SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12506
LUCILLE FARMS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 13-2963923
(State of incorporation) (I.R.S. employer
identification no.)
150 River Road, P.O. Box 517 (201) 334-6030
Montville, N.J. 07045 (Registrant's telephone number)
(Address of principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Redeemable Common Stock Purchase Warrant.
Preferred Stock Purchase Rights
(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. [X]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant was $2,470,313 based on the
average bid and ask price as reported by NASDAQ on June 19, 1997.
The number of shares of the Registrant's common stock
outstanding as of June 19, 1997 was: 3,002,500.
Documents Incorporated by Reference
None
PART I
ITEM 1. BUSINESS
General
Lucille Farms, Inc. (the "Company") is engaged in the
manufacture and marketing of conventional mozzarella cheese and,
to a lesser extent, other Italian variety cheeses. Utilizing
proprietary formulas and processes, the Company has developed a
nutritional line of products consisting of (a) an all natural,
cholesterol free mozzarella-style cheese substitute which is low
in saturated fat and has the taste, mouth feel, texture,
handling and cooking characteristics of conventional mozzarella
cheese ("Mozzi-RITE" for the Real Italian Taste Experiencer),
(b) an all natural, low-cholesterol and low-fat mozzarella
cheese ("Tasty-Lite Cheese - Low Fat"), (c) an all natural,
no-cholesterol and no-fat mozzarella cheese ("Tasty-Lite Cheese-
Fat Free"), and (d) an all natural mozzarella cheese
("Tasty-Lite Cheese - Light"). The Company believes that there
is currently no other all natural, cholesterol free mozzarella
cheese substitute or all natural, no-cholesterol and no-fat
mozzarella cheese on the market. For the fiscal years ended
March 31, 1997 and 1996, conventional mozzarella cheese sales
and blends accounted for over 90% of the Company's revenues.
Sales of the Company's nutritional line of products during these
periods were not significant. All of the Company's products,
which are manufactured in the Company's production facility in
Swanton, Vermont, are made of natural ingredients.
The Company's conventional mozzarella cheese is sold primarily
to the food service segment of the cheese market. To a lesser
extent, sales are made to the industrial and government segments
of the cheese market. The food service segment includes 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 industrial segment includes manufacturers that
utilize cheese products as an ingredient in processed foods and
general frozen entrees and side dishes. The Company believes
that the food service and industrial groups have exhibited
increased interest and demand for nutritional cheese products in
response to an increasing consumer awareness of nutrition in
general and cholesterol and fat intake in particular. In 1997,
the Company has launched its lowfat products into selected
supermarkets in the New York Metro area. The Company intends to
seek to expand its retail presence in the coming months. The
Company has implemented a marketing program utilizing trade news
coverage, cooperative advertising, public relations, point of
purchase promotion, trade advertising and promotions and direct
mail campaigns to create visibility for and promote sales of the
Company's nutritional products.
The Company believes that its proprietary processes can be
applied to a wide variety of cheeses and, accordingly, plans to
continue to develop new dairy related products that meet the
increasing demand for healthier products that satisfy consumer
taste and appearance expectations.
Nutritional Concerns
During the past twenty years, medical and dietary experts have
been advocating a diet that is lower in saturated fat,
cholesterol and sodium as a means of reducing the risk of heart
disease and other health problems. The public's concern with
dietary fat and cholesterol as related to health have increased
significantly in the past several years. A national consumer
survey conducted by the Calorie Control Council reveals that 81%
of American adults consume low calorie, sugar free and/or
reduced fat foods and beverages. The Food Marketing Institute
reports that fat and sodium are consumers' chief dietary
concerns.
The Company believes that as public awareness of health and
nutrition continues to grow, consumers will increasingly choose
foods made with low cholesterol and low fat ingredients.
Accordingly, the Company believes that nutritional cheeses will
continue to represent an increasingly larger share of total
cheese sales as a result of their nutritional advantages over
conventional cheeses.
Nutritional Cheese in the Food Service and Industrial Markets
Over two-thirds of all cheese manufactured in the United States
is utilized by the food service and industrial segments.
Although statistics on the usage of nutritional cheese by these
segments is not available, it is commonly believed in the
industry that sales of nutritional cheese to these segments are
still quite small, but are beginning to grow.
The Company believes that nutritional cheese growth has been
slower in the food service and industrial segments primarily due
to the following three reasons:
Historically, food service and industrial operators have been
more conservative than retailers in adopting new products and
ideas, and significant industry interest in nutritional cheeses
has only become apparent in the last several years.
Nutritional cheeses have lacked consumer taste appeal, and
food service operators
and food manufacturers consider most nutritional cheese products
much more difficult
to cook and prepare foods with than conventional cheeses.
To the Company's knowledge, no cheese manufacturer has devoted
significant
financial and marketing resources to develop the food service
and industrial
segments for nutritional cheese products, and instead have
emphasized marketing
to the retail industry.
Despite the slower rate of adoption, there is increasing
evidence that these segments are moving to introduce low fat
food options.
Cheese consumption in general, and pizza consumption in
particular, decline significantly among customers who categorize
themselves as concerned with their diets. In addition, there is
a significant reduction in the per capita volume consumption by
consumers over age 50. (The Cheese Market, October 1995,
Find/SVP, Inc.) As the "baby boomer" segment enters this age
category, the Company expects that food manufacturers of all
types will provide for their diet and nutritional needs. The
Food Trends '95 Survey, sponsored by Thomas Food Industry
Register & Find/SVP, Inc., reveals that a majority (52%) of
restaurant patrons are more concerned about fat in their diet
than anything else.
The industrial segment (comprised primarily of food processors)
has been quicker than the food service segment to embrace low
fat foods. Low fat products led all categories for new product
introductions for the second year in a row and reached an
all-time high in 1996 according to Prepared Foods' New Food
Products Annual Survey. And there is likely to be even more new
low fat foods introduced in the years ahead. The 1996 R&D
Investment Survey conducted by Prepared Foods Magazine is the
most comprehensive in the industry. The results of the survey
identifying the top ten priorities-places development of reduced
fat foods as the number one priority (for the second year in a
row) among the 736 food manufacturing companies responding.
The Company believes that the food service and industrial
segments will increasingly offer products made with nutritional
cheese and cheese substitute products, and therefore the Company
is continuing its marketing effort for its nutritional products
in these segments.
Nutritional Cheese at Retail
The Company has recently entered the retail market with its all
natural low fat / fat free cheese. The Company believes that a
number of positive factors make entering this market segment
attractive. First, the low fat cheese segment at retail has
grown at double digit rates for the last several years and the
publication, Business Trend Analyst, estimates that low fat /
fat free cheese will continue to grow at retail at a rate of
20-30% per year for the next 3 years. Further, the low fat /
fat free cheese segment is substantial and, at $1.2 billion, it
accounts for nearly 20% of total retail cheese sales. (See
Chart Below)
Supermarket Cheese Sales For the Year Ended Jan. 27, 1996
VOLUME (MILLION LBS.) SALES (MILLION-$) % CHG. YEAR AGO/LBS.
% CHANGE YR. AGO/$ AVG. PRICE PER LB.
Total Cheese 1,984.6 $6,091.3 2.3% 4.0% $3.07
Reduced-Fat 275.9 852.0 2.2 3.3 3.09
Non-Fat / Fat-Free 103.9 394.9 18.6 19.7 3.80
Source: NCI's Cheese Market Research Project with A.C.
Nielsen
The Company believes that its nutritional products have certain
attributes that the leading low fat / fat free products lack.
The Company's nutritional cheeses are 100% natural cheeses with
no fillers or artificial additives. Many of the leading low fat
/ fat free brands are processed, substitute or imitation
products. The Company believes its nutritional cheeses have
more flavor and perform more like their traditional counterparts
than the leading low fat / fat free brands. The Company's
nutritional cheeses have distinctive packaging and are
competitively priced.
The Company believes that these attributes will be attractive to
many consumers. Although the Company believes it can establish
a niche for its products in the retail segment, there can be no
assurance that the trade or consumers will accept its products,
or that any sales generated in this segment will prove
profitable.
