March 31, 2005:
First Quarter 2.200 1.190
Second Quarter 4.950 1.810
Third Quarter 3.940 1.800
Fourth Quarter 1.980 1.000
Year Ended March 31, 2004:
First Quarter 1.190 .820
Second Quarter 1.490 .740
Third Quarter 1.580 1.010
Fourth Quarter 1.420 .840
The above quotations represent prices between dealers, do not include retail
mark-ups, markdowns or commissions and do not necessarily reflect actual
transactions.
As of June 28, 2005 there were approximately 96 holders of record of Common
Stock. Since many shares are registered in street name, the number of beneficial
owners is considerably higher.
The Company has never paid cash dividends on its Common Stock. Payment of
dividends, if any, is within the discretion of the Company's Board of Directors
and will depend, among other factors, on earnings, capital requirements and the
operating and financial condition of the Company. At the present time, the
anticipated capital requirements are such that the Company intends to follow a
policy of retaining earnings, if any, in order to finance its business.
ITEM 6. SELECTED FINANCIAL DATA
The following tables summarize certain financial data, which should be read in
conjunction with the reports of the Company's independent auditors and the more
detailed financial statements and the notes thereto which appear elsewhere
herein.
Statement of Operations Data (in thousands, except share and per share data)
Year Ended March 31
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2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Net Sales ........................... $ 47,802 $ 42,174 $ 36,691 $ 44,915 $ 41,374
Net income (loss) ................... $ (3,269) 209 (847) (1,540) (1,477)
Net income (loss) per share ......... (0.98) 0.07 (0.26) (0.52) (0.5)
Weighted average common and common
equivalent shares outstanding ....... 3,329,116 3,162,410 3,229,220 2,961,392 2,971,342
Balance Sheet Data (in thousands)
March 31
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2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Total assets ........................ $ 18,561 $ 18,960 $ 16,762 $ 18,827 $ 17,194
Long term debt and capital lease
obligations ......................... 13,766 6,423 7,143 6,771 9,250
Total liabilities ................... 18,823 15,953 13,817 18,583 15,924
Working capital ..................... 3,607 (383) (238) (3,885) 1,103
Stockholders' equity ................ (262) 3,007 2,945 244 1,270
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
General
The Company's low moisture mozzarella cheese, which accounts for more than a
majority of the Company's sales, is a commodity item. The Company prices this
product competitively with others in the industry, which pricing is based on the
Chicago Mercantile Exchange Block Cheddar Market (CME Block Market). The price
the Company pays for fluid milk and condensed skim milk solids, a significant
component of cost of goods sold, is not determined until the start of the month
after its cheese has been sold. Generally, the price of milk for any particular
month, is computed, based on formulas determined by the United States Department
of Agriculture (USDA), by the National Agricultural Statistical Service (NASS)
after the end of the month by reference to the average selling price of block
cheddar cheese, barrel cheddar cheese, butter, non-fat dry milk and whey. Thus,
everything else being equal and there being stability in the price of cheese,
the price of milk will follow the price of cheese in an orderly manner, the
normal spread between the selling price of cheese and the cost of milk will be
maintained, and there will be stability in the Company's gross profit margin.
However, sometimes things are not equal. For one thing, the market information
required by NASS to compile the price of milk is not immediately available and
takes time to collect. For this reason, the commodity prices used to calculate
the milk price is two weeks old when the NASS receives it at the end of a
particular month (i.e. it includes the commodity prices for two weeks of the
current month and two weeks of the prior month), creating a "lag" between the
data used for determining the selling price of cheese for the month (the CME
Block Market prices for the month) and the data used for determining the cost of
milk for the month (based upon commodity prices for two weeks of the current
month and two weeks of the prior month). Thus, if there is a precipitous
increase or decrease in the price of block cheddar cheese during a given month,
it may not be reflected in the average selling price of block cheddar cheese
utilized in computing the price of milk for such month. In such event, there is
a disconnect between the average price of cheese for the month and the cost of
milk for the month . In such a case, the price of milk does not increase or
decrease as fast as the price of cheese, and the Company's gross profit margin
is affected accordingly. By virtue of the fact that the Company does not know
its cost of milk for the month until the following month and customers are
billed for cheese when it is shipped to them during the month, the Company
cannot readily pass along to customers the changes in the cost of milk. As a
consequence thereof, the Company's gross profit margin for its product is
subject to fluctuation, which fluctuation, however slight, can have a
significant effect on profitability.
Results for the year ended March 31, 2005 were down significantly from 2004. The
spread between the selling price of cheese and the cost of milk changed
dramatically during the year ended March 31, 2005, compared to historical
spreads. This spread, which has a direct effect on gross margin for the company,
declined over 50% compared to the year ended March 31, 2004, exceeding
historical lows, and resulted in a negative gross profit of $1,668,000 for the
last quarter of the Company's fiscal year ended March 31, 2005. This decline in
gross margin has affected all cheese makers throughout the United States.
The Company is unable to predict any future increase or decrease in the prices
in the CME Block Market as such market is subject to fluctuation based on
factors and commodity markets outside the control of the Company. Although the
cost of fluid milk does tend to move correspondingly with the CME Block Market,
the extent of such movement and the timing thereof is not predictable. As a
result of these factors, the Company is unable to predict pricing trends.
The financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. At March 31, 2005, the Company has a loss from
continuing operations of $3,269,000, cash used in operating activities of
$1,026,000 and a deficiency in assets of $262,000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the outcome of this
uncertainty.
The Company has developed a business plan designed to improve gross margins and
reduce its dependency on the spread allowed by the calculation of the milk
price. The plan calls for various capital improvements that will significantly
reduce the cost of producing cheese and change the type of whey produced by the
Company to whey protein concentrate for human and animal consumption. The
capital improvements needed to achieve the business plan will require an
infusion of capital of approximately $8,000,000. Discussions are currently
underway with St. Albans Cooperative, the Company's milk supplier, the Vermont
Economic Development Authority, the United States Department of Agriculture, the
Franklyn County Economic Development Authority, the Village of Swanton, Vermont,
UPS Business Credit, LLC and LaSalle Business Credit, LLC to structure a
financing package that would provide a portion of such financing as well as
strengthen the Company's balance sheet. Also, the Company is having
conversations with a potential joint venture partner that would provide the
necessary financing to modify the Company's whey facility. There can be no
assurance that such a financing package or joint venture will be forthcoming.
7
Year ended March 31, 2005 compared to the year ended March 31, 2004
Sales for the year ended March 31, 2005 increased to $47,802,000 from
$42,174,000 for the comparable period in 2004, an increase of $5,628,000 (or
13.3%). Approximately $6,887,000 (or 122%) of such increase was due to an
increase in the average selling price for cheese. The increase in average
selling price was the result of an increase in the CME Block Market prices
resulting in a higher selling price per pound of cheese. This increase was
partially offset by a decrease in the number of pounds of cheese sold reducing
sales by approximately $1,591,000 or (28%). The remaining $332,000 sales
increase this period represented an increase in whey sales. Such increase was
due to an increase in the average selling price of whey. In the years ended
March 31, 2005 and March 31, 2004, approximately 25,000,000 and 27,000,000
pounds of cheese and 8,900,000 and 10,100,000 pounds of whey were sold,
respectively. The volume of cheese and whey sold during 2005 was less than that
sold in 2004 as the Company did not choose to pursue marginal business.
During the fiscal year ended March 31, 2005, the average quarterly selling
price of cheese ranged from approximately $1.72 to $2.06. During the fiscal year
ended, March 31, 2004, the average quarterly selling price of cheese ranged from
approximately $1.22 to $1.64. There is no way to predict the trend of the CME
Block Market and the Company cannot provide any guidance as to future trends or
as to range of selling price for commodity cheese.
In the years ended March 31, 2005 and March 31, 2004, sales of whey amounted to
$1,744,000 and $1,412,000, respectively. As explained above, the average selling
price of whey improved in 2005 compared to 2004. The average selling price of
whey for 2005 was $.20 per pound compared to $.14 for 2004. Whey pounds sold
were down due to lower cheese production
Cost of sales and gross profit margin for the year ended March 31, 2005 were
$47,674,000 (or 99.7% of sales) and $128,000 (or 0.3% of sales), respectively,
compared to a cost of sales and gross profit margin of $39,287,000 (or 93.1% of
sales) and $2,887,000 (or 6.9% of sales), respectively, for the comparable
period in 2004. Higher selling prices were offset by higher milk prices along
with increased fuel costs, insurance, and repairs and maintenance.
Fuel costs were up $205,000 in 2005 compared to 2004 due to the higher market
prices for gas in 2005. Insurance costs were up $170,000 due to higher worker's
compensation rates. These rates are determined based on the previous three years
experience. Experience has improved over the past year and rates are expected to
decline next year. Repairs and maintenance was $97,000 higher in 2005. All items
contributing to this increase were not significant by themselves.
Selling, general and administrative expenses for the year ended March 31, 2005
amounted to $2,422,000 (or 5.1% of sales) compared to $1,932,000 (or 4.7 % of
sales) for the comparable period in 2004.
Selling expenses are mainly variable in nature. The most significant component
of selling expense is sales commission and promotion expenses. Sales commission
expenses were $392,000 and $330,000 in 2005 and 2004, respectively. The increase
resulted from an increase in commissionable sales in the year ended March 31,
2005. Promotion expense was $333,000 and $130,000 in 2005 and 2004,
respectively. Increased efforts to promote non-marginal business attributed to
the increase in promotion expense. A portion of this increase is attributable to
a rebate program and a portion is attributable to use of a marketing consultant
and brochures in 2005. Advertising expense also increased over the previous year
to $135,000 in 2005 compared to $50,000 in 2004. This increase can be attributed
also to the push to increase non-marginal business.
Generally, general and administrative expenses are fixed in nature. The more
significant items in general and administrative expense are professional fees,
payroll, provision for bad debts and bank charges amounting to:
2005 2004
----- ----
Professional fees $ 192,000 $268,000
Payroll 428,000 346,000
Provision for bad debts 50,000 43,000
Bank charges 131,000 28,000
8
Professional fees paid to engineering consultants were down as expenses
associated with improving the efficiency of production and implementing good
manufacturing procedures were incurred in 2004 and not in 2005. The increase in
payroll costs is the result of a salary increase for some of the employees
including the CEO and the President. The increase in bank charges is due to loan
covenant violation fees.
Interest expense for the year ended March 31, 2005 amounted to $935,000 compared
to $800,000 for the year ended March 31, 2004, an increase of $135,000. This
increase is primarily due to financing higher milk costs during the year and
losses incurred during the fourth quarter of the year. Interest rates were also
somewhat higher compared to 2004.
The provision for income tax for the years ended March 31, 2005 and 2004 of
$1,000 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 year based on the
results of the operations.
The Company's net loss of $3,269,000 for 2005 was $3,478,000 less than the
profit of $209,000 for the comparable period in 2004. The primary factors
contributing to these changes are discussed above.
Year ended March 31, 2004 compared to the year ended March 31, 2003
Sales for the year ended March 31, 2004 increased to $42,174,000 from
$36,691,000 for the comparable period in 2003, an increase of $5,483,000 (or
14.9%). Approximately $6,143,000 (or 112%) of such increase was due to an
increase in the average selling price for cheese. The increase in average
selling price was the result of an increase in the CME Block Market prices
resulting in a higher selling price per pound of cheese. This increase was
partially offset by a decrease in the number of pounds of cheese sold reducing
sales by approximately $277,000 or (5%). The remaining $383,000 sales decrease
this period represented a decrease in whey sales. Such decrease was due to a
decrease in the average selling price of whey. In the years ended March 31, 2004
and March 31, 2003, approximately 27,000,000 and 27,200,000 pounds of cheese and
10,100,000 and 12,160,000 pounds of whey were sold, respectively.
