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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ________
Commission file number: 0-17363
LIFEWAY FOODS, INC.
--------------------------------------------------------------
(Exact name of small business issuer as specified in it charter)
Illinois 36-3442829
------------------------------ -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6431 WEST OAKTON, MORTON GROVE, ILLINOIS 60053
--------------------------------------
(Address of principal executive offices)
(847) 967-1010
-------------------------
(Issuer's telephone number)
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 30, 2004, the issuer had
8,441,988 shares of common stock, no par value, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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INDEX
PART I - FINANCIAL INFORMATION................................................3
ITEM 1. FINANCIAL STATEMENTS.............................................3
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION FOR
THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 AND
THE YEAR ENDED DECEMBER 31, 2003......................................3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
AND THE YEAR ENDED DECEMBER 31, 2003..................................4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE
THREE MONTHS ENDED MARCH 31, 2004 AND THE YEAR ENDED
DECEMBER 31, 2003.....................................................5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003 AND THE YEAR
ENDED DECEMBER 31, 2003...............................................6
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 2004 AND 2003 AND THE YEAR ENDED
DECEMBER 31, 2004.....................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......14
ITEM 3. CONTROLS AND PROCEDURES..........................................16
PART II - OTHER INFORMATION..................................................16
ITEM 2. CHANGES IN SECURITIES............................................16
ITEM 5. OTHER INFORMATION................................................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................16
SIGNATURE....................................................................18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND 2003 AND THE YEAR ENDED DECEMBER 31, 2003
(Unaudited)
March 31, December 31,
--------------------------------- ------------
2004 2003 2003
------------ ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,632,830 $ 2,787,724 $ 4,597,819
Marketable securities 6,615,579 5,643,829 6,302,606
Accounts receivable, net of allowance for doubtful
accounts of $15,000 2,006,629 1,730,870 1,800,141
Other receivables 160,968 58,380 165,767
Inventories 795,370 773,684 811,572
Prepaid expenses and other current assets 5,485 3,969 791
Deferred income taxes 27,288 439,754 27,038
Prepaid income taxes 343,023 -- 306,171
------------ ------------ ------------
TOTAL CURRENT ASSETS 14,587,172 11,438,210 14,011,905
PROPERTY, PLANT, AND EQUIPMENT, NET 3,617,411 3,903,407 3,732,731
------------ ------------ ------------
TOTAL ASSETS $ 18,204,583 $ 15,341,617 $ 17,744,636
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable $ 24,248 $ 31,271 $ 28,289
Accounts payable 739,253 698,259 795,321
Accrued expenses 100,634 154,587 183,600
Income taxes payable -- 249,694 --
------------ ------------ ------------
Total current liabilities 864,135 1,133,811 1,007,210
NOTES PAYABLE 468,768 492,502 472,509
DEFERRED INCOME TAXES 448,590 407,920 471,953
STOCKHOLDERS' EQUITY
Common stock 6,509,267 6,509,267 6,509,267
Stock subscription receivable (15,000) (15,000) (15,000)
Treasury stock, at cost (679,956) (679,956) (679,956)
Retained earnings 10,587,615 8,593,750 9,822,416
Accumulated other comprehensive loss, net of tax 21,164 (1,100,677) 156,237
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,423,090 13,307,384 15,792,964
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,204,583 $ 15,341,617 $ 17,744,636
============ ============ ============
3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 AND THE YEAR ENDED DECEMBER 31, 2003
(Unaudited)
March 31, December 31,
2004 2003 2003
------------ ------------ ------------
SALES $ 3,935,079 $ 3,308,557 $ 14,877,788
Cost of goods sold 2,099,198 1,825,956 7,840,782
------------ ------------ ------------
GROSS PROFIT 1,835,881 1,482,601 7,037,006
------------ ------------ ------------
Operating expenses 882,029 844,621 3,558,362
------------ ------------ ------------
INCOME FROM OPERATIONS 953,852 637,980 3,478,644
Other income (expense):
Interest and dividend income 41,124 33,447 96,850
Interest expense (7,611) (7,644) (41,205)
Gain (loss) on sale of marketable securities, net 268,367 (346,556) (1,293,579)
Gain on sale of assets -- 1,246,287 1,246,287
Other income -- -- 89,490
------------ ------------ ------------
Total other income (expense) 301,880 925,534 97,843