Products
The Company's products include the following:
Conventional Cheese Group:
Conventional Mozzarella. The Company's premium quality, all
natural mozzarella cheese meets or exceeds all federal and
industry standards for purity, freshness, taste, appearance and
texture. During the fiscal years ended March 31, 1995, 1996 and
1997, conventional mozzarella cheese sales and blends accounted
for approximately 90%, 88% and 90%, respectively, of the
Company's sales.
Conventional Provolone. The Company's provolone is a premium
quality, all natural cheese that meets or exceeds all federal
and industry standards for purity, freshness, taste, appearance
and texture. During the fiscal years ended March 31, 1995, 1996
and 1997, sales of conventional provolone accounted for
approximately 6%, 6%, and 5%, respectively, of the Company's
sales.
Conventional Feta. The Company's feta is a premium quality, all
natural cheese that meets or exceeds all federal and industrial
standards for purity, freshness, taste, appearance and texture.
During the fiscal years ended March 31, 1995, 1996 and 1997,
sales of feta accounted for less than 1% of the Company's sales
in each of such periods.
Nutritional Products Group:
Mozzi-RITE. The Company manufactures a proprietary
mozzarella-style cheese substitute made with 97% pasteurized
skim milk and 3% canola and sunflower oils. Mozzi-RITE is all
natural, cholesterol free and low in saturated fat and sodium.
A "substitute cheese" must be nutritionally equal or superior to
its conventional counterpart, whereas "imitation cheese" (which
the Company does not produce) is nutritionally inferior to
conventional cheese. The Company believes that its Mozzi-RITE
cheese substitute has the taste, mouth feel, texture, handling
and cooking characteristics of conventional mozzarella.
Mozzi-RITE differs from "conventional cheese" in that oils are
used in its manufacture, whereas butterfat containing
cholesterol and saturated fat is used in the manufacture of
conventional cheese. To the Company's knowledge, there is
currently no other all natural, cholesterol-free
mozzarella-style cheese substitute on the market.
Tasty-Lite Cheese - Low Fat. This all natural mozzarella-style
cheese is made from 100% pasteurized part-skim milk, and is low
in fat, cholesterol and sodium and is higher in calcium than
conventional mozzarella. This "real" cheese satisfies the Heart
Association guidelines that recommend eating foods that derive
30% or less of their calories from fat.
Tasty-Lite Cheese - Fat Free. This all natural mozzarella
cheese is made from 100% pasteurized skim milk, and contains no
fat or cholesterol, is low in sodium and has reduced calories
compared to conventional mozzarella. The Company is not aware
of any other all natural, real mozzarella cheese available that
is both fat and cholesterol free.
Tasty-Lite Cheese - Light. This all natural mozzarella cheese
is made from 100% pasteurized part-skim milk and contains nearly
60% less fat than whole milk mozzarella, and 50% less fat than
conventional part-skim mozzarella. This product is low in
cholesterol and sodium. Its fat content, however, is greater
than the Company's Tasty-Light Cheese - Low Fat nutritional
product.
During the fiscal years ended March 31, 1995, 1996 and 1997, the
Company's nutritional products accounted for approximately 2.5%,
3% and 2%, respectively, of the Company's total sales. While
the Company's conventional cheeses are viewed as commodity
items, the Company believes that its nutritional line should be
viewed as "premium" products, which enables the Company to
charge higher prices.
Proprietary Formulas and Processes; New Product Development
The Company's nutritional products are made using the Company's
formulas and processes, which are believed to be proprietary.
The formulas and processes for the Company's nutritional
products were designed and developed by the Company's Chairman
and the Vice Chairman specifically for these products. The
rights to these formulas and processes have been assigned by
such officers to the Company. These proprietary processes can
be applied to a wide variety of cheeses, and the Company's
future plans include developing other varieties of nutritional
cheeses and products (e.g., provolone, ricotta, feta and
cheddar). However, there can be no assurance that the Company
will be successful in such development, or that if developed,
such products will be accepted by the marketplace or prove
profitable.
Production Facilities
The Company currently produces substantially all of its products
at its manufacturing plant in Swanton, Vermont. The Swanton
facility, located in Franklin County, Vermont's highest volume
dairy producing area, operates 24 hours a day, 6 days a week and
ships approximately 500,000 pounds of bulk product per week.
The plant currently has 57 full-time and 8 part-time employees.
The Swanton facility is designated as an approved plant by the
United States Department of Agriculture and is qualified to
produce cheese for the armed forces and school lunch programs,
which it has been doing since the facility was built in 1975.
The Company has equipment for shredding, dicing, slicing, vacuum
packaging, gas flush bag packaging, and labeling its products.
The manufacturing equipment is of modern design and assembled in
a flow through arrangement for labor saving operation. The
production operation has been established in such a way that
changes in cheese orders, whether size, specification,
packaging, labeling or delivery dates, can be accomplished
without significant effort or disruption of operations. Due to
recent improvements, the Company's facility now has the capacity
to produce approximately 600,000 pounds of bulk product per
week. The Company believes that its facilities currently lack
the capacity to fill all of the future demand if significant
added sales are achieved, for which there can be no assurance.
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 ("co-packing"), or (b)
further expand its current plant facilities, subject to
appropriate financing, for which it believes it has sufficient
acreage and technical capabilities. However, there can be no
assurance that co-packing arrangements can be effected, or, if
effected, that such arrangements could be done in a timely
manner and at a reasonable cost.
Quality Control
The Company is supplied with milk by the largest milk
cooperative headquartered in Vermont. Quality control starts on
the several local farms which produce the milk for the
cooperative. The milk the Company receives is delivered
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 regulation,
meet customer specifications and assure consistent product
quality. The Company currently employs two persons qualified to
perform the necessary testing as prescribed by the state,
federal and the Company's quality standards and specifications.
Such tests are performed at the Company's laboratory on-site. A
sample of each product batch is tested promptly after
manufacture and again before shipment for various
characteristics, including taste, color, acidity, surface
tension, melt, stretch and fat retention. On a frequent basis,
random samples are sent to qualified independent labs to test
for bacteria and other microorganisms. Federal and state
regulation agencies also perform regular inspections of the
Company's products and facilities.
Raw Materials
At present, there are adequate supplies of the 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 milk supply contracts
with several milk cooperatives and has been able to purchase as
much milk as needed for its production. The cooperatives also
ensure the Company a flexible mix of milk products, besides
direct farm milk, such as extra milk, skim milk, condensed skim
milk or dry milk powder. This flexibility is an advantage in
cheese production. It enables the Company to switch from one
milk product to another on short notice with no down time.
Markets and Customers
The Company's products are sold primarily to the food service
segment of the cheese market. To a lesser extent, sales are
made to the industrial and government segments of the cheese
market. The Company has recently commenced to market its
products to the retail segment, primarily to supermarkets in the
Northeastern U.S.
The food service segment of the cheese market includes pizza
chains and independent pizzerias, restaurants, recreational
facilities, transportation hubs, business feeders, health care
facilities, schools and other institutions, which 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 a network of 20
non-exclusive food brokers that sell to approximately 140
independent distributors that service the industry in over 27
states and Washington, D.C. The bulk of the Company's products
distributed in the food service market are utilized by regional
pizza chains and independent pizza shops. For the fiscal years
ended March 31, 1995, 1996 and 1997, sales of the Company's
products to the food service segment of the cheese market
accounted for approximately 92.7%, 90.3% and 88.1%,
respectively, of revenues. Virtually all of such sales were of
the Company's conventional cheeses. In the year ended March 31,
1995, 1996 and 1997, one customer, Lisanti Foods, Inc.,
accounted for approximately 12%, 11%, and 14% of sales,
respectively.
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 finished processed foods
are then generally sold to retail supermarket and grocery
accounts under various brand names. The majority of the
Company's sales of its conventional cheeses and nutritional
products to the industrial market are made directly by the
Company's in-house sales staff. For the fiscal years ended
March 31, 1995, 1996 and 1997, sales of the Company's products
to the industrial segment of the cheese market accounted for
approximately 4.9%, 9.0% and 9.6%, respectively, of revenues.
The government segment of the cheese market includes the
military, school lunch program and the commodities price support
program. For the fiscal years ended March 31, 1995, 1996 and
1997, sales of the Company's products to the government segment
of the cheese market accounted for less than 1%, 1%, and less
than 1%, respectively.
Sales to the retail segment have just been initiated as of March
31, 1997 and are still in the test market phases.
