SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly period Ended: September 30, 2002
Commission File Number 1-12506
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LUCILLE FARMS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 13-2963923
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(State or other Jurisdiction (I.R.S. Employer
Of Incorporation) Identification No.)
150 River Road, P.O. Box 517
Montville, New Jersey 07045
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (973) 334-6030
Former name, former address and former fiscal year, if changed since last
report. N/A
---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x NO
--- ---
The number of shares of Registrant's common stock, par value $.001 per share,
outstanding as of November 6, 2002 was 3,284,775.
Item 1. Financial Statements
LUCILLE FARMS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
SEPTEMBER 30, 2002 MARCH 31, 2002
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(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 299,000 $ 175,000
Accounts receivable, net of allowances of
$78,000 at September 30, 2002 and
$144,000 at March 31,2002 3,757,000 3,688,000
Inventories 2,851,000 3,169,000
Deferred income taxes 72,000 72,000
Prepaid expenses and other current assets 484,000 164,000
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Total Current Assets 7,463,000 7,268,000
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PROPERTY, PLANT AND EQUIPMENT, NET 10,366,000 10,503,000
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OTHER ASSETS:
Due from officers 101,000 101,000
Deferred loan costs, net 241,000 250,000
Other 103,000 118,000
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Total Other Assets 445,000 469,000
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TOTAL ASSETS $ 18,274,000 $ 18,240,000
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See notes to consolidated financial statements
2
LUCILLE FARMS, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, 2002 MARCH 31, 2002
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(UNAUDITED)
CURRENT LIABILTIES:
Revolving credit loan $ 3,272,000 $ 3,744,000
Accounts payable 2,909,000 6,824,000
Current portion of long-term debt 702,000 201,000
Accrued expenses 378,000 384,000
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Total Current Liabilities 7,261,000 11,153,000
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LONG-TERM LIABILITIES:
Long-term debt, net of current portion 7,253,000 6,771,000
Deferred income taxes 72,000 72,000
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Total Long-term Liabilities 7,325,000 6,843,000
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TOTAL LIABILITIES 14,586,000 17,996,000
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STOCKHOLDERS' EQUITY:
Preferred Stock- face value 250,000 shares authorized:
216 shares Series A convertible
issued and outstanding 1,000 1,000
583 shares Series B convertible
issued and outstanding 1,000 --
Common stock, $ 0.001 per value,
10,000,000 shares authorized 3,284,775 shares issued 3,000 3,000
at September 30, 2002 and 3,021,342 shares issued at
March 31, 2002
Additional paid-in capital 8,425,000 5,001,000
Accumulated deficit (4,577,000) (4,596,000)
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3,853,000 409,000
Less: 69,900 shares of treasury stock, at cost (165,000) (165,000)
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Total Stockholders' Equity 3,688,000 244,000
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 18,274,000 $ 18,240,000
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See notes to consolidated financial statements
3
LUCILLE FARMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
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SALES $ 9,198,000 $ 12,994,000
COST OF SALES 8,733,000 12,236,000
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GROSS PROFIT 465,000 758,000
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OTHER EXPENSE (INCOME):
SELLING 171,000 138,000
GENERAL AND ADMINISTRATIVE 216,000 231,000
INTEREST INCOME (3,000) (3,000)
INTEREST EXPENSE 205,000 245,000
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TOTAL OTHER EXPENSE (INCOME) 589,000 611,000
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INCOME (LOSS) BEFORE INCOME TAXES (124,000) 147,000
(PROVISION) FOR INCOME TAXES -- (2,000)
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NET INCOME (LOSS) $ (124,000) $ 145,000
=============== ===============
NET INCOME PER SHARE (LOSS)
:BASIC $ (.04) $ .05
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:DILUTED $ (.04) $ .05
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WEIGHTED AVERAGE SHARES
OUTSTANDING USED TO COMPUTE
NET INCOME PER SHARE
: BASIC 3,284,775 2,971,342
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: DILUTED 3,284,775 2,981,761
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See notes to consolidated financial statements
4
LUCILLE FARMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