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,255,732 1,563,514 3,576,487
Provision for income taxes 490,533 570,241 1,354,548
------------ ------------ ------------
NET INCOME $ 765,199 $ 993,273 $ 2,221,939
============ ============ ============
EARNINGS PER COMMON SHARE 0.09 0.12 0.26
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,436,888 8,436,888 8,436,888
============ ============ ============
COMPREHENSIVE INCOME
NET INCOME $ 765,199 $ 993,273 $ 2,221,939
Other comprehensive income (loss), net of tax:
Unrealized gains on marketable securities (net of tax
of $15,072, $55,882 and $114,070) 21,422 30,450 212,634
Less reclassification adjustment for (gains) losses
Included in net income (156,495) 203,743 1,278,473
------------ ------------ ------------
COMPREHENSIVE INCOME $ 630,126 $ 1,227,466 $ 3,713,046
============ ============ ============
See accompanying Notes to Financial Statements.
4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND THE YEAR ENDED DECEMBER 31, 2003
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES
AUTHORIZED # OF SHARES
--------------------------- OF STOCK
# OF SHARES # OF SHARES TREASURY COMMON SUBSCRIPTION
ISSUED OUTSTANDING STOCK STOCK RECEIVABLE
----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2002 8,636,888 8,436,888 200,000 $ 6,509,267 $ (15,000)
Other comprehensive income:
Unrealized gains (losses) on securities, net of
Taxes and reclassification adjustment -- -- -- -- --
Net income for the year
Ended December 31, 2003 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2003 8,636,888 8,436,888 200,000 6,509,267 (15,000)
Other comprehensive income:
Unrealized gains (losses) on securities, net of
Taxes and reclassification adjustment -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income for the three months
Ended March 31, 2004 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCES AT MARCH 31, 2004 (UNAUDITED) 8,636,888 8,436,888 200,000 $ 6,509,267 $ (15,000)
=========== =========== =========== =========== ===========
ACCUMULATED
OTHER
COMPREHENSIVE
TREASURY RETAINED INCOME,
STOCK EARNINGS NET OF TAX TOTAL
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2002 $ (679,956) $ 7,600,477 $(1,334,870) $12,079,918
Other comprehensive income:
Unrealized gains (losses) on securities, net of
Taxes and reclassification adjustment -- -- 1,491,107 1,491,107
----------- ----------- ----------- -----------
Net income for the year
Ended December 31, 2003 -- 2,221,939 -- 2,221,939
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2003 (679,956) 9,822,416 156,237 15,792,964
Other comprehensive income:
Unrealized gains (losses) on securities, net of
Taxes and reclassification adjustment -- -- (135,073) (135,073)
----------- ----------- ----------- -----------
Net income for the three months
Ended March 31, 2004 -- 765,199 -- 765,199
----------- ----------- ----------- -----------
BALANCES AT MARCH 31, 2004 (UNAUDITED) $ (679,956) $10,587,615 $ 21,164 $16,423,090
=========== =========== =========== ===========
See accompanying Notes to Financial Statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2004
AND 2003 AND THE YEAR ENDED DECEMBER 31, 2003
(Unaudited)
March 31, December 31,
--------------------------------- ------------
2004 2003 2003
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 765,199 $ 993,273 $ 2,221,939
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 155,905 165,212 688,309
Gain (loss) on sale of marketable securities, net (268,367) 346,556 1,293,579
Gain on sales of assets -- (1,246,287) (1,246,287)
Deferred income taxes 75,127 43,454 9,084
(Increase) decrease in operating assets:
Accounts receivable (206,488) (295,649) (364,920)
Other receivables 4,799 1,871 (105,516)
Inventories 16,202 (53,181) (91,069)
Prepaid income taxes (36,852) -- (306,171)
Prepaid expenses and other current assets (4,694) (2,693) 485
Increase (decrease) in operating liabilities:
Accounts payable (56,069) 58,861 155,923
Accrued expenses (82,966) (28,941) 72
Income taxes payable -- (148,213) (397,907)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 361,796 (165,738) 1,857,521
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (3,141,028) (2,029,176) (4,283,532)
Sales of marketable securities 2,862,610 608,696 3,025,285
Sales of assets -- 1,712,659 1,712,660
Purchases of property, plant and equipment (40,585) (62,641) (415,064)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (319,003) 229,538 39,349
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (7,782) (7,732) (30,707)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (7,782) (7,732) (30,707)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,011 56,068 1,866,163
Cash and cash equivalents at the beginning of the year 4,597,819 2,731,656 2,731,656
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,632,830 $ 2,787,724 $ 4,597,819
============ ============ ============
See accompanying Notes to Financial Statements.