Sales and Marketing
The Company has developed and put in place a marketing program
utilizing trade news coverage, cooperative advertising, public
relations, point-of-purchase promotion (e.g. menu boards,
posters and other stimuli), trade advertising and promotion and
direct mail campaigns to create visibility for and promote sales
of the Company's nutritional and traditional products. The
Company is seeking to position its nutritional products as a
premium line, but there can be no assurance that it will be
successful in doing so.
Competition
The Company faces intense competition. The conventional cheese
market is a commodity, price-sensitive industry, with numerous
small local, medium-sized regional, and large national
competitors. The Company competes with many established
national manufacturers of conventional cheese, including Kraft,
Inc., Borden, Inc., Polly-O Dairy Products Corporation and
Sorrento Cheese Company Inc. There are also a number of
national dairy cooperatives, including Dairymen's Creamery
Association Inc., Agri-Mark and Mid-American Dairymen Inc. Many
of these competitors have significantly greater financial and
other resources than the Company.
The principal competition for the Company's nutritional products
group include many of the same major competitors listed above in
the conventional cheese industry, in addition to Sargento, Inc.,
Alpine Lace Brands, Inc. and Stella Foods, Inc.
To date, most of the nutritional cheese competitors have focused
on developing the retail segment of the cheese market, and have
not yet established significant sales in the food service and
industrial segments with their nutritional cheeses. The Company
may face competition from future expansion by companies in the
cheese industry into products and markets competing more closely
with those of the Company, especially if the Company's marketing
programs succeed, as well as from future entrants into the
cheese industry. In addition, existing competitors of the
Company may intensify their marketing efforts.
The Company's nutritional products are positioned as premium
products and are generally higher in price than certain similar
competitive products. The Company believes that the principal
competitive factors in the marketing of cheese products are
quality, customer service, price and brand recognition. While
the Company believes that its products compete favorably with
respect to these factors and believes that its anticipated
increased sales and marketing efforts will result in greater
product recognition and market penetration for its existing and
new products, there can be no assurance that the Company will be
able to compete successfully, particularly with respect to its
new products and its entry into new markets.
Trademarks and Patents
The Company owns the trademarks Lucille Farms, Mozzi-RITE, Real
Italian Taste Experiencer, and Tasty-Lite Cheese for its
products. The Company owns a registered trademark for Real
Italian Taste Experiencer. In addition, the Company is
currently pursuing trademark protection for a number of other
potential names for existing and planned new products. The
Company believes these trademarks are an important means of
establishing consumer 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.
Although the Company believes its formulas, processes and
technology for its nutritional 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 the manufacturer is able to bring
its operations or products 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 its
products meet the applicable FDA standards of identity and that
the various products it labels as "no-cholesterol",
"low-sodium", "low saturated fat", "fat free", "reduced calorie"
and "source of calcium" meet the applicable FDA standards of
identity for such designations.
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 waste water generated from the Company's
manufacturing facility. The Company entered into an Agreement
with the State of Vermont, to make significant improvements in
its waste water facility. The improvements have been completed
and the Company believes the facility is in compliance with all
regulatory requirements.
Employees
The Company and its wholly-owned manufacturing subsidiary
currently employ 64 full-time employees, five of which are
executive officers of the Company. Of such employees, seven are
in executive and administrative positions, 52 are in production
and distribution, and five are in clerical positions. Of such
employees, 57 are located at the Swanton, Vermont facility and
seven are located at the Company's executive offices in
Montville, New Jersey.
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 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.
The Company currently operates a facility for the purpose of
pre-treating the waste water generated from the Company's
manufacturing facility. The Company entered into an Agreement
with the State of Vermont to make significant improvements in
the waste water facility. The improvements have been completed
and the Company believes the facility is in compliance with all
regulatory requirements.
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. Philip, Gennaro and Alfonso Falivene, officers,
directors, and principal stockholders of the Company, all of
whom 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, pursuant to a
four-year lease which expired on March 31, 1997. These premises
are currently being leased on a month-to-month basis at $1,200
per month. The remainder of the Company's premises is occupied
pursuant to a month-to-month sublease from Messrs. Philip,
Gennaro and Alfonso Falivene pursuant to which the Company pays
$750 per month rent.
ITEM 3. LEGAL PROCEEDINGS
On August 6, 1996, Lucille Farms, Inc. was served with a
complaint filed June 14, 1996 by Lifeline Food Company, Inc. in
the Superior Court of California, County of Monterey, alleging
breach of contract, breach of warranty, negligence, intentional
misrepresentation and negligent misrepresentation against
Lucille Farms Products, Inc., Golden Cheese Company of
California, Simplot / Mountain Farms, Wildcat Construction Co.,
Inc., L.W. Miller, Gary Olsen Trucking, Pacific Cheese, and DOES
I through XX, Inclusive.
On March 13, 1997 a settlement agreement and mutual release was
entered into whereby the lawsuit was resolved. The Company's
share of settlement costs amounting to $27,500 and substantially
all of the legal costs in this action were covered by insurance.
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLEPART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been traded 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
Company's Common Stock for the periods indicated.
High Low
Year Ended March 31, 1997:
First Quarter 4-3/4 3-7/8
Second Quarter 4-1/2 4
Third Quarter 4 3-3/4
Fourth Quarter 3-3/4 2-1/4
Year Ended March 31, 1996:
First Quarter 4-1/8 3-1/2
Second Quarter 4-1/8 3-7/8
Third Quarter 4-1/8 4
Fourth Quarter 4 4
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 19, 1997 there were approximately 79 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, will be 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
Company's anticipated capital requirements are such that it
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 report 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) (1)
Year ended March 31,
Ten Months Ended March 31,
1997 1996 1995 1994 1993(1)
Net Sales . . . . . . . . . . . . . . . $43,890 $41,708
$35,159 $32,131 $24,360
Net income (loss) . . . . . . . . (935) 773 (997) (178)
81
Net income (loss) per share . . . . . . . . . . . . . . . . . .
(.31) .25 (.33) (.08) .05
Weighted average common and common equivalent shares
outstanding . . . . . . . . . . . 3,005,513 3,052,500
3,052,500 2,138,438 1,615,000
Balance Sheet Data (in thousands)
March 31,
1997 1996 1995 1994 1993
Total assets . . . . . . . . . . . . . $13,330 $12,773
$11,109 $10,474 $7,729
Long-term debt and capital lease obligations . . . . . . . . .
2,150 1,902 1,880 630 827
Total liabilities . . . . . . . . . . . 9,181 7,564 6,673
5,041 6,628
Working capital (deficiency) . . . . . . . . . . . . 713
2,345 1,842 3,318 (823)
Stockholders' equity . . . . . . 4,149 5,209 4,436 5,433
1,101
(1) In March 1993, the Company changed its fiscal year end to
March 31. Accordingly, information is presented for the ten
month period ended March 31, 1993.ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General
The Company's conventional cheese products, 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 (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. While the Company
generally can anticipate a change in the price of milk, it
cannot anticipate the extent thereof. By virtue of the pricing
structure for its cheese and the competitive nature of the
marketplace, the Company cannot always pass along to the
customer the changes in the cost of 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 profitability. 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 Chicago Mercantile Exchange, the extent
of such movement and the timing thereof is also 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. In the last half of the fiscal year ended March 31,
1997 there was a steep decline in the block cheddar market
without a corresponding change in the cost of milk and other raw
materials resulting in a significant decrease in gross profit
margin and a significant negative effect on profitability.
Year ended March 31, 1997 compared to year ended March 31, 1996
Sales for the year ended March 31, 1997 increased to
$43,890,000 from $41,708,000 for the comparable period in 1996,
an increase of $2,182,000 (or 5.2%). Approximately $2,764,000
(or 126.7%) of such increase was due to an increase in the
average selling price for cheese. This was offset in part by a
decrease in the number of pounds of cheese sold resulting in a
decrease in sales of $582,000 (or 26.7%). The volume decrease
was due to intense price competition in the commodity markets
and excess availability of cheese in the last half of the fiscal
year. The increase in average selling price was the result of
extremely favorable Wisconsin Block Cheddar Market prices during
the first half of the fiscal year, followed by, in the last half
of the year, what the Company believes was a record decline in
the Wisconsin Block Cheddar Market causing a decrease in unit
pricing which resulted in a significant decrease in the unit
selling price of cheese and the resulting loss of margins.