During the fiscal year, ended March 31, 2004, the average quarterly selling
price of cheese ranged from approximately $1.22 to $1.64. During the fiscal year
ended, March 31, 2003, the average quarterly selling price of cheese ranged from
approximately $1.24 to $1.34. There is no way to predict the trend of the CME
Block Market and the Company cannot provide any guidance as to future trends or
as to range of selling price for commodity cheese.
In the years ended March 31, 2004 and March 31, 2003, sales of whey amounted to
$1,412,000 and $1,795,000, respectively.
Cost of sales and gross profit margin for the year ended March 31, 2004 were
$39,287,000 (or 93.1% of sales) and $2,887,000 (or 6.9% of sales), respectively,
compared to a cost of sales and gross profit margin of $35,786,000 (or 97.5% of
sales) and $905,000 (or 2.5% of sales), respectively, for the comparable period
in 2003. Higher selling prices offset the increase in milk prices along with
large reductions in labor costs, freight charges and repairs and maintenance.
This increase was partially offset by an increase in whey removal, insurance
expense and parts and supplies for the whey plant. The reduction in labor costs
of approximately $195,000 can be attributed to better scheduling of shifts to
reduce overtime and management's decision to increase production when milk costs
are low and reduce production when milk costs were high. The decline in freight
charges of approximately $687,000 is the result of getting bids for shipping
needs instead of automatically renewing contracts with shippers. In addition,
the sales agreement with the customer that buys the Company's whey is priced
F.O.B .Swanton, Vermont, thus reducing freight charges. Repairs and maintenance
also experienced a reduction of approximately $100,000 due to the in house
maintenance department performing more of the repair work instead of hiring
outside contractors to do this work
The increase in expenses for whey removal is a result of the Company not having
sufficient capacity to process all of the whey it produced. This resulted in the
Company having to haul away the excess whey. Insurance expense climbed
approximately $140,000 due to the increase in the worker's compensation premium
and the corporate package premiums. Parts and supplies for the whey plant grew
by approximately $56,000 over the previous year due to the repairs of the
boilers that dry the whey before it is sold.
Selling, general and administrative expenses for the year ended March 31, 2004
amounted to $1,932,000 (or 4.7% of sales) compared to $1,813,000 (or 5.0 % of
sales) for the comparable period in 2003.
9
Selling expenses are mainly variable in nature. The most significant component
of selling expense is sales commission expense, which was $330,000 and $302,000
in 2004 and 2003, respectively. The increase resulted from an increase in
commissionable sales in the year ended March 31, 2004. Advertising expense also
increased over the previous year to $50,000 in 2004 compared to $28,000 in 2003.
Generally, general and administrative expenses are fixed in nature. The more
significant items in general and administrative expense are professional fees,
payroll, and provision for bad debts amounting to:
2004 2003
---- ----
Professional fees $ 268,000 $166,000
Payroll 346,000 280,000
Provision for bad debts 43,000 145,000
The increase of $92,000 in professional fees can be attributed to expenses
associated with improving the efficiency of production and implementing good
manufacturing procedures. The increase in payroll costs is the result of
increases in employee salaries including the CEO. The decrease in provision for
bad debts was due to a write-off of a large account that was in the reserve in
2003.
Interest expense for the year ended March 31, 2004 amounted to $800,000 compared
to $812,000 for the year ended March 31, 2003, a decrease of $12,000. This
decrease is the result of lower interest rates and the repayment of $500,000 on
our term loan with Co-Bank.
The provision for income tax for the years ended March 31, 2004 and 2003 of
$1,000 and $7,000, respectively, reflect minimum state taxes with the tax
benefits of operating losses being offset by the effect of changes in the
valuation allowance. Such amounts are re-evaluated each year based on the
results of the operations.
The Company's net profit of $209,000 for 2004 was $2,004,000 more than the loss
of $1,795,000 for the comparable period in 2003. The extraordinary item of
$875,000, as a result of restructuring debt, reduced the loss to $847,000 for
2003. The primary factors contributing to these changes are discussed above.
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, (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 principal payments beginning in year 3 (based on a 7 year
amortization schedule), the proceeds of which were used to repay outstanding
loans, (c) a $1,000,000, two year, "Term Loan B", with interest payable at 1.50%
over the LaSalle Bank prime lending rate, payable in equal monthly installments
commencing January 1, 2005, the proceeds of which are to be used for working
capital, and (d) a $1,000,000 capital equipment line, with interest at 1.25%
over the LaSalle Bank prime lending rate, the proceeds of which are to be used
to purchase equipment. The commitment contains various restrictive covenants. In
addition, the Company is required to maintain defined levels of net worth
annually. At December 31, 2004, due to a significant adverse pricing move
between the price of cheese and the price of milk for the month of December, the
Company was in default of certain covenants under its borrowing facility for the
test period ended December 31, 2004. 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 (m) 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, 2006, and (n) 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
March 31, 2005, due to a significant adverse pricing move between the price of
cheese and the price of milk for the month of February, the Company was in
default of certain covenants under its borrowing facility, for the test period
ended March 31, 2005, relating to, among other things, the maintenance of a
Tangible Net Worth of not less than $2,500,000, and the maintenance of a Fixed
Charge Coverage Ratio of not less than 1.00 x 1.00. On July 14, 2005 the Company
has received waivers for the existing defaults at March 31, 2005 and amended
such covenants to suspend the Company's compliance with (r) the Tangible Net
Worth Covenant for the test periods ended April 30, 2005, May 31, 2005 and June
30, 2005, and (s) the Fixed Charge Coverage test for the ten (10) month period
ended April 30, 2005, the eleven (11) month period ending May 31, 2005, and the
twelve (12) month period ended June 30, 2005. Also, the Company's borrowing
facility was amended to (x) reduce the total borrowing facility to $9,200,000
from $11,000,000, (y) reduce the revolving loan to $5,500,000 from $7,000,000,
and (z) reduce the capital expenditure loans to $700,000 from $1,000,000 and
make it subject to various conditions precedent.
10
At March 31, 2005, the Company had working capital of $3,607,000 as compared to
negative working capital of ($391,000) at March 31, 2004. The Company's
revolving bank line of credit is available for the Company's working capital
requirements.
At March 31, 2005, $5,751,000 was outstanding under such revolving credit line
of credit and $100,000 was available for additional borrowing at that time.
In connection with the LaSalle Business Credit, LLC borrowing facility, 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 so 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.
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 a guarantee 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 a maturity in February
2019.
A $990,000 commercial term note with interest fixed at 10.75 percent
having an amortization period of 20 years with a maturity in February
2019.
At March 31, 2005, the Company was in default of various covenants related to
this loan. The Company has received waivers for the existing defaults.
On May 23, 2001, the Company entered into a term loan with Co-op Bank for
$2,000,000 with interest payable at 1% above the rate of interest established by
the bank as its national variable rate. This loan was paid as part of the
refinancing arrangement with LaSalle Business Credit, LLC.
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 convertible
promissory note due on April 14, 2005 was repaid as part of the refinancing
arrangement with LaSalle Business Credit, LLC.
11
The Company's major source of external working capital financing is the
revolving line of credit. For the foreseeable future the Company believes that
the Company's revolving line of credit will continue to represent the major
source of working capital financing besides any income generated from
operations. Currently, the Company is seeking, as part of the financing package
discussed above, an enhancement of $750,000 to the revolving line of credit to
be guaranteed by the Vermont Economic Development Authority (VEDA). However,
there is no assurance that the enhancement to the revolving line of credit can
be secured and failure to secure such enhancement can have a significant
negative effect on the Company's liquidity.
For the year ended March 31, 2005, cash used by operating activities was
$1,026,000. Significant operating losses contributed to the use of cash for
operating activities mostly due to low gross margins as explained above. The
Company's Business Plan is designed to improve gross margins and reduce its
dependency on the spread between the selling price of cheese and the cost of
milk.. The Business Plan will be executed when financing efforts for capital
improvements are completed as explained above. There is no assurance that
financing for the Business Plan can be secured and failure to secure such
financing can have a significant negative effect on the Company's liquidity.
Net cash used by investing activities was $497,000 for 2005, which represented
$497,000 of purchases of plant and equipment.
Net cash provided by financing activities was $1,044,000 for 2005, provided
primarily by increases in the Company's revolving line of credit and additional
long term debt provided by the LaSalle Business Credit, LLC credit facility
obtained on December 2, 2004. This was done to finance losses sustained during
the year and purchases of plant and equipment of $497,000 and loan costs of
$472,000 associated with closing of the LaSalle Business Credit, LLC loan
facility.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." This
statement requires the allocation of fixed production overhead to inventory
based on the normal capacity of the production facilities and clarifies that
abnormal amounts of idle facility expense, freight, handling costs and wasted
materials should be recognized as period expense.
The Statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company is evaluating the impact of this
Statement but does not expect it to have a significant effect on financial
position or results of operations.
In December 2004, the FASB issued SFAS 123R, "Share Based Payment." SFAS 123R is
a revision to SFAS 123 and supersedes APB 25, "Accounting for Stock Issued to
Employees," and amends SFAS 95, "Statement of Cash Flows." This statement
requires a public entity to expense the cost of employee services received in
exchange for an award of equity instruments. This statement also provides
guidance on valuing and expensing these awards, as well as disclosure
requirements of these equity arrangements. The initial effective date for SFAS
123R was the first interim reporting period set to begin after June 15, 2005. On
April 14, 2005 the SEC deferred the effective date six months therefore Lucille
Farms, Inc. must comply with the provision of SFAS 123R in the first quarter of
2006. SFAS 123R permits public companies to choose between the following two
adoption methods:
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123R for
all share-based payments granted after the effective date and (b) based on the
requirements of Statement 123 for all awards granted to employees prior to the
effective date of SFAS 123R that remain unvested on the effective date, or
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for purposes
of pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption
Lucille currently accounts for share-based payments to employees using APB 25's
intrinsic value method and, as such, recognizes no compensation expense for
employee stock options. The impact of the adoption of SFAS 123R on Lucille
cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future. There would have been no material impact on
reported results of operations and earnings per share had the Company applied
the fair value provisions of SFAS 123 to share-based payments.
The adoption of SFAS 123R's fair value method may have an impact, possibly
material, on Lucille's future results of operations but no material impact on
overall financial position. SFAS 123R also requires the benefits of tax
deductions in excess of recognized compensation expense, if any, to be reported
as a financing cash flow, rather than as an operating cash flow as required
under current literature. This requirement may reduce net operating cash flows
and increase net financing cash flows in the consolidated statement of cash
flows of periods after adoption. Due to timing of the release of SFAS 123R and
the choice between the two adoption methods, the Company is still analyzing the
ultimate impact that this new pronouncement may have on its results of
operations.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29".
The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included exceptions to that principle. This statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commerical substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. Lucille intends to follow the
interpretive guidance on accounting for exchanges for nonmonetary assets as set
forth in SFAS No. 153.
On March 29, 2005, the Staff of the Securities and Exchange Commission (SEC or
the Staff) issued Staff Accounting Bulletin No. 107, "Share-Based Payment" (SAB
107). Although not altering any conclusions reached in SFAS 123R, SAB 107
provides the views of the Staff regarding the interaction between SFAS 123R and
certain SEC rules and regulations and, among other things, provide the Staff's
views regarding the valuation of share-based payment arrangements for public
companies. Lucille intends to follow the interpretative guidance on share-based
payment set forth in SAB 107 during the Company's adoption of SFAS 123R.
12
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
policies discussed below are considered by management to be critical to an
understanding of our financial statements because their application places the
most significant demands on management's judgment, with financial reporting
results relying on estimation about the effect of matters that are inherently
uncertain. Specific risks for these critical accounting policies are described
in the following paragraphs. For all of these policies, management cautions that
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment.
Revenue Recognition- Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. Revenue is recognized
when goods are shipped from production facilities or outside warehouses to
customers.
Allowance for Doubtful Accounts - We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. Based on historical information, we believe that our
allowance is adequate to cover potential uncollectible accounts. Changes in
general, economic, business and market conditions could result in an impairment
in the ability of our customers to make their required payments; therefore, the
allowance for doubtful accounts is reviewed monthly and changes to the allowance
are updated based on actual collections.