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SALES $18,516,000 $25,130,000
COST OF SALES 18,148,000 23,520,000
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GROSS PROFIT 368,000 1,610,000
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OTHER EXPENSE (INCOME):
SELLING 347,000 287,000
GENERAL AND ADMINSTRATIVE 474,000 491,000
INTEREST INCOME (5,000) (6,000)
INTEREST EXPENSE 407,000 449,000
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TOTAL OTHER EXPENSE (INCOME) 1,223,000 1,221,000
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INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (855,000) 389,000
(Provision) for income taxes (1,000) (3,000)
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INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $ (856,000) $ 386,000
EXTRAORDINARY ITEM: GAIN ON DEBT RESTUCTURING (NET) 875,000 -
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NET INCOME $ 19,000 $ 386,000
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NET INCOME(LOSS)PER SHARE
Basic:
Income (loss) before extraordinary item $ (.26) $ .13
Extraordinary item $ .27 -
Net income (loss) $ .01 $ .13
Diluted:
Income (loss) before extraordinary item $ (.21) $ .13
Extraordinary item $ .21 -
Net income (loss) $ .00 $ .13
WEIGHTED AVERAGE SHARES
OUTSTANDING USED TO COMPUTE
NET INCOME PER SHARE
:Basic 3,271,341 2,971,342
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:Diluted 4,073,351 2,979,572
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See notes to consolidated financial statements
5
LUCILLE FARMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30,
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2002 2001
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CASH FLOWS FROM OPERATING ACTIVITES:
NET INCOME $ 19,000 $ 386,000
Adjustments to reconcile net (loss)/
income to net cash (used) by
operating activities:
Gain on debt restructuring (875,000) -
Value of options issued for service - 4,000
Depreciation and amortization 424,000 349,000
Provision for doubtful accounts 34,000 35,000
(Increase) decrease in assets:
Accounts receivable (103,000) (394,000)
Inventories 318,000 (772,000)
Prepaid expenses and other current assets (320,000) 35,000
Other assets 15,000 (42,000)
Increase (decrease) in liabilities
Accounts payable 1,585,000 (673,000)
Accrued expenses (6,000) (4,000)
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Net cash provided (used) by operating activities 1,091,000 (1,076,000)
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant equipment (278,000) (601,000)
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Net Cash (used by) Investing Activities (278,000) (601,000)
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CASH FLOW FROM FINANCING ACTIVITIES:
(Payments of) proceeds from revolving credit loan-net (472,000) 45,000
(Payments of) proceeds from long-term debt and notes - net (217,000) 1,867,000
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Net Cash (Used) Provided by Financing Activities (689,000) 1,912,000
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NET INCREASE IN CASH AND CASH EQUIVALENTS 124,000 235,000
CASH AND CASH EQUIVALENTS-BEGINNING 175,000 212,000
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CASH AND CASH EQUIVALENTS-ENDING $ 299,000 $ 447,000
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See notes to consolidated financial statements
6
LUCILLE FARMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Consolidated Balance Sheet as of September 30, 2002,the Consolidated
Statement of Operations for the three and six month periods ended September
30, 2002 and 2001 and the Consolidated Statement of Cash Flows for the six
month periods ended September 30, 2002 and 2001 have been prepared by the
Company without audit. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the financial
position of Lucille Farms, Inc. as of September 30, 2002, the results of
its operations for the three months and six months ended September 30, 2002
and 2001 and its cash flows for the six months ended September 30, 2002 and
2001.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principals have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Although the
Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these financial statements
be read in conjunction with the year-end financial statements and notes
thereto for the fiscal year ended March 31, 2002 included in the Company's
Annual Report on Form 10-K as filed with the SEC. The company also suggests
that the Form 8-K filed with the SEC on July 11,2002, be read in
conjunction with this report.
The accounting policies followed by the Company are set forth in the notes
to the Company's consolidated financial statements as set forth in its
Annual Report on Form 10-K as filed with the SEC.
2. The results of operations for the three and six months ended September 30,
2002 are not necessarily indicative of the results to be expected for the
entire fiscal year.