Cost of sales and gross profit margin for the year ended March
31, 1997 were $42,181,000 (or 96.1% sales) and $1,709,000 (or
3.9% of sales), respectively, compared to a cost of sales and
gross profit margin of $38,201,000 (or 91.6% of sales) and
$3,507,000 (or 8.4% of sales), respectively, for the comparable
period in 1996. The increase in cost of sales and corresponding
decrease in gross profit margin for 1997 as a percentage of
sales is primarily due to an increase in the Company's cost of
raw materials as a percentage of selling price. Labor and
overhead remained relatively constant during the period. The
majority of the increase in the cost of sales and decrease in
gross profit margin occurred in the quarters ended December 31,
1996 and March 31, 1997 where cost of sales and gross profit
margin, as a percentage of sales, was 99.2% and .8% and 100.3%
and (.3)%, respectively.
Selling, general and administrative expenses for the year ended
March 31, 1997 amounted to $2,301,000 (or 5.2% of sales)
compared to $2,454,000 (or 5.9% of sales) for the comparable
period in 1996, a decrease of $153,000 (or 6.2%). The decrease
of selling, general and administrative expenses as a percentage
of sales was due to cost containment efforts by the Company.
Interest expense for the year ended March 31, 1997 amounted to
$392,000 compared to $353,000 for the year ended March 31, 1996
an increase of $39,000. This increase is the result of
increased borrowings due to the addition of new plant production
equipment and higher revolving credit line usage in the year.
The provision for income tax for the year ended March 31, 1997
of $10,000 and March 31, 1996 of $3,000 reflect the effect of
increasing the valuation allowance by $302,000 in 1997 and
reducing the valuation allowance by $295,000 in 1996 based upon
the expected use of net operating loss carryforwards. Such
amounts are re-evaluated each year based on the results of
operations.
The Company's net loss of $935,000 for the year ended March 31,
1997 represents a decrease of $1,708,000 from the net income of
$773,000 for the comparable period in 1996. The primary factors
contributing to these changes are discussed above.
With respect to its gross profit margin, the Company has met
with certain of its suppliers to address the pricing of fluid
milk and the pricing formula considerations required to improve
the Company's gross margins. As a result some limited price
adjustments have been obtained. Furthermore, the selling price
for the Company's nutritional line of cheeses is less dependent
on the Wisconsin Block Cheddar Market, which dictates the
Company's commodity cheese prices. With respect to its
nutritional line of cheeses, the Company is continuing its
efforts to increase sales of such products. To date sales of
the nutritional cheeses have not been significant. The Company
has now positioned itself to launch its nutritional products in
selected retail markets. Management believes that significant
sales will be achieved. However, there can be no assurances as
to whether such sales can be achieved or maintained. Should the
Company determine that it is not able to enter the nutritional
market to the extent necessary to justify these expenses, the
Company will reduce such expenditures.
Year ended March 31, 1996 compared to year ended March 31, 1995
Sales for the year ended March 31, 1996 increased to
$41,708,000 from $35,159,000 for the comparable period in 1995,
an increase of $6,549,000 (or 18.6%). Approximately $4,360,000
(or 66.6%) of such increase was due to an increase in the number
of pounds of cheese sold and approximately $2,189,000 (or 33.4%)
of such increase was due to an increase in the average selling
price for cheese. The volume increase was the result of the
Company's competitive pricing in order to maintain optimum plant
utilization and market share. The increase in average selling
price was the result of favorable Wisconsin Block Cheddar Market
prices, a different product mix (e.g. whole milk and part skim
shredded, loaf and diced mozzarella - the price of each of which
is referenced to the Wisconsin Block Cheddar Market) and
customer mix during the comparative periods.
Cost of sales and gross profit margin for the year ended March
31, 1996 was $38,201,000 (or 91.6% of sales) and $3,507,000 (or
8.4% of sales), respectively, compared to a cost of sales and
gross profit margin of $33,502,000 (or 95.3% of sales) and
$1,657,000 (or 4.7% of sales), respectively, for the comparable
period in 1995. The decrease in cost of sales and corresponding
increase in gross profit margin for 1996 (as a percent of sales)
was primarily due to a decrease in the Company's cost of raw
materials as a percentage of selling price and the application
of fixed overhead to greater unit sales volume.
Selling, general and administrative expenses for the year ended
March 31, 1996 decreased to $2,454,000 (or 5.9% of sales) from
$2,636,000 (or 7.5% of sales) for the comparable period in 1995,
a decrease of $182,000 (or 6.9%). This decrease was primarily
as a result of planned reductions of advertising costs in the
period.
Interest expense for the year ended March 31, 1996 increased to
$353,000 from $148,000, an increase of $205,000 over the
comparable period. This increase is the result of increased
borrowings due to the renovation of the Company's waste water
facility and higher revolving credit line usage due to sales
volume increases.
The provision for income tax for the year ended March 31, 1996
of $3,000 and the benefit of $58,000 for the year ended March
31, 1995 reflect the effects of reducing the valuation allowance
by $295,000 in 1996 and increasing the valuation allowance by
$213,000 in 1995 based upon the expected use of net operating
loss carryforwards. Such amounts are re-evaluated each year
based on the results of operations.
The Company's net income of $773,000 for the year ended March
31, 1996 represents an increase of $1,770,000 from the net loss
of $997,000 for the comparable period in 1995. The primary
factors contributing to these changes are discussed above.
Liquidity and Capital Resources
At March 31, 1997 the Company had working capital of $713,000,
as compared to working capital of $2,345,000 at March 31, 1996.
The Company has a $5,000,000 revolving bank line of credit
available for working capital requirements, which line of credit
was to expire on September 30, 1997 and has been extended to May
30, 1999. At March 31, 1997, $3,140,000 was outstanding under
such revolving line of credit and $225,000 was available for
additional borrowing at that time (based on the inventory and
receivable formula). Advances under this facility are limited
to 50% of inventory and 80% of receivables. The rate of
interest on amounts borrowed against the revolving credit
facility is prime plus 1%. A .25% annual unused line fee is
also charged on this facility. The agreement contains various
restrictive covenants the most significant of which relates to
limitations on capital expenditures ($1,000,000 annually outside
of those financed with the lender under its term loan facility).
This loan is cross collateralized with other loans from the
lender and secured by substantially all of the Company's assets,
including accounts receivable, inventory and equipment. The
Company intends to continue to utilize this line of credit as
needed for operations.
On June 17, 1994 the Company entered into an agreement with
Chittenden Bank for a $2,000,000 five year term loan which
requires monthly principal and interest payments based upon a
ten year amortization, except that interest payments only were
required to be made through December 1994. Interest was at the
prime lending rate plus 1.25%. A major portion of the proceeds
of the loan was used to complete the renovation of the Company's
waste treatment facility in Vermont. The balance was used to
refinance certain of its existing loans. The interest rate on
this facility was reduced to prime plus 1% in June, 1996.
In June, 1996 Chittenden Bank entered into a agreement with the
Company to provide an additional term loan of up to $1,000,000
for the financing of equipment and capital improvements.
Interest is at the prime lending rate plus 1%. At March 31,
1997, $174,000 was outstanding and $826,000 is available for
future capital acquisitions through September, 1998.
During the year ended March 31, 1996 the Company entered into
an agreement pursuant to which a supplier agreed to provide an
equipment loan to be converted to a term note in the amount of
$500,000 upon completion of additional borrowings. The $500,000
loan, secured by equipment, was fully funded and beginning
November 1, 1996, 84 monthly payments including interest at 6%
commenced.
The Company's major source of external working capital
financing has been and is currently the revolving line of
credit. For the foreseeable future the Company believes that
its current working capital and its existing lines of credit
will continue to represent the Company's major source of working
capital financing besides income generated from operations.
For the year ended March 31, 1997 cash used by operating
activities was $1,057,000. In addition, to the loss from
operations, increases in inventories of $1,155,000 and prepaid
expenses and other assets, of $10,000 used cash. Cash was also
used by a decrease in accrued expenses of $74,000 and a decrease
in accounts payable of $331,000 in the period. Decreases in
accounts receivable of $1,088,000 provided cash.
Net cash used by investing activities was $1,105,000 for the
year ended March 31, 1997. Purchases of property, plant and
equipment utilizing cash amounted to $1,295,000 during the
period. A decrease in deposits on equipment amounting to
$171,000 and proceeds from repayment of officers loans amounting
to $19,000 provided cash.