Reserve for inventory obsolescence - We maintain an allowance for inventory
obsolescence for losses resulting from inventory items becoming not saleable due
to spoilage or changes in customers' requirements. Based on historical and
projected sales information, we believe that our allowance is adequately stated.
However, changes in general economic, business and market conditions could cause
our customers purchasing requirements to change. These changes could affect the
sales of our inventory; therefore, the allowance for inventory obsolescence is
reviewed regularly and changes to the allowance are made as new information is
received.
Long Lived Asset Impairment - The Company reviews long-lived assets for
impairment whenever circumstances indicate that the carrying amount of the asset
may not be recoverable, and recognizes an impairment loss when the undiscounted
future cash flows expected to be generated by the asset are less than the
carrying amount of the asset. Long-lived assets held for sale, other than assets
to be disposed of in connection with disposal of a discontinued business
segment, are reported at the lower of carrying amount or fair value less cost to
sell.
Valuation Allowance for Deferred Tax Assets - We have recorded a valuation
allowance against deferred tax assets because there is a strong likelihood that
we will not be able to generate sufficient future taxable income to realize the
deferred tax assets. However, if these estimates and assumptions change in the
future, we will reduce our valuation allowance and record a deferred tax asset
for an amount that has a strong likelihood to be realized.
Impact of Inflation
Inflationary factor have not had a significant effect on our operations.
Website
The Company's website is www.Lucille-Farms.com. The Company's website enables
users to access its filings with the SEC as soon as reasonably practicable. The
Company makes available, free of charge through its website, its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC.
Off Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements.
13
Contractual Obligations
Payment due by period
Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years
----------------------- ----- ---------------- --------- --------- -----------------
Long Term Debt Obligations $14,416,000 $650,000 $1,590,000 $7,305,000 $4,871,000
Capital Lese Obligations 15,000 15,000 -0- -0- -0-
Operating Lease Obligations 78,000 36,000 41,000 1,000 -0-
Purchase Obligations -0- -0- -0- -0- -0-
Other Long Term Liabilities Reflected on the
Registrant's Balance Sheet under GAAP -0- -0- -0- -0- -0-
------------------------- ---------- --------- ----------
Total $14,509,000 $701,000 $1,631,000 $8,306,000 $4,871,000
=========== ======== ========== ========== ==========
Safe Harbor Statement
This Annual Report on Form 10-K (and any other reports issued by the Company
from time to time) contains certain forward-looking statements made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on current expectations that
involve numerous risks and uncertainties. Actual results could differ materially
from those anticipated in such forward-looking statements as a result of various
known and unknown factors including, without limitation, future economic,
competitive, regulatory, and market conditions, future business decisions, the
uncertainties inherent in the pricing of cheese on the Chicago Mercantile
Exchange upon which the Company's prices are based, changes in consumer tastes,
fluctuations in milk prices, and those factors discussed above under
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Words such as "believes," "anticipates," "expects," "intends,"
"may," and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. The
Company undertakes no obligation to revise any of these forward-looking
statements.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
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.
The Company is subject to interest rate exposure on variable rate debt. The
amount of that debt at balance sheet date, March 31, 2005 and March 31, 2004
amounted to $10,125,000, and $5,781,000, respectively. In as much as this debt
is based upon the Prime Rate plus 1/4 of 1% or 1.5%, the cost of this debt will
increase or decrease accordingly with changes in the prime rate.
The Company has exposure to the commodity prices for cheese, dry whey and fluid
milk. We have addressed these exposures in the general paragraph of MD&A Item 7.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Table of Contents
Independent Auditors' Report - Mahoney Cohen & Company, CPA, P.C. F-2
Independent Auditors' Report - Wiss & Company, LLP F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Lucille Farms, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Lucille Farms,
Inc. and Subsidiary as of March 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Lucille
Farms, Inc. and Subsidiary at March 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that Lucille
Farms, Inc. and Subsidiary will continue as a going concern. As more fully
described in Note 2, at March 31, 2005, the Company has a loss from continuing
operations of $3,269,000, cash used in operating activities of $1,026,000 and a
deficiency in assets of $262,000. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
Mahoney Cohen & Company, CPA, P.C.
New York, New York
June 24, 2005, except for Note 7b
As to which date is July 14, 2005
F-2
Report of Independent Accountants
To the Audit Committee of Lucille Farms, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Lucille
Farms, Inc. and Subsidiaries as of March 31, 2003 and the related consolidated
statements of operations, stockholders' equity and cash flows for the period
ended March 31, 2003. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principals used and significant estimates made by
management, as well as evaluating the overall consolidated financial statements
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lucille Farms, Inc. and Subsidiaries as of March 31, 2003 and the consolidated
results of their operations and their consolidated cash flows for the period
ended March 31, 2003 in conformity with accounting principals generally accepted
in the United States of America.
WISS & COMPANY, LLP
Livingston, New Jersey
June 26, 2003, except for note 14 for which the date of July 14, 2003
F-3
LUCILLE FARMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31,
2005 2004
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 132,000 $ 611,000
Accounts receivable, net of allowances of
$67,000 in 2005 and $170,000 in 2004 5,172,000 4,618,000
Inventories 2,739,000 3,234,000
Prepaid expenses and other current assets 621,000 676,000
----------- -----------
Total Current Assets $ 8,664,000 9,139,000
Property, Plant and Equipment, net 9,206,000 9,579,000
Other Assets:
Deferred loan costs, net 637,000 215,000
Other 54,000 27,000
----------- -----------
Total Other Assets 691,000 242,000
----------- -----------
TOTAL ASSETS $18,561,000 $18,960,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit loan $ -- $ 4,281,000
Accounts payable 3,730,000 3,964,000
Current portion of long-term debt 665,000 711,000
Accrued expenses 662,000 574,000
----------- -----------
Total Current Liabilities 5,057,000 9,530,000
Long-Term Liabilities:
Long-term debt, less current portion 13,766,000 6,423,000
----------- -----------
Total Long-Term Liabilities 13,766,000 6,423,000
----------- -----------
TOTAL LIABILITIES $18,823,000 $15,953,000
Stockholders' Equity:
Preferred stock, $0.001 per share, 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, at March 31, 2005 and
March 31, 2004; respectively; 3,570,675 shares issued, 4,000 3,000
3,353,937 outstanding at March 31, 2005 and
3,354,675 shares issued, 3,137,937
outstanding at March 31, 2004
Additional paid-in capital 8,548,000 8,548,000
Accumulated deficit (8,503,000) (5,234,000)
------------ ------------
50,000 3,319,000
Less: cost of 216,738 shares of treasury stock (312,000) (312,000)
------------ ------------
Total Stockholders' Equity (Deficit) (262,000) 3,007,000
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 18,561,000 $ 18,960,000
============ ============
See accompanying notes to consolidated financial statements.
F-4
LUCILLE FARMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
2005 2004 2003
----------- ----------- -----------
Sales $47,802,000 $42,174,000 $36,691,000
Cost of sales 47,674,000 39,287,000 35,786,000
----------- ----------- -----------
Gross profit 128,000 2,887,000 905,000
Other expense (income):
Selling 1,215,000 915,000 713,000
General and administration 1,207,000 1,017,000 1,100,000
Gain On Debt Restructuring -0- -0- (875,000)
Other income 39,000 (55,000) (5,000)
Interest expense 935,000 800,000 812,000
----------- ----------- -----------
Total other expense (income) 3,396,000 2,677,000 1,745,000
----------- ----------- -----------
Income (Loss) before income taxes (3,268,000) 210,000 (840,000)
----------- ----------- -----------
Provision for income taxes 1,000 1,000 7,000
----------- ----------- -----------
Net Income (Loss) $(3,269,000) $ 209,000 $ (847,000)
----------- ----------- -----------
Net Income (Loss) per Share:
Basic and Diluted:
Net Income (loss) $ (0.98) $ 0.07 $ (0.26)
=========== =========== ===========
Weighted average shares outstanding
used to compute net income (loss) per share:
Basic and Diluted 3,329,116 3,162,410 3,229,220
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
LUCILLE FARMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
Preferred Stock Common Stock Additional Accumulated Treasury Stock
Shares Amount Shares Amount Paid-in capital Deficit Shares Amount Total
------ ------ ------ ------ --------------- ------- ------ ------ -----
Balance 216 $1,000 3,021,342 $3,000 $5,001,000 $(4,596,000) 69,900 $(165,000) $244,000
March 31,2002
Preferred
Issued 583 1,000 333,333 3,548,000 3,548,000
Net loss (847,000) (847,000)
---- ------ --------- ------ --------- ----------- ------- --------- ---------
Balance 799 2,000 3,354,675 3,000 8,548,000 (5,443,000) 69,900 (165,000) 2,945,000
March 31, 2003
Purchase of 146,838 (147,000) (147,000)
treasury stock
Net Income 209,000 209,000
---- ------ --------- ------ --------- ----------- ------- --------- ---------
Balance 799 2,000 3,354,675 3,000 8,548,000 (5,234,000) 216,738 (312,000) 3,007,000
March 31, 2004
Net Loss (3,269,000) (3,269,000)
Preferred
stock (216) (1,000) 216,000 1,000
converted to
common
---- ------ --------- ------ --------- ----------- ------- --------- ---------
Balance
March 31, 2005 583 $1,000 3,570,675 $4,000 $8,548,000 $(8,503,000) 216,738 $(312,000) $(262,000)
==== ====== ========= ====== ========== =========== ======= ========= =========
See accompanying notes to consolidated financial statements.
F-6
LUCILLE FARMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
2005 2004 2003
---- ---- ----
Cash Flows from Operating Activities:
Net income/(loss) $(3,269,000) $ 209,000 $ (847,000)
Adjustments to reconcile net income/loss
to net cash flow from operations:
Depreciation and amortization 920,000 852,000 950,000
Provision for doubtful accounts 50,000 43,000 145,000
Deferred income taxes 0 0 72,000
Inventory valuation allowance 211,000 (350,000) 257,000
Non-cash compensation 0 0 5,000
Extraordinary gain
(Decrease) increase in assets: 0 0 (875,000)
Accounts receivable (604,000) (1,131,000) 13,000
Inventories 284,000 (699,000) 727,000
Prepaid expense and other current assets 55,000 (114,000) (452,000)
Other assets (27,000) 89,000 10,000
Increase (decrease) in liabilities:
Accounts payable 1,266,000 1,550,000 1,119,000
Deferred income taxes 0 0 (72,000)
Accrued expenses 88,000 (52,000) 231,000
----------- ----------- -----------
Cash flow provided by (used in) operating activities (1,026,000) 397,000 1,283,000
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (497,000) (428,000) (432,000)
----------- ----------- -----------
Net Cash used by investing activities (497,000) (428,000) (432,000)
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from (payments of) Line of Credit Facility 1,469,000 1,357,000 (820,000)
Proceeds from long-term debt 3,000,000 0 0
Principal payments of long-term debt (2,953,000) (719,000) (119,000)
Payment of loan costs (472,000) 0 (83,000)
---------- ---------- ----------
Net cash provided by (used in) financing activities 1,044,000 (638,000) (1,022,000)
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (479,000) 607,000 (171,000)
Cash and cash equivalents - beginning 611,000 4,000 175,000
---------- ---------- ----------
Cash and cash equivalents - ending $ 132,000 $ 611,000 $ 4,000
---------- ---------- ----------
Supplemental disclosure
of cash flow information:
Cash paid for:
Interest $ 924,000 $ 824,000 $ 789,000
Income taxes 1,000 1,000 7,000
Non-Cash Investing and Financing Activities:
Treasury Stock acquired in settlement loan 0 147,000 0
and accrued interest
Conversion of 216 shares of Series A Convertible
Preferred Stock into 216,000 shares of common stock 1,000 0 0
See accompanying notes to consolidated financial statements.