3. Inventories are summarized as follows:
September 30, 2002 March 31,2002
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Finished goods $1,917,000 $2,244,000
Raw Materials 389,000 281,000
Supplies and Packaging 545,000 644,000
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$2,851,000 $3,169,000
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4. In May 2001, the Company obtained a $2,000,000 bank loan. The loan,
collateralized by the Company's plant and equipment, bears interest at 1%
above the bank's national variable rate. The loan is due in annual
principal installments of $500,000 beginning May 2003. Interest is payable
monthly. The first installment, due May 2003, has been classified as a
current liability at September 30, 2002.
The Company is presently seeking to replace its $5,000,000 secured
revolving credit line, the maturity of which has been extended to February
1, 2003. Should the Company not be able to secure alternative financing by
the extended due date it will request an additional extension of this
maturity until such financing is secured. However, there can be no
assurance that such financing can be secured or the extension granted.
Should the Company be unable to secure such financing or receive such
extension it will result in a significant negative effect on the Company's
liquidity.
5. Income (loss) per share of common stock was computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the period in accordance with the provisions of the Statement of Financial
Accounting Standards No. 128. Basic and diluted per share amounts are the
same for the three months ended September 30, 2002, since the effect of
stock options would be antidilutive and therefore not taken into
consideration. Conversion of preferred stock was not taken into
consideration since the effect would be antidilutive.
6. For the six months ended September 30, 2002, non-cash investing and
financing activities were $5,500,000 for accounts payable restructuring for
a value ascribed to common stock, preferred stock, warrants and debt issued
in connection with the restructuring of $4,500,000.
For the six months ended September 30, 2001, non-cash investing and
financing activities were $540,000 for preferred stock issued for
equipment.
7
7. In May 2002, the Company restructured $5,500,000 of accounts payable from
its main supplier through the issuance of 333,333 shares of common stock,
583 shares of Series B Preferred Stock with a detachable 10-year warrant
and a $1,000,000 convertible not payable in April 2005, which had an
ascribed value of approximately $4,500,000.
The restructuring resulted in an extraordinary gain of $875,000, net of
expenses of $125,000 and income taxes calculated to be zero due to the
offset of net operation loss carry forwards previously unrealized.
8. In June 2002, the Company issued a 10-year warrant to B & W Investment
Associates, a partnership in which a director of the Company is a partner,
to purchase 500,000 shares of common stock at $3.00 per share. The warrant
was issued to satisfy outstanding professional services in connection with
the restructuring of accounts payable.
9. On April 1, 2002, we adopted FAS 141, "Business Combinations" and FAS 142,
"Goodwill and Other Intangible Assets". FAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after
June 30, 2001, and also specifies the criteria for the recognition of
intangible assets separately from goodwill.
Under the new rules, goodwill is no longer amortized, but is subject to an
impairment test at least annually. Separately identified and recognized
intangible assets resulting from business combinations completed before
July 1, 2001, that did not meet the new criteria for separate recognition
of intangible assets were subsumed in goodwill upon adoption.
We adopted FAS 144 "accounting for the Impairment of Disposal of Long-Lived
Assets", on April 1, 2002. FAS 144 supersedes FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". The primary objectives of FAS 144 are to develop on accounting model
based on the framework established in FAS 121 for long-lived assets to be
disposed of by sale, and to address significant implementation issues. Our
adoption of FAS 144 did not have a material impact on our financial
position or results of operations.