Net cash provided by financing activities was $1,887,000 in the
period. Proceeds from the revolving credit loan in the amount
of $1,751,000 and $456,000 of additional long-term borrowings
provided cash. Repayment of long-term debt obligations in the
amount of $195,000 and the purchase of treasury stock at a cost
of $125,000 utilized cash in the period.
The Company estimates that based upon its current plans, its
resources, including revenues from operations and utilization of
its existing credit lines, will be sufficient to meet its
anticipated needs for at least 12 months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Follow on next page
Shareholders
Lucille Farms, Inc.
and Subsidiaries
Independent Auditors' Report
We have audited the accompanying consolidated balance sheet of
Lucille Farms, Inc. and Subsidiaries as of March 31, 1997 and
1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended March
31, 1997, 1996 and 1995. These 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 generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by the 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 aforementioned consolidated financial
statements present fairly, in all material respects, the
financial position of Lucille Farms, Inc. and Subsidiaries as at
March 31, 1997 and 1996, and the results of their operations and
their cash flows for the years ended March 31, 1997, 1996 and
1995 in conformity with generally accepted accounting principles.
CITRIN COOPERMAN & COMPANY, LLP
June 10, 1997
New York, New YorkLUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, ASSETS 1997 1996
Current Assets :
Cash and cash equivalents $1,422,000 $1,697,000
Accounts receivable, net of allowances of $57,000 in 1997 and
$35,000 in 1996 2,999,000 4,109,000
Inventories 2,704,000 1,549,000
Deferred income taxes 37,000 37,000
Prepaid expenses and other current assets 104,000 147,000
Total Current Assets 7,266,000 7,539,000
Property, Plant and Equipment, Net 5,322,000 4,365,000
Other Assets:
Due from officers 176,000 195,000
Deferred income taxes 441,000 431,000
Deposits on Equipment 9,000 180,000
Other 116,000 63,000
Total Other Assets 742,000 869,000
TOTAL ASSETS $13,330,000 $12,773,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities :
Accounts payable $2,954,000 $3,285,000
Revolving credit loan 3,140,000 1,389,000
Current portion of long-term debt 240,000 227,000
Accrued expenses 219,000 293,000
Total Current Liabilities 6,553,000 5,194,000
Long-Term Liabilities:
Long-term debt 2,150,000 1,902,000
Deferred income taxes 478,000 468,000
Total Long-Term Liabilities 2,628,000 2,370,000
TOTAL LIABILITIES 9,181,000 7,564,000
Stockholders' Equity:
Common stock - $.001 par value, 10,000,000
shares authorized, 3,052,500 shares in 1997
and in 1996 issued 3,000 3,000
Additional paid-in capital 4,512,000 4,512,000
Retained (deficit) earnings (241,000) 694,000
4,274,000 5,209,000
Less: 50,000 shares treasury stock at cost (125,000)
Total Stockholders' Equity 4,149,000 5,209,000
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $13,330,000 $12,773,000
See accompanying notes to consolidated financial statements.
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
1997 1996 1995
Sales $43,890,000 $41,708,000 $35,159,000
Cost of Sales 42,181,000 38,201,000 33,502,000
Gross Profit 1,709,000 3,507,000 1,657,000
Other Expense (Income):
Selling 1,648,000 1,810,000 1,970,000
General and administration 653,000 644,000 666,000
Interest income (59,000) (76,000) (72,000)
Interest expense 392,000 353,000 148,000
Total Other Expense (Income) 2,634,000 2,731,000 2,712,000
(Loss) Income before income taxes (925,000) 776,000
(1,055,000)
Benefit (Provision) for income taxes (10,000) (3,000)
58,000
Net (Loss) Income $(935,000) $773,000 $(997,000)
Net (Loss) Income per share $(.31) $.25 $(.33)
Weighted average shares outstanding used to compute Net
(Loss) Income per share
3,005,513 3,052,500 3,052,500
See accompanying notes to consolidated financial statements.
LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
Common Stock Additional Paid In Retained Earnings
Treasury Stock
Shares Amount Capital (Deficit) Shares Amount
Total
Balance
March 31, 1994 3,052,500 $3,000 $4,512,000 $918,000
$ $5,433,000
Net loss (997,000) (997,000)
Balance
March 31, 1995 3,052,500 3,000 4,512,000 (79,000)
4,436,000
Net income 773,000 773,000
Balance
March 31, 1996 3,052,500 3,000 4,512,000 694,000
5,209,000
Net loss (935,000) (935,000)
Purchase of
50,000 shares
of treasury
stock 50,000 (125,000) (125,000)
Balance
March 31,
1997 3,052,500 $3,000 $4,512,000 $(241,000) 50,000
$(125,000) $4,149,000
See accompanying notes to consolidated financial
statements.LUCILLE FARMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
1997 1996 1995
Cash Flows From Operating Activities:
Net (loss) income $(935,000) $773,000 $(997,000)
Adjustments to reconcile net (loss) income to net cash (used by)
provided by operating activities:
Depreciation and amortization 338,000 290,000 260,000
Provision for doubtful accounts 22,000 (30,000) 30,000
Deferred income taxes (58,000)
(Increase) decrease in assets:
Accounts receivable 1,088,000 (1,212,000) (1,000)
Inventories (1,155,000) 105,000 301,000
Prepaid expenses and other current assets 43,000 17,000
(13,000)
Other assets (53,000) (8,000) (19,000)
Increase (decrease) in liabilities:
Accounts payable (331,000) 536,000 (144,000)
Accrued expenses (74,000) 54,000 (104,000)
Net cash (used by) provided by opearting activities (1,057,000)
525,000 (745,000)
Cash Flow From Investing Activities:
Investment in U.S. Treasury Bills 474,000 989,000
Proceeds from repayment of officers' loans 19,000
Purchase of property, plant and equipment (1,295,000)
(390,000) (1,911,000)
Deposits on equipment 171,000 (180,000)
Net cash (used by) Investing Activities (1,105,000) 0
(96,000) (922,000)
Cash Flow From Financing Activities:
Proceeds from revolving credit loan-net 1,751,000 307,000
485,000
Proceeds from long-term debt and notes 456,000 249,000
2,102,000
Principal payments of long-term debt and notes (195,000)
(238,000) (545,000)
Principal payments of capital leases (200,000)
Purchase of 50,000 shares of Treasury Stock (125,000)
Net cash provided by financing activities 1,887,000
318,000 1,842,000
Net (decrease) increase in cash (275,000) 747,000 175,000
Cash and Cash Equivalents - Beginning 1,697,000 950,000
775,000
Cash and Cash Equivalents - Ending $1,422,000 $1,697,000
$950,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid
during the period for:
Interest $356,000 $351,000 $146,000
Income taxes 10,000 2,000 2,000
See accompanying notes to consolidated financial statements.
LUCILLE FARMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Lucille Farms, Inc. and Subsidiaries ("the Company") is engaged
in the manufacture and marketing of a variety of cheese products
which are sold primarily to retailers through independent
distributors.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of 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 subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
Statement of Cash Flows
For purposes of the consolidated statement of cash flows, the
Company considers temporary investments with a maturity of three
months or less to be cash equivalents.
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
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 and
investment tax credit 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
Earnings per share includes, as weighted average shares
outstanding, a recapitalization in May 1993 whereby each share
of common stock was changed into 975 shares of common stock and
a .5384615 for 1 stock split in the form of a dividend paid on
June 1, 1993 (Note 12) and a .0766667 for 1 stock dividend paid
on October 12, 1993 (Note 12). Stock warrants were not used in
the computation as the effect on net income (loss) per share was
anti-dilutive or was not material.
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," as of April 1, 1996. The Statement requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairments whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Adoption of this Statement did not have an
impact on the Company's financial position or results of
operations.
Accounting for Stock-Based Compensation
Effective April 1, 1996, the Company adopted the fair value
disclosure requirement of SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 123, the
Company did not change the method of accounting for its employee
stock compensation plans. See Note 14 for the fair value
disclosures required under SFAS No. 123.
NOTE 2 - ACCOUNTS RECEIVABLE
The Company has entered into a revolving credit facility with a
bank whereby it has pledged all of its accounts receivable as
collateral (Note 6).