F-7
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Lucille Farms, Inc. and its wholly owned subsidiary (the "Company") is engaged
in the manufacture and marketing of a variety of cheese products which are sold
primarily to the food service and industrial segments of the cheese market
through independent distributors and the Company's sales staff, respectively.
The Company's cheese products are sold in a highly competitive market place and
as such the Company is unable to predict pricing trends that have a significant
effect on its operations. Regulatory factors affect the Company's milk
suppliers, such as dairy subsidies and price supports, which may have an effect
on the Company's raw material cost, but the impact cannot be predicted.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Basis of Presentation
The consolidated financial statements include the accounts of Lucille Farms,
Inc. and its wholly owned subsidiary. All significant intercompany balances
and transactions have been eliminated.
Cash Equivalents
The Company considers temporary investments with a maturity of three months or
less to be cash equivalents.
Concentration of Credit Risk
The Company maintains its cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. At times, cash balances may exceed insured limits.
Revenue Recognition
The Company follows the guidelines of the SEC Accounting Bulletin No. 104,
"Revenue Recognized in Financial Statements". Revenues are recognized at the
time products are shipped to the customer. Allowances are made for estimated
returns and allowances. Sales of whey, $1,744,000, $1,412,000 and $1,795,000 for
2005, 2004 and 2003, respectively, are also recognized at time of shipment to
customers.
Advertising
Advertising is expensed as incurred. Advertising expense was $135,000, $41,000
and $28,000 for 2005, 2004 and 2003, respectively.
Inventories
Inventories are stated at the lower of cost or market determined on a first in,
first out method of accounting.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization
is being provided on a straight-line basis over the estimated useful lives of
the assets as follows:
Plant 35 years
Equipment 3-10 years
Long-Lived Asset Impairment
Pursuant to Financial Accounting Standards Board Statement No. 144, "Accounting
for the Impairment or disposal of Long-Lived Assets is recognized whenever
events or changes in circumstances indicate that the carrying amount of the
asset, or related group of assets, may not be fully recoverable from estimated
future cash flows and the fair value of the related assets is less than their
carrying value.
Deferred Loan Costs
Costs of obtaining term facilities were deferred and are being amortized on a
straight-line basis over the term of the loans.
F-8
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company provides for deferred income taxes resulting from temporary
differences in reporting certain income and expense items (principally
depreciation) for income tax and financial reporting purposes. Income tax
benefits from operating loss carryforwards are recognized to the extent
available less a valuation allowance if it is more likely than not that some
portion of the deferred tax asset will not be realized.
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 2005, 2004, and
2003 since options and warrants were not included in the calculation because
their effect would have been antidilutive. For 2005, 2004, and 2003 conversion
of preferred stock was not taken into consideration since the effect would be
antidilutive.
Accounting for Stock-Based Compensation
The Company follows the intrinsic method of Accounting Principals Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for it's employee stock options because, as
discussed below, Financial Accounting Standards Board Statement No. 123,"
Accounting for Stock-Based Compensation" (FAS 123) requires use of option
valuation models that were not developed for use in valuing employee stock
options. FAS 123 permits a Company to elect the intrinsic method of APB 25
rather than the alternative fair value accounting provided under FAS 123 but
requires pro forma net income and earnings per share disclosures as well as
various other disclosures not required under APB 25 for companies following APB
25. The Company has adopted the disclosure provisions required under Financial
Accounting Standards Board Statement No. 148, "Accounting for Stock-Based
Compensation -Transition and Disclosure" (FAS 148). Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock at the date of grant, no compensation expense was recognized.
See "New Pronouncements".
Sales concentration
In fiscal year ended March 31, 2005 one customer accounted for approximately 10%
of sales. In the fiscal years ended March 31, 2004 and 2003, no one customer
accounted for more than 10% of sales.
Vendor concentration
The Company purchases milk from one vendor. Management believes that if this
supplier should discontinue production there are other suppliers of milk in the
region and new sources would be readily available.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." This
statement requires the allocation of fixed production overhead to inventory
based on the normal capacity of the production facilities and clarifies that
abnormal amounts of idle facility expense, freight, handling costs and wasted
materials should be recognized as period expense.
The Statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company is evaluating the impact of this
Statement but does not expect it to have a significant effect on financial
position or results of operations.
In December 2004, the FASB issued SFAS 123R, "Share Based Payment." SFAS 123R is
a revision to SFAS 123 and supersedes APB 25, "Accounting for Stock Issued to
Employees," and amends SFAS 95, "Statement of Cash Flows." This statement
requires a public entity to expense the cost of employee services received in
exchange for an award of equity instruments. This statement also provides
guidance on valuing and expensing these awards, as well as disclosure
requirements of these equity arrangements. The initial effective date for SFAS
123R was the first interim reporting period set to begin after June 15, 2005. On
April 14, 2005 the SEC deferred the effective date six months therefore Lucille
Farms, Inc. must comply with the provision of SFAS 123R in the first quarter of
2005. SFAS 123R permits public companies to choose between the following two
adoption methods:
F-9
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the effective date and (b)
based on the requirements of Statement 123 for all awards granted to employees
prior to the effective date of SFAS 123R that remain unvested on the effective
date, or
2. A "modified retrospective" method which includes the
requirements of the modified prospective method described above, but also
permits entities to restate based on the amounts previously recognized under
SFAS 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption.
Lucille currently accounts for share-based payments to employees using APB 25's
intrinsic value method and, as such, recognizes no compensation expense for
employee stock options. The impact of the adoption of SFAS 123R on Lucille
cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future. There would have been no material impact on
reported results of operations and earnings per share had the Company applied
the fair value provisions of SFAS 123 to share-based payments.
The adoption of SFAS 123R's fair value method may have an impact, possibly
material, on Lucille's future results of operations but no material impact on
overall financial position. SFAS 123R also requires the benefits of tax
deductions in excess of recognized compensation expense, if any, to be reported
as a financing cash flow, rather than as an operating cash flow as required
under current literature. This requirement may reduce net operating cash flows
and increase net financing cash flows in the consolidated statement of cash
flows of periods after adoption. Due to timing of the release of SFAS 123R and
the choice between the two adoption methods, the Company is still analyzing the
ultimate impact that this new pronouncement may have on its results of
operations.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29".
The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included exceptions to that principle. This statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commerical substance. A nonmonetary exchange has
commerical substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. Lucille intends to follow the
interpretive guidance on accounting for exchanges for nonmonetary assets as set
forth in SFAS No. 153.
On March 29, 2005, the Staff of the Securities and Exchange Commission (SEC or
the Staff) issued Staff Accounting Bulletin No. 107, "Share-Based Payment" (SAB
107). Although not altering any conclusions reached in SFAS 123R, SAB 107
provides the views of the Staff regarding the interaction between SFAS 123R and
certain SEC rules and regulations and, among other things, provide the Staff's
views regarding the valuation of share-based payment arrangements for public
companies. Lucille intends to follow the interpretative guidance on share-based
payment set forth in SAB 107 during the Company's adoption of SFAS 123R.
Fair value and Credit Risk
The Company's other financial instruments are generally cash deposits, accounts
receivable and debt. The Company's debt carries interest at market rates and the
Company believes that the fair value of the cash deposits and accounts
receivable approximates the carrying value due to the short term nature of those
instruments.
The Company provides credit to customers on an unsecured basis after evaluating
customer credit worthiness. Since the Company sells to a broad range of
customers with a wide geographical dispersion, concentrations of credit risk are
limited. In addition, the Company provides an allowance for doubtful accounts
for accounts receivable, which are potentially uncollectable and carries credit
insurance on large and mid-sized accounts.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or accumulated
deficit.
F-10
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - GOING CONCERN
The financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. At March 31, 2005, the Company has a loss from
continuing operations of $3,269,000, cash used in operating activities of
$1,026,000 and a deficiency in assets of $262,000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result from the outcome of
this uncertainty.
The Company has developed a business plan designed to improve gross margins and
reduce its dependency on the spread allowed by the calculation of the milk
price. The plan calls for various capital improvements that will significantly
reduce the cost of producing cheese and change the type of whey produced by the
Company to whey protein concentrate for human and animal consumption. The
capital improvements needed to achieve the business plan will require an
infusion of capital of approximately $8,000,000. Discussions are currently
underway with St. Albans Cooperative, the Company's milk supplier, the Vermont
Economic Development Authority, the Village of Swanton, Vermont, UPS Business
Credit, LLC and LaSalle Business Credit, LLC to structure a financing package
that would provide a portion of such financing as well as strengthen the
Company's balance sheet. Also, the Company is having conversations with a
potential joint venture partner that would provide the necessary financing to
modify the Company's whey facility. There can be no assurance that such a
financing package or joint venture will be forthcoming.
NOTE 3 - ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are net of $67,000 and $170,000 in allowance for doubtful
accounts at March 31, 2005 and 2004, respectively. Credit is extended after a
credit review by management that is based on a customer's ability to perform its
obligations. Such reviews are regularly updated. The allowance for doubtful
accounts is based upon agings of customer balances and specific account review
by management. The Company has no concentration of credit risks and, generally,
does not require collateral or other security from its customers.
NOTE 4 - INVENTORIES Inventories consist of the following:
March 31, 2005 March 31, 2004
-------------- --------------
Finished goods $2,244,000 $2,164,000
Raw materials 217,000 691,000
Supplies and packaging 489,000 379,000
-------------- --------------
2,950,000 $3,234,000
Less: Reserve for Obsolescence 211,000 -0-
-------------- --------------
$2,739,000 $3,234,000
-------------- --------------
F-11
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
March 31, 2005 March 31, 2004
-------------- ---------------
Land $ 25,000 $ 25,000
Plant 4,962,000 4,867,000
Equipment 11,206,000 10,814,000
Whey facility 2,153,000 2,143,000
----------- -----------
$18,346,000 $17,849,000
Less: accumulated
depreciation and
amortization 9,140,000 8,270,000
----------- -----------
$ 9,206,000 $ 9,579,000
----------- -----------
NOTE 6 - DUE FROM OFFICERS
Amounts due from officers reflect advances and loans, which effective June 1,
1992 were converted to promissory notes bearing interest at 9% per annum.
Interest is payable annually. Principal originally due on June 1, 2000 was
extended to June 1, 2003. During 2004, $146,838, the entire outstanding amount
of the debt, was repaid by the Company acquiring shares of its common stock from
the officers.
NOTE 7 - REVOLVING CREDIT LOAN
A) 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 (5.75% at March 31, 2005) 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 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. This loan facility has been
suspended.
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.
B) At March 31, 2005, the Company was in default of various covenants related to
its debt with LaSalle Business Credit, LLC. As of July 14, 2005 the Company
has received waivers for the existing defaults at March 31, 2005 and
the covenants have been amended to suspend the Company's compliance with
(a) the Tangible Net Worth covenant for the test periods ended April 30,
2005, May 31, 2005 and June 30, 2005, and (b) the Fixed Charge Coverage
test for the ten (10) month period ended April 30, 2005, the eleven (11)
month period ended May 31, 2005, and the twelve (12) month period ended
June 30, 2005. Also, the Company's borrowing facility was amended to (1)
reduce the total borrowing facility to $9,200,000 from $11,000,000, (2)
reduce the revolving loan to $5,500,000 from $7,000,000, and (3) reduce the
capital expenditure loan to $700,000 from $1,000,000 and make it subject to
various conditions precedent.
F-12
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - LONG-TERM DEBT Long-term debt consists of the following:
March 31, 2005 March 31, 2004
-------------- --------------
Term loan with a bank dated February 8, 1999, secured by
real estate and equipment, payable monthly at $37,561
including interest at 9.75% for 20 years maturing February
8, 2019 $3,420,000 $3,536,000
Term loan with a bank dated February 8, 1999 secured by real
estate and equipment, payable monthly at $10,051 including
interest at 10.75% for 20 years maturing February 8, 2019 870,000 896,000
Loan payable to bank due in annual installments of $500,000
beginning May 1, 2003. The loan, collateralized by the
Company's plant and equipment, bears interest at 1% above -0- 1,500,000
the bank's national variable rate (5.25% at March 31, 2004).