In June 2002, the Financial Accounting Standards Board (or FASB) issued FAS
146, "Accounting for Costs Associated with Exit or Disposal Activities",
which addresses accounting for restructuring, discontinued operation, plant
closing, or other exit or disposal activity. FAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rater than at the date of a commitment to an exit or disposal
plan. FAS 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of FAS 146 is not expected
to have a significant impact on our financial position and results of
operations.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERTAIONS
Results of Operations
General
The Company's conventional cheese product's, which account for substantially all
of the Company's sales, are commodity items. The Company prices its conventional
cheese products competitively with others in the industry, which pricing, since
May 1997, is referenced to the Chicago Mercantile Exchange block cheddar price
(and was formerly referenced to the Wisconsin Block Cheddar Market). The price
the Company pays for fluid milk, a significant component of cost of goods sold,
is not determined until the month after its cheese has been sold. Regulatory
factors effecting our milk suppliers such as dairy subsidies and price supports
may have an effect on our raw material costs, but that impact cannot be
predicted. Milk is generally sold above the subsidy price, which is established
by government regulation. The subsidy price generally establishes a floor for
such costs. While the Company generally can anticipate a change in the price of
milk, it cannot anticipate the extent thereof. There is no corresponding floor
on the Chicago Mercantile Exchange block cheddar price. Therefore, if the block
cheddar price, to which our selling price is referenced, changes at a different
rate than the price of milk our margins are affected. By virtue of the pricing
structure for our cheese, the delay in the determination of the cost, and the
competitive nature of the marketplace, the Company cannot pass along to the
customer the changes in the cost of fluid milk in the price of its conventional
cheese. As a consequence thereof, the Company's gross profit margin for such
cheese is subject to fluctuation, which fluctuation, however slight, can have a
significant effect on the Company's profitability and cash flows.
The Company is unable to predict any future increase or decrease in the prices
in the Chicago Mercantile Exchange as such markets are subject to fluctuation
based on factors and commodity markets outside of the control of the Company.
Although the cost of fluid milk does tend to move correspondingly with the block
cheddar price on the Chicago Mercantile Exchange, the extent of such movement
and the timing thereof is not predictable as it is subject to government control
and support. As a result of these factors, the Company is unable to predict
pricing trends.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001.
Sales for the three months ended September 30, 2002 decreased to $9,198,000
from $12,994,000 for the comparable period in 2001, a decrease of $3,796,000(or
29.2%). Approximately $3,588,000(or 94.5%) of such decrease was due to a
decrease in the average selling price of cheese while a decrease in the sale of
whey accounted for $444,000 (or 11.7%). These decreases were partially offset by
the number of pounds of cheese sold resulting in a $236,000 (or 6.2%) increase
in sales when compared to the same period in 2001.
During the three month period ended September 30, 2002, the average quarterly
selling price of cheese was approximately $1.26. During the three month period
ended September 30, 2001, the average quarterly selling price was approximately
$1.80. There is no way to predict the trend of block cheddar prices on the
Chicago Mercantile Exchange and, therefore, we can provide no guidance as to the
future range of selling prices for commodity cheese.
9
With respect to its gross profit margin, the Company is continuing its efforts
to increase sales of its value-added products which are less dependent on the
block cheddar price on the Chicago Mercantile Exchange. The Company has now
positioned itself to co-pack private label retail products. However, there can
be no assurance as to whether such sales can be achieved or maintained. In
addition, the Company has continued to upgrade its equipment to enable it to
reduce costs and add product lines with greater margins.
In the three month period ended September 30, 2002, and September 30, 2001,
sales of whey amounted to $439,000 and $883,000, respectively.
Cost of sales and gross profit margin for the three months ended September 30,
2002 were $8,733,000 (or 95.0% of sales) and $465,000 (or 5.0% of sales),
respectively, compared to a cost of sales and gross profit margin of $12,236,000
(or 94.2% of sales) and $758,000 (or 5.8% of sales), respectively, for the
comparable period in 2001. The cost of sales and corresponding decrease in gross
profit margin for 2002 as a percentage of sales was the result of a lower
average selling price for cheese due to decreases in the block cheddar market in
the period without a corresponding decrease in raw material costs.
Selling , general and administrative expenses for the three month period ended
September 30, 2002 amounted to $387,000 (or 4.2% of sales) compared to $369,000
(or 2.8% of sales) for the comparable period in 2001. The company is currently
classifying all freight expense as a component of cost of sales and has
reclassified prior years to conform.