NOTE 3 - INVENTORIES
Inventories consist of the following:
March 31, 1997 March 31, 1996
Finished goods $1,564,000 $567,000
Raw materials 763,000 656,000
Supplies and packaging 377,000 326,000
$2,704,000 $1,549,000
Inventories are pledged as collateral under a revolving credit
facility with a bank (Note 6).
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
March 31, 1997 March 31, 1996
Land $25,000 $25,000
Plant 3,859,000 3,795,000
Equipment 5,564,000 4,333,000
9,448,000 8,153,000
Less: accumulated depreciation and amortization 4,126,000
3,788,000
$5,322,000 $4,365,000
Included in property, plant and equipment is capitalized
interest of $74,000, $67,000, and $67,000 at March 31, 1997,
1996 and 1995, respectively. Interest capitalized was $7,000
for the year ended March 31, 1997 and $40,000 for the year ended
March 31, 1995.
NOTE 5 - DUE FROM OFFICERS
Amounts due from officers reflect advances and loans which
effective June 1, 1992 are represented by promissory notes
bearing interest at 9% per annum. Interest is payable beginning
on June 1, 1994 and annually thereafter, with the principal due
on June 1, 2000. $15,000, $18,000 and $18,000 was included in
operations as interest income for the years ended March 31,
1997, 1996 and 1995, respectively.
NOTE 6 - REVOLVING CREDIT LOAN
The Company has available a $5,000,000 revolving credit
facility. The rate of interest on amounts borrowed against the
revolving credit facility is based upon the New York prime rate
plus 1% in 1997 (9.5% at March 31, 1997) and prime plus 1 1/4% in
1996 (9.5% at March 31, 1996). The facility, which was to
expire on September 1, 1997, was renewed until May 30, 1999.
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 outside of those financed with the lender under its
term loan facility). In addition, the Company was required to
generate an increase in its dollar amount of net worth annually.
This covenant was waived by the bank for fiscal year ended March
31, 1997.
This loan is cross collateralized with other loans from the bank
and is secured by substantially all of the Company's assets.NOTE
7 - LONG-TERM DEBT
Long-term debt consists of the following:
March 31, 1997 March 31, 1996
Term loan with a bank dated December 1, 1994, secured by real
estate, payable monthly at $26,305 including interest at 1 point
over the bank's prime rate adjusted periodically through
December 1, 1999 when the unpaid balance is due. $1,703,000
$1,844,000
Equipment loan with a bank dated June 13, 1996 to be converted
to a term loan upon completion of additional borrowings through
September 1998, at which time the outstanding balance is to be
repaid over 60 consecutive months with interest at prime plus
1%. 174,000
Term loan with an equipment supplier dated April 14, 1994
secured by equipment for $56,000 payable monthly at $1,142
including interest at 8.25% through April 1999. 26,000
37,000
Term loan with a supplier in the amount of $500,000 secured by
equipment. Monthly payments at $7,304 including interest at 6%
commenced November 1, 1996 for a period of 84 months. 476,000
229,000
Insurance premium financing secured February 3, 1997 for $14,000
payable monthly at $1,624 including interest at 10.5%. 11,000
Insurance premium financing secured February 3, 1996 for $24,000
payable monthly at $2,724 including interest at 8.91%.
19,000
2,390,000 2,129,000
Less: current portion 240,000 227,000
TOTAL $2,150,000 $1,902,000
As of March 31, 1997 long-term debt matures as follows:
1998 $240,000
1999 267,000
2000 1,477,000
2001 108,000
2002 112,000
2003 and thereafter 186,000
$2,390,000
Virtually all of the Company's property, plant and equipment are
pledged as collateral for these obligations.
On April 30, 1996 the Bank entered into a commitment with the
Company to provide an additional term loan of up to $1,000,000
for the financing of equipment and capital improvements. At
March 31, 1997, $174,000 was outstanding.
NOTE 8 - INCOME TAXES
Temporary differences and carryforwards which give rise to
deferred tax assets and liabilities are as follows:
March 31, 1997 March 31, 1996
Deferred Tax Asset Deferred Tax Liability Deferred Tax
Asset Deferred Tax Liability
Depreciation $478,000 $468,000
Provision for doubtful accounts $22,000 $13,000
Reserve for compensated absences 15,000 24,000
Investment tax credit carryforwards 125,000 191,000
Operating loss carryforwards 665,000 289,000
Contribution carryforwards 2,000
829,000 478,000 517,000 468,000
Valuation Allowance (351,000) (49,000)
Total Deferred Tax $478,000 $478,000 $468,000 $468,000
The net change in the valuation allowance for the periods
presented were as follows:
March 31,
1997 1996 1995
Valuation allowance increase (decrease) $302,000 $(295,000)
$213,000
The provision (benefit) for income taxes is as follows:
March 31,
1997 1996 1995
Current:
Federal
State $10,000 $3,000 $2,000
Deferred:
Federal -54,000
State -6,000
Total $10,000 $3,000 $(58,000)
The provision (benefit) for income taxes is different than the
amount computed using the United States Federal Statutory income
tax rate for the reasons set forth below:
March 31,
1997 1996 1995
Expected tax at U.S. Statutory Rate (34.0)% 34.0% (34.0)%
State and local income taxes (4.2) 4.4 (3.3)
Valuation allowance for operating loss
carryforwards not expected to be used
(released). 37.1 (38.0) 31.8
1.1% .4% (5.5)%
Operating loss carryforwards and investment tax credit
carryforwards totaled approximately $1,751,000 and $125,000,
respectively, as of March 31, 1997 and expire on March 31, of
the following years:
Net Operating Loss Investment Tax Credit
2010 $823,000 1998 $16,000
2012 928,000 1999 21,000
Total $1,751,000 2000 13,000
2001 75,000
Total $125,000
NOTE 9 - LEASE COMMITMENTS
The Company leases automobiles for two of its officers under
lease arrangements classified as operating leases. The leases
expire in January 1998 and in November 1999. Rent expense was
approximately $13,000 for each of the years ended March 31,
1997, 1996 and 1995.
Future minimum payments under the leases are approximately
$20,000 as at March 31, 1997.
On December 20, 1994 the Company began leasing waste water
purification equipment under leasing arrangements classified as
an operating lease. The monthly lease payments are $3,870 for a
period of 60 months. Leasing expense was $46,000 for the years
ended March 31, 1997 and 1996 and $12,000 for the year ended
March 31, 1995 . Future minimum payments under the lease are
approximately $129,000 as at March 31, 1997. As per the
agreement, the Company has the option to purchase the equipment
for approximately $44,000 at the end of 50 months or fair market
value as determined by independent appraisal at termination of
lease.
NOTE 10 - SIGNIFICANT MATTERS
The Company currently operates a facility for the purpose of
pre-treating the waste water generated from the Company's
manufacturing facility. After being cited by state
environmental authorities for excess discharge of effluents
(waste by-products), on March 15, 1990, the Company entered into
an Assurance of Discontinuance with the State of Vermont. The
Company agreed to make certain improvements in the waste water
facility as a result of the various proceedings with the State
of Vermont. The improvements were completed in 1995 as required
and the Company believes the facility is now in compliance with
all regulatory requirements.
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company leases space for its executive offices at
approximately $1,200 per month from three of its officers under
a lease which expired on March 31, 1997. Rent expense was
approximately $14,000 for each of the years ended March 31,
1997, 1996 and 1995. These premises are currently being leased
on a month to month basis at $1,200 per month.
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 officers. This space is primarily used for the
Company's marketing operations. Rent expense was $9,000 for
each of the years ended March 31, 1997, 1996 and 1995.
NOTE 12 - STOCKHOLDER'S 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 $.001 per share. Such preferred stock may be
issued in series, the terms of which will be determined by the
Company's Board of Directors without action by stockholders and
may include dividend and liquidation preferences to common
stock, voting rights, redemption and sinking fund provisions and
conversion rights. No shares have been issued at March 31, 1997.
The Company recapitalized its common stock in May 1993 by
issuing 975 shares of common stock $.001 par value for each
share of common stock, no par value, previously outstanding
pursuant to which 1,000 shares of common stock were changed into
975,000 shares of common stock. On June 1, 1993 a .5384615 for
1 stock split in the form of a dividend was paid for each share
of common stock outstanding. On October 12, 1993 a .0766667 for
1 stock dividend was paid for each share of common stock
outstanding. All 1997 and prior share and per share information
has been adjusted to give effect to these transactions.