Interest is payable monthly. This loan was paid off as part
of the restructuring with LaSalle Bank explained above.
Promissory note to St. Albans Cooperative Creamery due April
14, 2005. The note bears interest at the applicable federal
rate, paid annually in arrears on each anniversary date of -0- 1,100,000
the note. This loan was paid off as part of the
restructuring with LaSalle Bank explained above.
Equipment notes payable in monthly installments ranging from
$972 to $3,006, including interest at rates of 9.75% to 11%,
through September 2005. The notes are collateralized by
equipment with a net book value of $236,000 at March 31,
2005 15,000 102,000
Long term revolving credit loan with LaSalle Business
Credit, LLC., $7,000,000 revolving loan with interest
payable at 1/4 of 1% over the LaSalle Bank prime lending 5,751,000 -0-
rate (5.75% at March 31, 2005) to be repaid on December 1,
2009. (See Note 7B)
Promissory note to LaSalle Business Credit LLC. of
$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 2,000,000 -0-
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.
F-13
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Promissory note to LaSalle Business Credit LLC. of
$1,000,000. Two year "term loan B," with interest payable at
1.5% over the LaSalle Bank prime lending rate, payable in 875,000 -0-
equal monthly installments of principal of $41,667
commencing January 1, 2005. The proceeds of term loan B will
be used for working capital.
Long Term account payable with St. Albans Cooperative
Creamery. 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 1,500,000 -0-
dollars ($6,000,000).
---------- ----------
14,431,000 7,134,000
Less: current portion 665,000 711,000
---------- ----------
TOTAL 13,766,000 $6,423,000
As of March 31, 2005 long-term debt matures as follows:
2006 665,000
2007 635,000
2008 468,000
2009 487,000
2010 7,306,000
Thereafter 4,870,000
----------
14,431,000
Substantially all of the Company's property, plant and equipment are pledged as
collateral for these obligations.
F-14
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities are as follows:
March 31, 2005 March 31, 2004
----------------------------- ----------------------------
Deferred Deferred
Deferred Tax Deferred Tax
Tax Asset Liability Tax Asset Liability
------------ ----------- ------------- ------------
Depreciation $ - $ 676,000 $ 821,000
Provision for doubtful accounts 26,000 65,000
Reserve for obsolescence 80,000
Reserve for compensated
absences 26,000 14,000
Operating loss carryforwards 4,443,000 3,227,000
Contribution carryforwards 0 2,000
--------- ---------- ---------- ----------
4,575,000 676,000 3,308,000 821,000
Valuation allowance 3,899,000 2,487,000
--------- ---------- ---------- ----------
$ 676,000 $ 676,000 $ 821,000 $ 821,000
--------- ---------- ---------- ----------
The net change in the valuation allowance for the periods presented were as
follows:
March 31,
---------------------------------
2005 2004 2003
--------- ------- --------
Valuation allowance increase (decrease) $1,412,000 $(3,000) $441,000
The provision for income taxes represents the provision for minimum state taxes,
with the tax benefits of loss carryforwards being offset by increases or
decreases in the valuation allowance.
The provision for income taxes is different than the amount computed using the
United States Federal Statutory income tax rate for the reasons set forth below:
Years Ended March 31,
----------------------------------
2005 2004 2003
------ ------ ------
Expected tax at U.S. Statutory Rate (34.0)% 34.0% (34.0)%
State and local income taxes 0.0 .5 .1
Permanent differences and other (.6)
Prior year tax adjustment (9.2) (32.6)
Valuation allowance for operating loss
Carryforwards 43.2 (1.4) 34.6
----- ---- ----
0.0% .5% .1%
----- ---- ----
Operating loss carry forwards totaled $11,693,000 as of March 31, 2005 and
expire on March 31, of the following years:
2009 $ 77,000
2011 $ 913,000
2013 2,122,000
2015 269,000
2016 1,562,000
2022 1,674,000
2023 1,274,000
2024 196,000
2025 3,606,000
-----------
Total $11,693,000
===========
F-15
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LEASE COMMITMENTS
The Company leases automobiles for two of its officers under lease arrangements
classified as operating leases. The leases expire in November 2005 and April
2006. Rent expense was approximately $17,000 and $17,000 in the years ended
March 31, 2005 and 2004, respectively. Future minimum payments under the leases
are approximately $13,000 at March 31, 2005.
The Company leases a building for administrative offices and warehouse space for
dry goods with a purchase option (subject to terms and conditions). The lease
expires December 31, 2004 with the right to renew for an additional year. The
Company exercised its right to renew said lease for an additional term of one
year. The lease amount is $43,200 per year in equal monthly installments.
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company leases a parcel of land adjacent to its production facility. This
parcel is owned by three of its stockholders. The space is used as an employee
parking lot and its use was required in conjunction with the construction of the
new whey drying facility. The ten- year lease term carries a monthly rental of
$750 during the first five years and $900 during the remaining five years. Rent
expense for the years ended March 31, 2005, 2004 and 2003 was $10,800, $10,800
and $9,000, respectively, in each of the years. This lease has a purchase option
to purchase at fair market value at the end of the ten-year period. This lease
was assigned to the bank as security in conjunction with the whey plant
financing.
The Company purchases all of its milk supplies from one of its stockholders (see
Note 13). Purchases totaled approximately $28,665,000 for 2005, $24,868,000 for
2004 and $21,290,000 for 2003.
The Company leases space for its executive offices at $1,200 per month from
three of its stockholders on a month-to-month basis. Rent expense was
approximately $14,000 for each of the years ended March 31, 2005, 2004 and 2003.
The Company also leases an additional 900 square feet for $750 monthly on a
month-to- month basis. These premises are owned by three of its stockholders.
This space is primarily used for the Company's marketing operations. Rent
expense for the Company's office facility in New Jersey was $9,000 for each of
the years ended March 31, 2005, 2004 and 2003.
The Company has incurred approximately $77,000 of legal fees from the law firm
of Breslow and Walker, LLP. The Chairman of the Board of Directors is a partner
of that firm.
F-16
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY
In May 1993, the Board of Directors of the Company adopted a resolution
authorizing the issue of 250,000 shares of Preferred Stock, par value $0.001 per
share. The preferred stock may be issued in series, the terms of which will be
determined by the Company's Board of Directors without action by shareholders
and may include dividend and liquidation preferences to common stock, voting
rights, redemption and sinking fund provisions and conversion rights.
In June 2001 the Company entered into an agreement to purchase plant equipment
with preferred stock. In connection therewith, the Company issued 216 shares of
Series A Convertible Redeemable Preferred Stock with a face value of $540,000.
The stock has been converted into 216,000 shares of common stock at $2.50 per
share as of March 31, 2005. The preferred stock has no rights as to dividends or
voting. There is a liquidation preference at face value and the Company can
redeem the Preferred Stock at face value under certain defined conditions. On
May 16, 2002, the Company entered into an agreement with St. Albans Cooperative
Creamery to sell 583 shares of Lucille Farms' Series B Convertible Redeemable
Preferred stock, which is convertible into 583,333 shares of common stock, and a
10-year warrant to purchase 583,333 shares (subject to adjustment to a maximum
of 1,416,668 shares) of common stock at $.01 per share, for an aggregate price
of $3,500,000, to cancel accounts payable owed to St Albans.
On December 20, 2002, the shareholders of the Company voted on and approved the
2002 stock option plan authorizing the issue of 1,000,000 shares of common
stock, par value $.001, per share upon the exercise of options, which may be
granted from time to time in accordance with the plan.
NOTE 13 - OTHER EVENTS
Employment Agreements
On February 21, 2005, the Company entered into an employment agreement with Don
Desjarlais, the Chief Financial Officer, for a 5 year term. Among other items,
the employment agreement provides for a base salary of $150,000 per annum and
the granting of a 10-year option to purchase 50,000 shares of the Company's
common stock at $3 per share. Subject to accelerated vesting in the case of
certain change of control event, the options vest 10,000 shares on February 21,
2005 and 10,000 shares on each of the next four anniversary dates.
On November 1,2002, the Company entered into an employment agreement with Jay
Rosengarten, the Chief Executive Officer, for a 5 year term. Among other items,
the employment agreement provides for a base salary of $250,000 per annum
(effective for the fiscal year ended March 31, 2005 and continuing for the
balance of the term) and the granting of a 10-year option to purchase 250,000
shares of the Company's common stock at $3 per share. Subject to accelerated
vesting in the case of certain change of control event, the options vest 50,000
shares on November 1, 2002 and 50,000 shares on each of the next four
anniversary dates.
2002 Stock Option Plan
On October 24, 2002, the 2002 Stock Option Plan became effective. An aggregate
of 1,000,000 shares of common stock were reserved for issuance upon exercise of
options which may be granted from time to time in accordance with the plan.
Options may be granted to employees, including officers, directors, consultants
and advisors. Options shall be designated as either Incentive Stock Options or
Non-Incentive Stock Options being issued at a purchase price of not less than
100% (110% in case of optionees who own more than 10% of the voting power of all
classes of stock of the Company) of fair market value of the Common Stock on the
date the option is granted. In February 2005, options to purchase 15,000 shares
were granted to an employee of the Company for an exercise price of $3.00 per
share. Also, in February 2005, options to purchase 50,000 shares were granted to
the CFO of the Company for an exercise price of $3.00 per share. In November
2002, options to purchase 250,000 shares were granted to the CEO of the Company
for an exercise price of $3.00 per share, and options to purchase 25,000 shares
were granted to an employee of the Company for an exercise price of $3.00 per
share. Options to purchase an aggregate of 55,000 shares have been issued to
directors of the Company.
F-17
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1993 Stock Option Plan
In April 1995, options to purchase 10,000 shares were granted to each of two
employees at an exercise price of $3.625. The options shall expire on April 4,
2005. In May 1996, options to purchase 50,000 shares were granted to a newly
hired employee at an exercise price of $4.00. These options vested and were
exercisable ratably over a five-year period beginning one-year from date of
employment, and expired April 1, 2003. In January 1998, options to purchase
25,000 shares were granted to a director of the Company in his capacity as
consultant at an exercise price of $1.50 per share. The options expire on
January 2008 and vest to the extent of 5,000 shares on date of issue and 5,000
shares on each of the next four anniversary dates. In June, 2001 the Company
issued options for consulting services and for a directorship. The ten year
options were for 5,000 shares each with an exercise price at the fair market
value on the date of grant of $1.80 and $1.84, respectively, and were valued as
determined using the Black Scholes option-pricing model for a total of $13,695.
The options were cancelled in May 2002.
All option values calculated, on the date of grant using the Black Scholes
option-pricing model with the following assumptions:
March 31, 2005 March 31, 2004
---------------------- ----------------------
Options Warrants Options Warrants
---------- ----------- ---------- ----------
Expected dividend yield -0-% -0-% -0-%
Risk free interest rate 4.0% 4.0% 4.0%
Expected stock volatility 89.7-116.0% 112.6% 111.0%
Expected option life 10 years 10 years 10 years
The Company follows the intrinsic method of Accounting Principals Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
directed below, Financial Accounting Standards Board Statement No. 123,"
Accounting for Stock-Based Compensation" (FAS 123) requires use of option
valuation models that were not developed for use in valuing employee stock
options. FAS 123, permits a company to elect to the intrinsic method of APB 25
rather than the alternative fair value accounting provided under FAS 123 but
requires pro forma net income and earnings per share disclosures as well as
various other disclosures not required under APB 25 for companies following APB
25. The Company has adopted the disclosure provisions required under Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation-Transition and Disclosure" (FAS 123). Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock date of grant, no compensation expense was recognized. See "New
Pronouncements".