Selling expenses are mainly variable in nature. The most significant amount in
selling expense is sales commission expense, which was $68,000 and $55,000 in
2002 and 2001, respectively. The increase resulted from an increase in
commissionable sales in the period ended September 30, 2002. General and
administrative expenses are generally fixed in nature and remained relatively
constant in the period.
Interest expense (net) for the period ended September 30, 2002 amounted to
$202,000 compared to $242,000 for the period ended September 30, 2001, a
decrease of $40,000.
The provision for income tax for the periods ended September 30, 2002, and 2001
of $0.00 and $2,000, respectively, reflect minimum state taxes with the tax
benefits of operating losses being offset by the effect of changes in the
valuation allowance. Such amounts are re-evaluated each period based on the
results of the operations.
The Company's net loss of $124,000 for the three month period ended September
30, 2002, represents a decrease of $269,000 from the net income of $145,000 for
the comparable period in 2001. The primary factors contributing to these changes
are discussed above.
SIX MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2001.
Sales for the six months ended September 30, 2002 were $18,516,000 down from
$25,130,000 for the comparable period in 2001, a decrease of $6,614,000 (or
26.3%). Approximately $5,590,000 (or 84.5%) of such amount was due to a decrease
in the average selling price of cheese and approximately $270,000 (or 4.1%) was
due to a decrease in pounds sold. Whey sales decreased to $848,000 from
$1,639,000, a decline of approximately $754,000 (or 11.4 %) due to falling
prices and less volume.
Cost of sales and gross profit margin for the six months ended September 30,
2002, was $18,148,000 (or 98.0%) of sales and $368,000 (or 2.0% of sales)
respectively, compared to a cost of sales and gross profit margin of $23,520,000
(or 93.6% of sales) and $1,610,000 (or 6.4% of sales) respectively for the
comparable period in 2001. The increase in the cost of sales and corresponding
decrease in gross profit margin in 2002 was primarily due to a decline in the
block cheddar market.
Selling, general and administrative expenses for the six months ended September
30, 2002 amounted to $821,000 (or 4.4% of sales) compared to $778,000 (or 3.1%
of sales) for the comparable period in 2001. The increase in selling, general,
and administrative expenses were primarily due to an increase in commissionable
sales in the period.
Interest expense (net) for the six months ended September 30, 2002, amounted to
$402,000 compared to $443,000 for the six months ended September 30, 2002, a
decrease of $41,000.
The provision for income tax for the six month period ended September 30, 2002
of $1,000 and September 30, 2001 of $3,000 reflect minimum state taxes. Charges
for federal income taxes were offset by changes in the valuation allowances for
the six months ended September 30, 2002, and September 30, 2001. Such amounts
are re-evaluated each quarter based in the results of operations.
The Company's net income of $19,000 for the six months ended September 30, 2002
represents a decrease of $367,000 from the net income of $386,000 for the
comparable period in 2001. The primary factors contributing to these changes are
discussed above including the restructuring of $5,500,000 of accounts payable
resulting in an extraordinary gain of $875,000 during May 2002.
10
Liquidity and Capital Resources
The Company had available a $5,000,000 revolving credit facility at September
30, 2002 that was to expire on June 1, 2002 and had been extended to September
1, 2002. The bank has provided an additional extension of the facility to
February 1, 2003, at which time the outstanding principal is due. The rate of
interest on amounts borrowed against the revolving credit facility is based upon
the New York prime rate plus 1% (5.75% at September 30, 2002). Advances under
this facility are limited to 50% of inventory (with a cap on inventory
borrowings of $1,000,000) and 80% of receivables as defined in the agreement.
The commitment contains various restrictive covenants, the most significant of
which relates to limitations on capital expenditures ($1,000,000 annually
without bank consent). In addition, the Company is required to generate an
increase in its dollar amount of net worth annually. The Company is seeking
alternative financing to replace this loan. Should the Company not be able to
secure alternative financing by the extended due date it will request an
additional extension until such financing is secured. However, there is no
assurance that such financing can be secured or the extension granted. Failure
to secure such financing or receive such extension will result in a significant
negative effect in the Company's liquidity.