On November 9, 1993, the Company consummated an underwritten
initial public offering of 1,250,000 units, consisting of
1,250,000 shares of common stock and 1,250,000 redeemable common
stock purchase warrants. On December 27, 1993, the exercise of
the Underwriter's over-allotment option was consummated and an
additional 187,500 shares of common stock and 187,500 redeemable
common stock purchase warrants were issued in connection with
the initial public offering. Net proceeds to the Company were
$4,510,000. Each Warrant entitles the holder to purchase one
share of common stock at an exercise price of $5.00 at any time
commencing from the completion of the offering until November 1,
1996, thirty-six months from the date of the prospectus. The
Company has extended the warrants until November 1, 1997.
During the exercise period the warrants are subject to
redemption at $.05 per warrant on 30 days' written notice if the
closing bid price of the common stock as reported by NASDAQ (or
a National Securities Exchange or the National Quotation Bureau
of the NASD Bulletin Board, as the case may be) is at least
$7.50 per share (or 150% of the exercise price of the warrant in
the event there is a reduction in the exercise price of the
warrant) on each day during the 20 consecutive trading days
ending three days preceding the date of the written notice of
redemption. The exercise price of the warrants is subject to
adjustment under certain circumstances.
NOTE 13 - SIGNIFICANT CUSTOMERS
In the year ended March 31, 1997, one customer accounted for
approximately 14% of sales.
In the year ended March 31, 1996, one customer accounted for
approximately 11% of sales.
In the year ended March 31, 1995, one customer accounted for
approximately 12% of sales.
NOTE 14 - OTHER EVENTS
a. Employment Agreements
In April 1993, the Company entered into four year employment
agreements to be effective upon the closing of the public
offering with its three principal officers and three other newly
employed individuals pursuant to which the three officers each
shall be paid salaries
of $100,000, $100,000 and $90,000 per annum, respectively, and
the other three individuals shall be paid salaries of $110,000,
$88,000 and $85,000 per annum, respectively. Such salaries are
to increase each year to the extent of any cost-of living
increases based on the Consumer Price Index for the immediately
preceding year. In December of 1995 the agreement with the
individual earning $110,000 was terminated. Effective April 1,
1997 all employment agreements expired and the officers continue
employment at the salaries applicable in the final year of their
agreements.
b. 1993 Stock Option Plan
On April 1, 1993 the Company adopted its 1993 Stock Option
Plan. An aggregate of 200,000 shares of Common Stock has been
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,
Incentive 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 April 1995, options to purchase 10,000 shares were
granted to each of two employees pursuant to the stock option
plan at an exercisable price of $3.625. The options shall
expire on April 4, 2000. In May 1996, options to purchase
50,000 shares were granted to a newly hired employee pursuant to
the stock option plan at an exercisable price of $4.00. These
options will vest and be exercisable ratably over a five year
period beginning one year from date of employment. The options
are subject to approval by the Board of Directors and expire
upon plan termination. The plan terminates on April 1, 2003.
The per share fair value of stock options granted during the
years ended March 31, 1997 and 1996 was $1.64 and $1.05,
respectively, on the date of grant using the Black Scholes
option-pricing model with the following assumptions:
March 31, 1997 March 31, 1996
Expected dividend yield -0-% -0-%
Risk free interest rate 6.5% 6%
Expected stock volatility 20.1% 15.2%
Expected option life 7 years 5 years
The Company applies AFB Opinion No. 25 in accounting for its
Plan and, accordingly, no compensation costs has been recognized
in the financial statements for its stock options which have an
exercise price equal to the fair value of the stock on the date
of the grant. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options
under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below:
Year Ended March 31, 1997 Year Ended March 31, 1996
Net income (loss):
As reported . . . . . . . . . . . . . $ (935,000) $
773,000
Pro forma . . . . . . . . . . . . . . . $ (951,000) $
752,000
Net earnings (loss) per share:
As reported . . . . . . . . . . . . . $ (.31) $ .25
Pro forma . . . . . . . . . . . . . . . $ (.32) $ .25
Pro forma net income reflects only options granted during the
years ended March 31, 1997 and 1996. Therefore, 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 one
option's vesting period of 5 years.
c. Purchase of Treasury Stock
In April of 1996 the Company purchased 50,000 share of its
common stock for cash at a total cost of $125,000 from one of
its former officers.
NOTE 15 - FAIR VALUE AND CREDIT RISK
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 a reserve for bad debts for
accounts receivable which are potentially uncollectable.
The Company maintains cash accounts with several major financial
institutions. At March 31, 1997 approximately $637,000 of the
Company's cash was in excess of FDIC insured limits.
The Company considers the fair value of all financial
instruments to be not materially different from their carrying
value at year end.
NOTE 16 - SUBSEQUENT EVENTS
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 the 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
exercise 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 of 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 June 1997, the Company received a non-binding offer by
Suprema Specialties, Inc. to purchase all of its shares at $2.50
per share in cash. The offer is subject to the preparation and
execution of a mutually satisfactory acquisition agreement. The
Company's Board of Directors will meet in the future to consider
the offer.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company as of June 19, 1997
are as follows:
Name Age Present Office or Position
Philip Falivene 79 Chairman of the Board of Directors and
Executive Vice President-Manufacturing
Gennaro Falivene 67 Vice Chairman of the Board of Directors
and Executive Vice President-Quality Control
Alfonso Falivene 55 Director, President and Chief Executive
Officer
David McCarty 41 Vice President-Marketing and Sales
Stephen M. Katz 62 Director, Vice President-Finance and
Administration, Chief Financial Officer and Secretary
Howard S. Breslow 57 Director
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.
Mr. Philip Falivene is a founder of the Company and has been a
director of the Company since inception in 1976. He served as
President of the Company from the date of its incorporation
until April 1993 when he was appointed Chairman of the Board and
Executive Vice President-Manufacturing.
Mr. Gennaro Falivene is a founder of the Company and has been a
director of the Company since inception in 1976. He served as
Vice President and Treasurer of the Company from inception until
April 1993 when he was appointed Vice Chairman of the Board and
Executive Vice President-Quality Control.
Mr. Alfonso Falivene is a founder of the Company and has been a
director of the Company since inception in 1976. He served as
Vice President and Secretary of the Company until April 1993
when he was appointed President and Chief Executive Officer.
Mr. David McCarty has been Vice President-Marketing and Sales of
the Company since April 1993. From July 1991 to March 1993, Mr.
McCarty was the Vice President of Braff & Company, Inc., a New
York, New York based marketing and public relations firm which
specializes in consumer products, particularly in the food
industry. Braff & Company, Inc. has represented a broad range
of clients, including The Dannon Company, Kraft General Foods
and The Seagram Beverage Company and has played an integral role
in the start-up, launch and promotion of such products as The
Dove Bar and Micro Magic Foods. From February 1990 to July
1991, Mr. McCarty was the New York area Manager for Good Humor,
a division of Thomas J. Lipton, where he established a new
distribution network, created a sales promotion program and
aided in reversing a sales decline and increasing sales. From
August 1986 to February 1990, Mr. McCarty was the Director of
Marketing of Braff & Company, Inc. From 1982 to 1986, Mr.
McCarty was the Director of Marketing (1985 and 1986) and
National Sales Manager (1982-1985) for Ginseng VP Corp., a "New
Age" beverage corporation.
Mr. Stephen M. Katz has been a director of the Company, its Vice
President-Finance and Administration and Chief Financial Officer
and Secretary since April 1993. Mr. Katz is a partner in the
certified public accounting firm of Drogin & Katz, a position he
has held since 1970. Drogin & Katz was the Company's accounting
firm from 1973 to March 1993. Mr. Katz is a certified public
accountant licensed in New York and Florida.
Mr. Howard S. Breslow has been a director of the Company since
April 1993. He has been a practicing attorney in New York for
more than 25 years and has been a member of the law firm of
Breslow & Walker, New York, New York for more than 20 years,
which firm is counsel to the Company. Mr. Breslow currently
serves as a director of Cryomedical Sciences, Inc., a
publicly-held company engaged in the research, development and
sale of products for use in low temperature medicine, Vikonics,
Inc., a publicly-held company engaged in the design and sale of
computer-based security systems, FIND/SVP, Inc., a publicly-held
company engaged in the development and marketing of business
information services and products, and Excel Technology, Inc., a
publicly-held company engaged in the development and sale of
laser products.