Years Ended March 31,
---------------------------------------------
2005 2004 2003
---------- ----------- ----------
Net income (loss):
As reported $(3,269,000) $209,000 $(847,000)
Pro forma (3,506,000) $135,000 $(924,000)
Net earnings (loss) per share:
As reported $(.98) $.07 $(.26)
Pro forma $(1.05) $.04 $(.29)
The full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options' vesting period. Stock
options are summarized as follows:
Exercise price 2005 2004 2003
----------------- --------- ---------- --------
Outstanding - beginning $ 1.50 to $4.00 320,000 370,000 105,000
Issued $1.80 and $3.9375 -0- -0- 275,000
Issued $3.00 120,000
Terminated $3.9375 and $4.00 -0- 50,000 10,000
------------------------ --------- ---------- --------
Outstanding - ending $ 1.50 to $4.00 440,000 320,000 370,000
F-18
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
March 31, 2004:
Range of Number Weighted Average Remaining Weighted Average Remaining
Exercise Prices Outstanding (in years) Exercise Price
-------------------- -----------------------------------------------------------------------------
$ 1.50 - 3.00 420,000 7.7 $ 2.91
$ 3.01 - 4.00 20,000 3.6 $ 3.82
Purchase of Common Stock
On June 1, 2003, the Company acquired 146,838 shares of its common stock valued
at $1.00 per share, in payment of loans, due from three of its officers.
Preferred Share Purchase Rights
On June 2, 1997, the Board of Directors declared a dividend distribution of one
preferred share purchase right on each outstanding share of common stock. The
rights will be exercisable only if a person or group acquires 20% or more of the
Company's common stock or announces a tender offer the consummation of which
would result in ownership by a person or group of 20% or more of the common
stock. Each right will entitle stockholders to buy one one-hundredth of a share
of a new series of preferred stock at an exercise price of $8.00. In the event
of an acquisition, merger, or other business combination transaction after a
person has acquired 20% or more of the Company's outstanding common stock, each
right will entitle its holder to purchase, at the right's then-current exercise
price, a number of the acquiring company's common shares having a market value
of twice such price. In addition, if a person or group acquires 20% or more of
Company's outstanding common stock, each right will entitle its holder (other
than such person or members of such group) to purchase, at the right's
then-current price, a number of the Company's common shares having a market
value of twice such price. Following the acquisition by a person or group of
beneficial ownership of 20% or more of the Company's common stock and prior to
an acquisition of 50% or more of the common stock, the Board of Directors may
exchange the rights (other than rights owned by such person or group), in whole
or in part, at an exchange ratio of one share of common stock (or approximately
one one-hundredth of a share of the new series of junior participating preferred
stock) per right. Prior to the acquisition by a person or group of beneficial
ownership 20% or more of the Company's common stock, the rights are redeemable
for one tenth of one cent per right at the option of the Board of Directors. In
May 2002 the Board of Directors amended the rights agreement to exclude the
financing with St. Albans Cooperative Creamery, Inc. and to provide for the
expiration of the rights upon consummation of the financing.
NOTE 14. - RESTRUCTURING
The Company entered into an agreement, as of May 16, 2002, with St. Albans
Cooperative Creamery, Inc. ("St. Albans"), the Company's primary supplier of raw
materials, pursuant to which St. Albans (i) converted $1,000,000 of accounts
payable owed by the Company to St. Albans, into 333,333 share of the Company's
common stock, (ii) converted $3,500,000 of accounts payable owed by the Company
to St. Albans into (A) preferred stock convertible into 583,333 shares of common
stock, which preferred stock (1) automatically converts into such number of
shares of common stock if the common stock is $8 or higher for thirty
consecutive trading days, and (2) may be redeemed by the Company for $3,500,000,
and (B) a ten-year warrant to purchase 583,333 shares of common stock (subject
to adjustment under certain circumstances to a maximum of 1,416,667 shares of
common stock) at $.01 per share, which warrant (1) may not be exercised for a
period of three-years, (2) terminates if, during such three-year period, the
Company's common stock is $8 or higher for thirty consecutive trading days, and
(3) in the event the Company's common stock is not $8 or higher for thirty
consecutive trading days during such three-year period, may only be exercised on
the same basis percentage wise as the preferred shares are converted, (iii)
converted an additional $1,000,000 of accounts payable owed by the Company to
St. Albans into a convertible promissory note, bearing interest at the
applicable federal rate (4.99%) at the note's inception, due on April 14, 2005,
which note is convertible into common stock at $6 per share at any time by St.
Albans
F-19
LUCILLE FARMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and, at the Company's option, automatically shall be converted into common stock
at $6 per share if the common stock is $8 or higher for a period of 30
consecutive trading days, and (iv) provided the Company with a pricing structure
for milk and milk by-products, for a minimum of one-year and a maximum of
four-years (subject to renegotiation at the expiration of the applicable
period), designed to produce profitability for the Company. Accordingly, a gain
was recognized in the amount of $875,000, net of income taxes that were
calculated to be zero. The Company has recorded the restructured debt issued
pursuant to the restructuring in accordance with the requirements of SFAS 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings".
Accordingly, the debt recorded in connection with this transaction included
obligations for future cash payments of principal and interest to the extent
that the total of such cash flows did not exceed the principal amount of the
debt cancelled.
Schedule II
Valuation and Qualifying Accounts:
COL A COL B COL C COL D COL E
----- ----- ----- ----- -----
Additions
Balance at Additions (Deductions) Other Changes Balance
Beginning Charged (Credited) to Add (Deduct) at End of
Classification Of Period Cost and Expenses Described Period
-------------- --------- ----------------- --------- ------
Year ended March 31, 2005
Reserves and allowances
deducted
From asset account:
Allowance for uncollectible
accounts 170,000 (103,000) - 67,000
Reserve on Inventory - 211,000 - 211,000
Valuation for deferred tax asset 2,487,000 1,412,000 - 3,899,000
---------- ---------- ---------- ----------
2,657,000 1,520,000 - 4,177,000
Year ended March 31, 2004
Reserves and allowances
deducted
From asset account:
Allowance for uncollectible
accounts 189,000 43,000 (62,000) 170,000
Reserve on Inventory 350,000 (350,000) - -
Valuation for deferred tax asset 2,490,000 (3,000) - 2,487,000
---------- ---------- ---------- ----------
3,029,000 (310,000) (62,000) 2,657,000
Year ended March 31, 2003
Reserves and allowances
deducted
From asset account:
Allowance for uncollectible
accounts 144,000 145,000 (100,000) 189,000
Reserve on Inventory 93,000 257,000 - 350,000
Valuation for deferred tax asset 1,951,000 539,000 - 2,490,000
---------- ---------- ---------- ----------
2,188,000 941,000 (100,000) 3,029,000
F-20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At the stockholders' meeting on March 31, 2005, the shareholders approved
Mahoney Cohen & Co., CPA, PC as the Company's independent accounting firm for
the year ended March 31, 2005.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the CEO and CFO, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15. 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 and ensures that information required to be disclosed by the Company in
the report it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within time periods specified by the rules and forms.
The Company and its auditors have identified deficiencies within its internal
control framework which, if left uncorrected could result in a material control
weakness. Our internal control deficiencies relate to the account reconciliation
process and lack of compliance with established procedures for monitoring and
adjusting balances relating to certain accruals and provisions. As a result of
the above actions, considerable improvements in the Company's internal controls,
including a reorganization and centralization of its accounting department, are
currently being implemented.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of June 24, 2005 are as
follows:
Name Age Present Office or Position
---- --- --------------------------------
Howard Breslow 65 Chairman of the Board of Directors
Jay M. Rosengarten 60 Chief Executive Officer and Director
Alfonso Falivene 60 President
Don Desjarlais 49 Executive Vice President and Chief Financial Officer
Carl Millerick 59 Vice President-Operations
George Bell 60 Director
Ralph Singer 55 Director
Frank DiPasquale 48 Director
Mr. Howard S. Breslow has been a director of the Company since April 1993. On
October 24, 2002, he was elected as the non-employee Chairman of the Board of
Directors. Mr. Breslow has been a practicing attorney in New York for more than
35 years and has been a member of the law firm of Breslow & Walker, LLP New
York, New York for more than 30 years, which firm is counsel to the Company. Mr.
Breslow currently serves as a director of Excel Technology, Inc., a publicly
held company that markets photonic-based solutions, consisting of laser systems
and electro-optical components, primarily for industrial and scientific
applications, and BioLife Solutions, Inc., a publicly held company engaged in
the research, development and sale of products for use in low temperature
medicine.
Mr. Jay Rosengarten was appointed Chief Executive Officer by the Board of
Directors in August 2002 and has been on the Board of Directors since February
1, 1998. Mr. Rosengarten, the former Board Chairman of Shopwell, Chicago, is an
internationally recognized consultant, author and lecturer on Consumer
Marketing, Ethnic Marketing and Business Management. He has been the keynote
speaker at numerous national trade association meetings and major corporate
events. Mr. Rosengarten has a J.D. from Fordham University Law School. Mr.
Rosengarten is the principal of The Rosengarten Group, a management consulting
firm, a position he has held from 1993 to present.
Mr. Alfonso Falivene is a founder of the Company. He served as Vice President
and Secretary of the Company until April 1993 when he was appointed President
and Chief Executive Officer. On November 1, 2002, Mr. Falivene resigned the
position of Chief Executive Officer.
Mr. Carl Millerick, Vice President-Operations, has worked for the Company from
April, 2002 to the present. From 1988 to 2002, Mr. Milerick was the president
and owner of Milerick Associates, a consulting firm providing advisory services
to the dairy industry.
Mr. Don Desjarlais was appointed the Chief Financial Officer of the Company in
February 2005. Prior to this position, he was the Chief Financial Officer for
Alto Dairy Cooperative, a large dairy cooperative based in Wisconsin. During his
tenure with Alto, he served as CFO for the last ten years. Mr. Desjarlais has
been a licensed Certified Public Accountant for more than 25 years.
Mr. George Bell has been a director of the Company since August 2002. Mr. Bell
has been the President of National Provisions, Inc., a national specialty food
processing company based Florida, since June 2001 and the President of Florida
Deli Pickle Company, Inc. since 1993. Mr. Bell previously spent over 25 years
with Hebrew National, an internationally renowned meat processing company,
especially known for their frankfurters. His last position was Sr. V.P. of
Operations for the company.
Mr. Ralph Singer has been a director of the Company since August 2002. Mr.
Singer has been the Chairman of the Board of National Provisions, Inc. since
June 2001, and the Chairman of Florida Deli Pickle Company Inc. since February
2001. He is a former Deputy Chairman of the Board of The Stirling Group, PLC in
the U.K. Mr. Singer brings over twenty years experience as a successful
entrepreneur.
Mr. Frank DiPasquale has worked for the National Grocers Association since 1997,
where he is Senior Vice President. Mr. DiPasquale was the head of human
resources management and operational services for all of Kmart's Super Kmart
Centers from 1992 to 1997. Mr. DiPasquale has a B.B.A. in Marketing Management
from Iona College in New York, a Graduate Degree in Leadership Development from
Hartford University in Connecticut and a Master's of Arts in Human Resource
Management/Organizational Development from Marist College in New York. He is on
the Advisory Board of Second Harvest, the National Skills Standards and Western
Michigan University's Food Marketing Program and the Editorial Board at St.
Joseph's University Food Marketing Program.
Officers serve at the discretion of the Board of Directors and are elected at
the annual meeting of the Board of Directors. Directors are elected at the
annual meeting of stockholders for a term of one year. The Company's Certificate
of Incorporation provides that no director shall be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
except for: (a) any breach of the duty of loyalty; (b) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (c) improper distributions to stockholders or loans to officers or
directors; or (d) any transactions from which a director derives an improper
personal benefit. The Company currently maintains insurance to indemnify
directors and officers.
BOARD COMMITTEES
Audit Committee. The Board of Directors has an Audit Committee which operates
under a written charter adopted by the Board of Directors. The Audit Committee
held four meetings during the year ended March 31, 2005. The Audit Committee is
comprised of Messrs. DiPasquale, Bell and Singer and each are "independent
directors" as defined under NASDAQ rules. Mr. Bell is qualified as an audit
committee financial expert within the meaning of the SEC regulations.