At September 30, 2002, the Company had working capital of $202,000 as compared
to negative working capital of ($3,885,000) at March 31, 2002. The Company's
revolving bank line of credit is available for the Company's working capital
requirements.
At September 30, 2002, $3,272,000 was outstanding under such revolving credit
line and $390,000 was available for additional borrowing at that time.
On February 8, 1999, a $4,950,000 bank loan agreement was signed. The loan is
collateralized by the Company's plant and equipment and guaranteed by the USDA.
Provisions of the loan are as follows:
A $3,960,000 commercial term note with interest fixed at 9.75 percent
having an amortization period of 20 years with maturity in February
2019.
A $990,000 commercial term note with interest fixed at 10.75 percent
having an amortization period of 20 years with maturity in February
2019.
On May 23, 2001, a $2,000,000 bank loan agreement was signed. The loan is
collateralized by a second position of the Company's plant and equipment.
Provisions of the loan are as follows:
A promissory note with interest payable at 1% above the rate of
interest established by the bank as its national variable rate and
principal repayable in four consecutive annual installments of $500,000
with the first such installment due on May 1, 2003 and the last such
installment due on May 1, 2006.
Proceeds of the new loan were used for working capital.
11
On May 16, 2002, Lucille Farms, Inc. entered into an agreement with St. Albans
Cooperative Creamery, Inc., the Company's primary supplier of raw materials,
pursuant to which St. Albans (i) converted $1,000,000 of accounts payable owed
by Lucille Farms to St. Albans into 333,333 shares of common stock, (ii)
converted $3,500,000 of accounts payable owed by Lucille Farms to St. Albans
into (A) preferred stock convertible into 583,333 shares of common stock, which
preferred stock (1) automatically converts into such number of shares of common
stock if the common stock is $8.00 or higher for 30 consecutive trading days,
and (2) may be redeemed by Lucille Farms for $3,500,000, and (B) a 10-year
warrant to purchase 583,333 shares of common stock (subject to adjustment under
certain circumstances to a maximum of 1,416,667 shares of common stock) at $.01
per share, which warrant (1) may not be exercised for a period of three-years,
(2) terminates if, during such three-year period, Lucille Farms' common stock is
$8.00 or higher for 30 consecutive trading days, and, (3) in the event Lucille
Farms' common stock is not $8.00 or higher for 30 consecutive trading days
during such three-year period, may only be exercised on the same basis
percentage wise as the preferred shares are converted, (iii) converted an
additional $1,000,000 of accounts payable owed by Lucille Farms to St. Albans
into a convertible promissory note due on April 14, 2005, which note is
convertible into common stock at $6.00 per share at any time by St. Albans and,
at the option of Lucille Farms, automatically shall be converted into common
stock at $6.00 per share if the common stock is $8.00 or higher for a period of
30 consecutive trading days, and (iv) provided Lucille Farms with a pricing
structure for milk and milk by-products, for a minimum of one-year and a maximum
of four-years (subject to renegotiation at the expiration of the applicable
period), designed to produce profitability for Lucille Farms.
The Company's major source of external working capital financing has been the
revolving line of credit. For the foreseeable future the Company believes that
the Company's revolving line of credit will continue to represent the major
source of working capital financing besides income generated from operations.
However, there is no assurance that replacement of the revolving line or an
extension thereof can be secured and failure to secure such replacement
financing or extension can have a significant negative effect on the Company's
liquidity.
Accounts receivable turnover is directly related to the sales volume in the
month preceding the statement date. Therefore, any change in turnover rate is
not attributable to rate of collections or changes in customer base.
For the six month period ended September 30, 2002, cash provided by operating
activities was $1,091,000. In addition, increases in accounts receivable of
$103,000 and a decrease in accounts payable of $1,585,000 provided cash in the
period. Increases in inventory of $318,000 and an increase in prepaid expenses
and other assets of $101,000 used cash.
Net cash used by investing activities was $278,000 for the period ended
September 30, 2002, which represented purchase of property, plant and equipment.