Philip Falivene and Gennaro Falivene are brothers. Philip
Falivene is also the father of Alfonso Falivene. No other
family relationship exists between any director or executive
officer and any other director or executive officer of the
Company.
The Company has agreed, for a five year period terminating
November 1998, if so requested by Royce Investment Group, Inc.,
the underwriter of the Company's initial public offering
("Royce"), to nominate and use its best efforts to elect a
designee of Royce as a director of the Company or, at Royce's
option, as a non-voting advisor to the Company's Board of
Directors (which person may be an affiliate of Royce). Royce
has not yet exercised its right to designate such a person.
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, as amended except as follows: Mr. McCarty
filed one late Form 4 relating to the sale of 500 shares of
common stock and 500 common stock purchase warrants. Mr. Katz
filed one late Form 4 relating to a gift disposition. Messrs.
Philip Falivene, Gennaro Falivene and Alfonso Falivene have each
filed three late Form 4's with respect to certain gift
dispositions.
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, bonus and other compensation payments in excess of
$100,000 during the year ended March 31, 1997. None of such
persons owns, or ever has been granted, stock options options of
the Company.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Principal Positions Fiscal Year Salary
Bonus Other Annual Compensation (1)
Alfonso Falivene President and Chief Executive Officer
1997 1996 1995 $112,700 103,800 103,800 - - - $8,000
8,000 8,000
Gennaro Falivene Executive Vice President - Quality Control
1996 1995 1994 100,000 103,800 93,700 - - - - - -
(1) Represents automobile allowances and/or automobile lease
payments for the benefit of such employee.
The Company currently does not compensate its directors for
their services in such capacity.
Employment Agreements
Effective April 1, 1997, there are no employment agreements in
effect.
Compensation Committee Interlocks and Insider Participation
During the year ended March 31, 1997, Messrs. Alfonso, Gennaro
and Philip Falivene, and Stephen Katz were each officers of the
Company as well as directors of the Company who participated in
deliberations of the Company's Board of Directors concerning
executive officer compensation. Reference is made to Item 13
"Certain Relationships and Related Transactions".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS
The following table, as of June 19, 1997, sets forth certain
information concerning each stockholder known by the Company to
be the beneficial owner of more than 5% of the Company's
outstanding Common Stock, each director of the Company, the
named executive officers set forth in the table in Item 11, 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.
Name and Address Beneficial Owner Amount and Nature of
Beneficial Ownership Percent of Class
Philip Falivene Box 125 Swanton, VT 05488 319,917 10.7%
Gennaro Falivene Box 125 Swanton, VT 05488 327,417 10.9%
Alfonso Falivene (1) 150 River Rd., P.O. Box 517 Montville, NJ
07045 364,917 12.2%
Stephen Katz (2) 150 River Rd., P.O. Box 517 Montville, NJ
07045 85,750 2.9%
BWM Investments c/o Howard S. Breslow 14 Parkwood Lane Dix
Hills, NY 11746 242,249 8.1%
Howard S. Breslow 14 Parkwood Lane Dix Hills, NY 11746 242,249
(3) 8.1%
David McCarty 150 River Rd., P.O. Box 517 Montville, NJ 07045
81,750 (4) 2.7%
All officers and directors as a group 1,422,000 (5) 47.4%
(1) Includes for purposes of this table 7,500 shares owned by
Mr. Falivene's wife and 20,000 shares owned by one of his
children.
(2) Includes for purposes of this table 40,000 shares owned by
Mr. Katz's wife.
(3) Represents all of the shares owned by BWM Investments, a
partnership of which Howard S. Breslow, a director of the
Company, is a partner.
(4) Includes 500 shares issuable under Common Stock Purchase
Warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At March 31, 1996, Messrs. Alfonso Falivene, Philip Falivene and
Gennaro Falivene each was indebted to the Company in the amount
of $65,000. At March 31, 1997, Messrs. Alfonso Falivene, Philip
Falivene and Gennaro Falivene each was indebted to the Company
in the amount of $46,000, $42,000 and $42,000, respectively.
Such indebtedness is represented by promissory notes, dated as
of June 1, 1992, the principal amount of which notes are payable
in full on June 1, 2000. The notes bear interest at the rate of
9% per annum, which interest is payable annually commencing June
1, 1994.
The Company leases a portion of its Montville, New Jersey
offices from Messrs. Alfonso Falivene, Philip Falivene and
Gennaro Falivene, the joint owners of the office condominium
unit. During the fiscal years ended March 31, 1995, 1996 and
1997, the Company paid approximately $14,000, $14,000 and
$14,000, respectively, towards the rental of such offices. The
Company currently pays $1,200 per month rent for such premises
on a month-to-month basis. The Company also leases an
additional 900 adjacent square feet for $750 monthly on a
month-to-month basis. These premises are also owned by Messrs.
Alfonso Falivene, Philip Falivene and Gennaro Falivene. 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, 1995, 1996 and 1997.
The Company is the owner and beneficiary of life insurance
policies on the lives of Messrs. Falivene, each in the amount of
$300,000. In the event of the death of any such insured, the
Company has agreed to utilize the proceeds of such policy to
purchase shares of Common Stock from the deceased's estate at
the market value of such shares on the date of death.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS
ON FORM 10-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, 1997 and March 31,
1996
Consolidated Statement of Operations for the years ended March
31, 1997, March 31, 1996 and March 31, 1995
Consolidated Statement of Stockholders' Equity for the years
ended March 31, 1997, March 31, 1996 and March 31, 1995
Consolidated Statement of Cash Flows for the years ended March
31, 1997, March 31, 1996 and March 31, 1995
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules (included in Part
II, Item 8)*
3. Exhibits included herein:
See Index to Exhibits for exhibits filed as part of this Form
10-K annual report.
(b) Reports on Form 8-K
None
__________________________
* Financial statement schedules are omitted because they are
either not applicable or not required, or because the
information sought is included in the Consolidated Financial
Statements or the Notes thereto.
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 Specimen Redeemable Common Stock Purchase Warrant
Certificate (1)
4.3 Underwriter's Unit Purchase Warrant (1)
4.4 Form of Warrant Agreement (1)
10.1 1993 Stock Option Plan (1)
10.2 Whey Supply Agreement between Lucille Farm Products,
Inc. (A/K/A Lucille Farms of Vermont, Inc.) and Vermont Whey
Company, dated February 3, 1994(2)
10.3 Loan facility with Chittenden Bank, including
Commitment Letter, dated April 30, 1996, Loan Agreement, dated
June 13, 1996, and Promissory Notes (2) dated June 13, 1996,
relating to short term working capital facility and capital
expenditures line of credit (3) and amendment thereto dated June
11, 1997
21 List of subsidiaries of the Company (1)
23 Consent of Citrin Cooperman & Company, LLP
_______________________________
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1, File
No. 33-64868.
(2) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994.
(3) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1996.
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.
By:___/s/ Alfonso Falivene____
Alfonso Falivene, President
(Principal Executive Officer)
By:___/s/ Stephen Katz_______
Stephen Katz, Vice President-
Finance and Administration (Principal
Financial and Accounting Officer)
Date: June 25, 1997
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/Philip Falivene__ ____ Director June 25, 1997
Philip Falivene
/s/Gennaro Falivene________ Director June 25, 1997
Gennaro Falivene
/s/Alfonso Falivene __ Director June 25, 1997
Alfonso Falivene
/s/Stephen M. Katz_ _____ Director June 25, 1997
Stephen M. Katz
/s/Howard S. Breslow ______ Director June 25, 1997
Howard S. Breslow
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.
By:___________________________
Alfonso Falivene, President
(Principal Executive Officer)
By:___________________________
Stephen Katz, Vice President-
Finance and Administration (Principal
Financial and Accounting Officer)
Date: June __, 1997
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
_________________________ Director June ___, 1997
Philip Falivene
_________________________ Director June ___, 1997
Gennaro Falivene
_________________________ Director June ___, 1997
Alfonso Falivene
_________________________ Director June ___, 1997
Stephen M. Katz
_________________________ Director June ___, 1997
Howard S. Breslow