Compensation Committee. Management compensation for fiscal year 2005 was
determined by the Company's Compensation Committee, which met twice during 2005.
The role of the Compensation Committee is to evaluate the performance of the
Company's executive officers, and to determine and approve their compensation.
The Compensation Committee is comprised of Messrs. DiPasquale, Bell and Singer.
Nominating Committee. The Board of Directors has no standing nominating
committee. The Company believes that obtaining input from all of its directors
in connection with Board nominations enhances the nomination process. The
Company currently does not have a charter with regard to the nomination process.
The nominations of the directors standing for election or re-election at the
Meeting were unanimously recommended for selection by the independent directors,
and were unanimously approved by the Board of Directors.
The Company does not have a formal policy concerning stockholder recommendations
of nominees to the Board of Directors. The need for such a policy has not arisen
since, to date, the Company has not received any recommendations from
stockholders requesting that the Board of Directors consider a candidate for
inclusion among the Board's slate of nominees in the Company's proxy statement.
The absence of such a policy does not mean, however, that a recommendation would
not have been considered had one been received. The Company will consider
director candidates recommended by stockholders. Any stockholder desiring to
make such a recommendation should send the recommendation, in writing, to the
Corporate Secretary at the address of the Company set forth on the first page of
this Form 10-K, no later than the date by which stockholder proposals for action
must be submitted. The recommendation should include the recommended candidate's
biographical data, and should be accompanied by the candidate's written consent
to nomination and to serving as a director, if elected.
The Company's goal is to assemble a Board of Directors that brings to the
Company a variety of perspectives and skills derived from business and
professional experience. The Company does not have any formal rules or policies
regarding minimum qualifications for nominees, but expects that its candidates
be of the highest ethical character, share the values of the Company, have
reputations, both personal and professional, consistent with the image and
reputation of the Company, be highly accomplished in their respective field, and
possess the relevant expertise and experience necessary to assist the Board and
the Company to increase stockholder value.
The Board of Directors identifies nominees by first evaluating the current
members of the Board of Directors willing to continue in service. Current
members of the Board with skills and experience that are relevant to the
Company's business and who are willing to continue in service are considered for
re-nomination, balancing the value of continuity of service by existing members
of the Board with that of obtaining a new perspective. If any member of the
Board does not wish to continue in service or if the Board of Directors decides
not to re-nominate a member for re-election, the Board of Directors will seek to
identify nominees that possess the characteristics outlined above. Current
members of the Board of Directors are polled for suggestions. Research also may
be performed to identify qualified individuals. To date, the Company has not
engaged third parties to identify, evaluate, or assist in identifying potential
nominees, although the Company reserves the right in the future to retain a
third party search firm, if necessary.
In evaluating director nominees, the Board of Directors may consider the
following factors:
o the appropriate size and the diversity of the Company's Board of
Directors;
o the needs of the Company with respect to the particular talents and
experience of its directors;
o the knowledge, skills and experience of nominees, including experience
in the food industry, business, or finance, in light of prevailing
business conditions and the knowledge, skills and experience already
possessed by other members of the Board;
o familiarity with national and international business matters;
o experience with accounting rules and practices; and
o the need to satisfy governance and other standards set by the SEC and
NASDAQ.
The Board of Directors may also consider such other factors as it may deem to be
in the best interests of the Company and its stockholders.
COMMUNICATING WITH DIRECTORS
Stockholders may contact any of our directors or our Board as a group by writing
to them c/o Lucille Farms, Inc., 12 Jonergin Drive, P.O. Box 125, Swanton,
Vermont 05488, Att: Don Desjarlais. All communications will be received,
processed and forwarded to the directors by the Corporate Secretary. You will
receive a written acknowledgement from the Corporate Secretary upon receipt of
your communication if you include a return address.
AUDIT COMMITTEE REPORT
The Company's management is responsible for preparing the Company's financial
statements, and the independent auditors are responsible for auditing those
financial statements. The Audit Committee is responsible for monitoring and
reviewing these processes on behalf of the Board of Directors.
The Audit Committee has reviewed and discussed the audited financial statements
with management. Management represented to the Audit Committee that the
Company's consolidated financial statements were prepared in accordance with
generally accepted accounting principles.
The Audit Committee discussed with the independent auditors matters required to
be discussed by Statement on Auditing Standards No. 61 (Communication With Audit
Committees). In addition, the Audit Committee has received the written
disclosures and the letter from the independent auditors required by
Independence Standards Board Standard No. 1 (Independence Discussions With Audit
Committees), and has discussed with the independent auditors the auditors'
independence from the Company and its management. In concluding that the
auditors are independent, the Audit Committee considered, among other factors,
whether the nonaudit services provided by auditors were compatible with their
independence.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors (and the Board subsequently
approved the recommendation) that the audited financial statements be included
in the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
2005 for filing with the Securities and Exchange Commission.
Audit Committee
Frank DiPasquale
George Bell
Ralph Singer
CODE OF ETHICS
The Company has a Code of Ethics that is applicable to all employees of the
Company, including the Company's executive officers. The Company will provide an
electronic or paper copy of the Code of Ethics free of charge upon request.
Requests may be made by calling Investor Relations at (802) 868-7301, or by
writing to Investor Relations at 12 Jonergin Drive, P.O. Box 125, Swanton,
Vermont 05488.
Section 16A Beneficial Ownership Reporting Compliance
The Company is not aware of any late filings of, or failure to file, the reports
required by Section 16(a) of the Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation paid
by the Company during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and to each of the Company's executive
officers who received salary and bonus payments in excess of $100,000 during the
year ended March 31, 2005 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation
---------------------------------------------
Name and Principal Fiscal Other Annual
Positions Year Salary Bonus Compensation(1)
------------------------ ----------- --------- --------- -----------------------
Jay Rosengarten 2005 $250,000 $11,000
Chief Executive Officer 2004 $211,000 -- $11,000
2003 56,000 -- --
-- --
Alfonso Falivene 2005 $111,200 $11,000
President 2004 106,000 -- 11,000
2003 106,000 -- 9,000
(1) Represents health insurance, automobile allowances and/or automobile lease
payments for the benefit of such employee.
OPTION/SAR GRANTS IN YEAR-ENDED MARCH 31, 2005
In the fiscal year ended March 31, 2005, the Company issued options to purchase
shares of Common Stock to each of the Named Executive Officers, as follows:
Number of Percent of Total Potential Realized Value
Securities Options/SAR's at Assumed Annual Rates
Underlying granted to or Stock Price
Options/SAR's Employees in Exercise or Base Expiration Appreciation for Option Term
Name and Principal Position granted (#) (1) Fiscal Year Price ($/Sh) Date 5% 10%
--------------------------- --------------- ----------- ---------------- ------------ ------------- ----------
Jay Rosengarten 10,000 8.3% $3.00 4/26/14 (5,000) 48,867 $77,812
Chief Executive Officer 3/29/14 (5,000)
Alfonso Falivene 5,000 4.2% $3.00 3/29/14 $24,433 $38,906
President
(1) Options to acquire shares of Common Stock.
AGGREGATED OPTIONS/SAR EXERCISES AND OPTION/SAR VALUES FOR THE FISCAL YEAR ENDED
MARCH 31, 2005
The following table provides information related to options exercised by each of
the Named Executive Officers during the year ended March 31, 2005 fiscal year
and the number and value of options held at March 31, 2005. The Company does not
have any outstanding stock appreciation rights. None of the options were in the
money at year ended March 31, 2005.
Number of Securities Underlying Value of Unexercised in the
Unexercised Options/SAR at money Options/SAR At Fiscal
Fiscal Year End (#) Year End ($)(1)
------------------- ---------------
Shares
Acquired On Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Jay M. - - 185,000 100,000 - -
Rosengarten
Alfonso Falivene - - 5,000 - - -
-------------------
(1) The closing price for the Common Stock as reported on the Nasdaq on March
31, 2005 was $1.26.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
During the fiscal year ended March 31, 2005, the Company's Compensation
Committee held primary responsibility for determining executive compensation
levels. The goals of the Company's compensation program is to align compensation
with business objectives and performance and to enable the Company to attract,
retain and reward executive officers and other key employees who contribute to
the long term success of the Company.
The Chief Executive Officer's compensation for the fiscal year ended
March 31, 2005 was his base salary as determined by the terms of Mr.
Rosengarten's employment agreement with the Company.
COMPENSATION COMMITTEE
Ralph Singer
George Bell
Frank DiPasquale
Employment Agreements
On October 24, 2002, the Company entered into an employment agreement with Jay
Rosengarten, pursuant to which Mr. Rosengarten was employed as the Company's
Chief Executive Officer, initially, and for a period of approximately three (3)
months (the "Wind Down Period"), on a part-time basis, during which period of
time Mr. Rosengarten is to wind down his consulting practice and devote not less
than three (3) week days per week to the business of the Company, and thereafter
on a full-time basis, provided, however, that Mr. Rosengarten is permitted to
retain, as consulting clients, two food industry related trade associations (the
"Trade Associations") and two food industry related trade clients (the "Trade
Clients") and devote, on average, not more than an aggregate of two (2) days per
month in connection with such clients. During the Wind Down Period, Mr.
Rosengarten will receive a salary at the rate of $150,000 per annum. Thereafter,
until such time as he terminates his consulting relationship with the Trade
Clients (at which time he can devote, on average, not more than an aggregate of
one (1) day per month in connection with the Trade Associations), his salary
will be at the rate of $200,000 per annum. At such time as Mr. Rosengarten
terminates his consulting relationship with the Trade Clients, his salary shall
be at the rate of $250,000 per annum. Pursuant to the terms of the employment
agreement, in addition to his salary, the Company has granted to Mr.
Rosengarten, under the Company's 2002 Stock Option Plan (the "Plan"), a 10-year
option to purchase 250,000 shares of the Company's Common Stock at $3.00 per
share, which option vests to the extent of 50,000 shares upon the commencement
of employment and 50,000 shares on each of the next four anniversary dates
thereof; provided, however, that such vesting accelerates and all options vest
in the event of a sale of all or substantially all of the assets or all of the
shares of capital stock of the Company or the merger or consolidation of the
Company with another entity where the Company is not the surviving entity or
becomes a wholly owned subsidiary of another entity ( a "Change of Control
Event"). In the event Mr. Rosengarten's employment is terminated on account of
his death, disability, or resignation or for cause, the Company shall be
obligated to pay his salary only up to the date of termination. In the event his
employment is terminated by the Company without cause, the Company shall be
required to continue to pay his salary for a period of six (6) months and that
portion of any bonus which has accrued to the date of termination; provided,
however, that Mr. Rosengarten shall have the affirmative obligation to seek
employment or reactivate his consulting business and mitigate the Company's
damages-i.e. to the extent that he earns monies from his employment or
consulting business, the same shall be applied to reduce the payment to be made
to Mr. Rosengarten under his employment agreement; and provided further that if
such termination takes place within two (2) years after a Change of Control
Event, then the Company shall be required to continue to pay his salary for a
period of twelve (12) months.
On February 21, 2005, the Company entered into an employment agreement with Don
Desjaralis, pursuant to which Mr. Desjaralis was employed as the Company's
Executive Vice President and Chief Financial Officer. The employment agreement
provides for (a) a base salary of $150,000 per annum, (b) the grant to him of a
10-year option to purchase 50,000 shares of the Company's Common Stock at $3.00
per share, which options vest to the extent of 10,000 shares upon the
commencement of employment and the balance ratably on each of the next four
anniversary dates thereof and provide for partial acceleration on certain Change
of Control events, and (c) in the event his employment is terminated, the
payment to him of his salary for a period of twelve months; provided, however,
that he shall have an affirmative obligation to seek employment and mitigate the
Company's damages.
Compensation of Directors
The Company has not compensated its directors for their services in such
capacity other than through the grant of stock options.