Net cash used by financing activities was $689,000 for the period ended
September 30, 2002. Payments of the revolving credit loan of $472,000 decreased
cash. Payments of long-term debt and notes of $117,000 used cash in the period.
In the six month period ended September 30, 2002, the Company spent $278,000 on
plant machinery and improvements most of which were related to the packaging
room and plant operation. These expenditures were considered necessary to
competitively enter new markets. The Company has budgeted approximately
$1,000,000, $200,000 of which was anticipated to complete current projects in
process and $800,000 of which is budgeted for additional capital expenditures
during the fiscal year ended March 31, 2003. The Company anticipates financing a
significant portion of these expenditures; however, the ability to obtain such
financing cannot be assured.
12
The Company presently is seeking to replace its $5,000,000 secured revolving
credit line, the maturity of which has been extended to February 1, 2003. The
Company estimates that based on current plans and its ability to replace or
extend the revolving line of credit, its resources, including revenues from
operations and utilization of its revolving credit lines, should be sufficient
to meet anticipated needs for at least 12 months. Failure to secure such
financing or receive such extension will result in a significant negative effect
on the Company's liquidity.
Safe Harbor Statement
This Quarterly Report on Form 10Q (and any other reports issued by the Company
from time to time) contains certain forward-looking statements made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on current expectations that
involve numerous risks and uncertainties. Actual results could differ materially
from those anticipated in such forward-looking statements as a result of various
known and unknown factors including, without limitation, future economic,
competitive, regulatory, and market conditions, future business decisions, the
uncertainties inherent in the pricing of cheese on the Chicago Mercantile
Exchange upon which the Company's prices are based, changes in consumer tastes,
fluctuations in milk prices, and those factors discussed above under
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Words such as "believes," "anticipates," "expects," "intends,"
"may," and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. The
Company undertakes no obligation to revise any of these forward-looking
statements.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The registrant does not utilize market rate sensitive instruments for trading or
other purposes.
The Company is subject to interest rate exposure on variable rate debt. The
amount of that debt at balance sheet date, September 30, 2002 and March 31, 2002
amounted to $5,271,000, and $5,744,000, respectively. In as much as this debt is
based upon the Prime Rate plus 1%, the cost of this debt will increase or
decrease accordingly with changes in the prime rate.
The Company has exposure to the commodity price for cheese, dry whey and fluid
milk. We have addressed these exposures in the general paragraph of MD&A Item 2.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Quarterly Report on Form 10-Q,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the CEO and CFO, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Company's CEO and CFO concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the company required to be included in the Company's periodic SEC
filings. Subsequent to the date of that evaluation, there have been no
significantly affect internal controls, nor were any corrective actions required
with regard to significant deficiencies and material weaknesses.
13
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification of Periodic Report dated November 14, 2002
Exhibit 99.2 Certification of Periodic Report dated November 14, 2002
(b) Reports on Form 8-K
Current Report on Form 8-K, filed July 11, 2002, relating to the
transaction between the Company and St. Albans Cooperative Creamery,
Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 2002
Lucille Farms, Inc.
------------------------------------
(Registrant)
By: /s/ Jay M. Rosengarden
--------------------------------
Jay M. Rosengarden
Chief Executive Officer
By: /s/ Albert N. Moussab
--------------------------------
Albert N. Moussab
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION
I, Jay Rosengarten, Chief Executive Officer of Lucille Farms, Inc. (the
"Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to me by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002
By: /s/ Jay M. Rosengarten
---------------------------------------
Jay Rosengarten
Chief Executive Officer
CERTIFICATION
I, Albert N. Moussab, Chief Financial Officer of Lucille Farms, Inc. (the
"Company"), certify that:
5. I have reviewed this quarterly report on Form 10-Q of the Company;
6. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
7. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
8. The Company's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to me by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002
By: /s/ Albert N. Moussab
---------------------------
Albert N. Moussab
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
-------------- -------------------------------------------------------------
99.1* Certification of Periodic Report dated November 14, 2002
99.2* Certification of Periodic Report dated November 14, 2002
* Filed herewith