Compensation Committee Interlocks and Insider Participation
Management compensation for the year ended March 31, 2005 was determined by the
Compensation Committee comprised of non-employee directors of the Company. None
of these outside directors was at any time during such year or at any other time
an officer or employee of the Company, and none of them had any relationship
with the Company requiring disclosure under SEC rules.
Comparison of Cumulative Total Stockholder Return
The following chart compares the percentage change in the cumulative
total stockholder return of the Common Stock during the period from March 31,
2000 through the fiscal year ended March 31, 2005 with the cumulative total
return on the NASDAQ Composite Index and the Company Peer Group. The comparison
assumes $100 was invested in the Common Stock on March 31, 2000, and in each of
the stocks included in the NASDAQ Composite Index and the Company Peer Group.
[CHART OMITTED]
STOCK PERFORMANCE GRAPH
CRSP Total Return Index for: 03/2000 03/2001 03/2002 03/2003 03/2004 03/2005
------- -------- ------- ------- ------- -------
Lucille Farms, Inc. 100.0 45.2 37.5 18.9 23.2 24.0
Nasdaq Stock Market (US Companies) 100.0 40.0 40.3 29.6 43.7 44.0
NASDAQ Stocks (SIC 5140-5149 US
Companies) Groceries and Related Products 100.0 140.3 185.7 154.4 215.3 226.6
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set on 3/31/2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table, as of June 28, 2005, sets forth certain information
regarding beneficial ownership of common stock and preferred stock by (i) all
persons known by the Company to be the beneficial owner of more than 5% of the
Company's outstanding voting stock, (ii) each director of the Company, (iii)
each Named Executive Officer and all executive officers and directors of the
Company as a group. Unless expressly indicated otherwise, each stockholder
exercises sole voting and investment power with respect to the shares
beneficially owned.
Amount and Nature
of Beneficial Ownership Percent of Class
---------------------- ---------------------
Name and Address of 5% Series B Series B
Owners Common Stock Prfd. Stock Common Stock Pfd. Stock
----------------------- ----------------- ----------- ------------------- ----------
Gennaro Falivene 180,652 5.4%
Box 125
Swanton, VT 05488
Alfonso Falivene 424,581(1) 12.3%
150 River Rd., P.O. Box 517
Montville, NJ 07045
The Estate of Philip Falivene 200,017(2) 6.0%
Box 125
Swanton, VT 05488
B&W Investment Associates 703,799(3) 18.2%
c/o Breslow and Walker
100 Jericho Quadrangle
Jericho, NY 11753
Howard S. Breslow 703,799(4) 18.2%
100 Jericho Quadrangle
Jericho, NY 11753
Jay M. Rosengarten 185,000(5) 5.5%
/o Lucille Farms, Inc.
150 River Rd., P.O. Box 517
Montville, NJ 07045
Frank DiPasquale 10,000 0.3%
/o Lucille Farms, Inc.
150 River Rd., P.O. Box 517
Montville, NJ 07045
George Bell 10,000 0.3%
c/o Lucille Farms, Inc.
150 River Rd., P.O. Box 517
Montville, NJ 07045
Ralph Singer 10,000 0.3%
c/o Lucille Farms, Inc.
150 River Rd., P.O. Box 517
Montville, NJ 07045
St. Albans Cooperative Creamery, Inc. 333,333(6) 583(7) 9.9% 100%
140 Federal Street
St. Albans, VT 05478
All officers and
directors as a group 1,383,380(8) 33.1%(8)
Shares of Common Stock subject to options and warrants currently exercisable or
exercisable within 60 days are deemed outstanding for computing the number of
shares and the percentage of the outstanding shares held by a person holding
such options and warrants, but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote and subject to
community property laws where applicable, the Company believes that the person
named in the table has sole voting and investment power with respect to all
shares shown as beneficially owned by them.
(1) Includes 7,500 shares owned by Mr. Falivene's wife and 20,000 shares owned
by one of his children. Also includes 5,000 shares issuable under outstanding
options.
(2) Represents all of the shares owned by the Estate of Philip Falivene, of
which Alfonso Falivene is executor.
(3) Includes 500,000 shares issuable under outstanding warrants. Also includes
10,000 shares issuable under outstanding options held by Howard S. Breslow, a
director of the Company, and a partner in B&W Investment Associates.
(4) Represents 500,000 shares issuable upon exercise of warrants and 193,799
shares held by B&W Investment Associates, a partnership of which Howard S.
Breslow, a director of the Company, is a partner. Also includes 10,000 shares
issuable under outstanding options.
(5) Includes 185,000 shares issuable under outstanding vested options. Does not
include an additional 100,000 shares issuable under outstanding options that are
not vested.
(6) Excludes warrants convertible into 583,333 shares (subject to adjustment) of
Common Stock, which may not be exercised until May 16, 2005.
(7) Convertible into shares of Common Stock. See "-Liquidity and Capital
Resources".
(8) Includes 265,000 shares issuable under outstanding options and 500,000
shares issuable under outstanding warrants. See "-Liquidity and Capital
Resources".
EQUITY COMPENSATION PLAN INFORMATION
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted average exercise under equity compensation plans
outstanding options, warrants price of outstanding options, (excluding securities reflected in
Plan Category and rights. warrants and rights column (a).
--------------------- ------------------------------ ------------------------------ ----------------------------------
(a) (b) (c)
Equity compensation
plan approved by
shareholders 440,000 3.05 605,000
Equity compensation
plan not approved by
shareholders 500,000 3.00 -0-
Total 940,000 3.02 605,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases a parcel of land adjacent to the Vermont facility. Messrs
Gennaro Falivene, Alfonso Falivene and the Estate of Philip Falivene own this
parcel. The space is used as an employee parking lot and its use was required in
conjunction with the construction of the whey drying facility. The lease is for
a ten-year period beginning April 1998. Rentals are $750 monthly for the first
five years and $900 monthly for the additional five-year period. Rent expense
for the years ended March 31, 2005, 2004, and 2003, was $10,800, $10,800 and
$9,000 respectively. This lease has a purchase option to purchase at fair market
value at the end of the ten-year period. This lease was assigned to the Bank in
conjunction with the whey plant financing.
The Company's executive offices, consisting of approximately 1,900 square feet,
are located in Montville, New Jersey. Approximately 1,000 square feet of such
premises are leased from Messrs. Gennaro Falivene, Alfonso Falivene and the
Estate of Philip Falivene, officers, directors, and/or principal stockholders of
the Company, all of who own the office condominium unit. The Company currently
pays Messrs. Falivene $1,200 per month rent for such premises, which is the fair
market value for such space, on a month-to-month basis. During the fiscal years
ended March 31, 2005, 2004 and 2003, the Company paid approximately $14,000,
$14,000 and $14,000, respectively, towards the rental of such offices. The
Company also leases an additional 900 adjacent square feet for $750 monthly on a
month--to--month basis. Messrs. Alfonso Falivene, Gennaro Falivene, and the
Estate of Philip Falivene also own these premises. This space is primarily used
for marketing operations. Rent expense for this space was $9,000, $9,000 and
$9,000, respectively, for the years ended March 31, 2005, 2004 and 2003.
ITEM 14 Principal Accountant Fees and Services
The accounting firm of Mahoney Cohen & Company, CPA, P.C. ("Mahoney") served as
the Company's independent accountants for the fiscal years ending March 31, 2005
and March 31, 2004.
The following table sets forth the aggregate fees billed by Mahoney for audit
and review services rendered in connection with the financial statements and
reports and for other services rendered during the fiscal years ended March 31,
2004 and 2005, respectively, on behalf of the Company:
2005 2004
---- ----
Audit Fees (a) $76,412 $37,117
Audit-related fees(a) -0- $10,000
Tax fees 8,000 -0-
All other fees -0- -0-
-------- --------
Total $ 84,412 $47,117
(a) Includes assistance with reviews of unaudited financial statements.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements (included in Part II, Item 8):
Independent Auditors' Report
Consolidated Balance Sheet as at March 31, 2005 and March 31, 2004
Consolidated Statement of Operations for the years ended March 31, 2005,
March 31, 2004 and March 31, 2003
Consolidated Statement of Stockholders' Equity for the years ended March
31, 2005, March 31, 2004 and March 31, 2003
Consolidated Statement of Cash Flows for the years ended March 31, 2005,
March 31, 2004 and March 31, 2003
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules (included in Part II, Item 8)
3. Exhibits included herein: Index to Exhibits for exhibits filed as part of
this Form 10-K annual report.
(b) Reports on Form 8-K:
Current Report on Form 8-K, filed February 15, 2005, relating to the
results of operations for the period ended December 31, 2004.
Current Report on Form 8-K, filed February 23, 2005, relating to the
appointment of Don Desjarlais as the Chief Financial Officer.
INDEX TO EXHIBITS
Exhibit Number Document
-------------- --------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 By-Laws of the Company, as amended (1)
4.1 Specimen Common Stock Certificate (1)
4.2 Certificate of Designation of Series A Convertible
Redeemable Preferred Stock of the Company. (5)
10.1 1993 Stock Option Plan (1)
10.2 Loan facility with Chittenden Bank, including Commitment
Letter, dated April 30, 1996, Loan Agreement, dated June
13, 1996, and Promissory Notes, dated June 13, 1996,
relating to short term working capital facility and capital
expenditures line of credit (2) and amendment thereto dated
June 11, 1997 (3)
10.3 Loan facility with First International Bank, N.A.,
including Collateral Assignments, Financial Condition
Affidavits, Loan Agreements and Promissory Notes, dated
February 8, 1999, Assignment of Contract Rights, Security
Agreement, dated February 8, 1999, and Commercial Mortgage
and Security Agreement, dated February 8, 1999.(4)
10.4 Loan facility with CoBANK, ACB including Single Advance
Term Loan Supplement, dated May 23, 2001, Master Loan
Agreement, dated May 23, 2001, Real Estate Mortgage, dated
May 23, 2001, Security Agreement, dated May 23, 2001 and
Continuing Guarantees, dated May 23, 2001. (5)
10.5 Loan and Security Agreement, dated as of December 2, 2004,
among LaSalle Business Credit, LLC, Lucille Farms, Inc. and
Lucille Farms of Vermont, Inc. (6)
21 List of subsidiaries of the Company (1)
31.1 Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2004 dated July 14, 2005*
31.2 Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated July 14, 2005*
32.1 Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated July 14, 2005*
32.2 Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated July 14, 2005*
* filed herewith
(1) Incorporated by reference to the Company's Registration
Statement Form S-1, File No. 33-64868.
(2) Incorporated by reference to the Company's Annual Report on
Form 10-K the fiscal year ended March 31, 1996.
(3) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal Year ended March 31, 1997.
(4) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1999.
(5) Incorporated by reference to the Company's Form 10-K for
the fiscal year ended March 31, 2001.
(6) Incorporated by reference to the Company's Form 10-Q for
the quarterly period ended December 31, 2004
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Lucille Farms, Inc.
----------------------------------------
(Registrant)
By: /s/ Jay M. Rosengarten
------------------------------------
Jay M. Rosengarten
Chief Executive Officer
By: /s/ Don Desjarlais
------------------------------------
Don Desjarlais
Chief Financial Officer
Date: July 14, 2005
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
--------- ----- ----
/s/Howard S. Breslow Director July 14, 2005
---------------------------
Howard S. Breslow
/s/Jay Rosengarten Director July 14, 2005
---------------------------
Jay Rosengarten
/s/George Bell Director July 14, 2005
---------------------------
George Bell
/s/Ralph Singer Director July 14, 2005
---------------------------
Ralph Singer
/s/Frank Di Pasquale Director July 14, 2005
---------------------------
Frank Di Pasquale
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- ----------------------
31.1* Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated July 14, 2005
31.2* Certification of Periodic Report pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated July 14, 2005
32.1* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated July 14, 2005
32.2* Certification of Periodic Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated July 14, 2005
* Filed herewith