6
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
AND THE YEAR ENDED DECEMBER 31, 2004
These financial statements include all adjustments which, in the opinion of
management, are necessary in order to make the financial statements not
misleading.
NOTE 1 - NATURE OF BUSINESS
Lifeway Foods, Inc. (the "Company") commenced operations in February 1986
and incorporated under the laws of the state of Illinois on May 19, 1986.
The Company's principal business activity is the production of dairy
products. Specifically, the Company produces Kefir, a drinkable product
which is similar to but distinct from yogurt, in several flavors sold under
the name "Lifeway's Kefir"; a plain farmer's cheese sold under the name
"Lifeway's Farmer's Cheese"; a fruit sugar-flavored product similar in
consistency to cream cheese sold under the name of "Sweet Kiss"; and a
dairy beverage, similar to Kefir, with increased protein and calcium, sold
under the name "Basics Plus." The Company also produces several soy-based
products under the name "Soy Treat" and a vegetable-based seasoning under
the name "Golden Zesta". The Company currently distributes its products
throughout the Chicago Metropolitan area through local food stores. In
addition, the product is a sold throughout the United States and in Eastern
Canada. During the three month periods ended March 31, 2004 and 2003,
export sales of the Company were approximately $37,050 and $123,700,
respectively. The majority of the Company's revenues are derived from the
sale of the Company's principal products.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated.
Use of estimates
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
-------------------
Sales represent sales of Company-produced dairy products that are
recorded at the time of shipment. In addition, shipping costs
invoiced to the customers are included in net sales and the related
cost in cost of sales.
Cash and cash equivalents
-------------------------
All highly liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents.
The Company maintains cash deposits at several institutions located
in the greater Chicago, Illinois metropolitan area. Deposits at each
institution are insured up to $100,000 by the Federal Deposit
Insurance Corporation or the Securities Investor Protector
Corporation.
BANK BALANCES OF AMOUNTS REPORTED BY FINANCIAL INSTITUTIONS ARE
CATEGORIZED AS FOLLOWS AT MARCH 31, 2004.
March 31, March 31, December 31,
2004 2003 2003
----------- ----------- -----------
Amounts insured $ 400,000 $ 400,000 $ 400,000
Uninsured and uncollateralized
amounts 4,337,104 2,553,294 4,212,259
----------- ----------- -----------
Total bank balances $ 4,737,104 $ 2,953,294 $ 4,612,259
=========== =========== ===========
Marketable securities
---------------------
Marketable securities are classified as available-for-sale and are
stated at market value. Gains and losses related to marketable
securities sold are determined by the specific identification
method.
7
Accounts receivable
-------------------
Credit terms are extended to customers in the normal course of
business. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral.
Accounts receivable are recorded at their estimated net realizable
value, net of an allowance for doubtful accounts. The Company's
estimate of the allowance for doubtful accounts is based upon
historical experience, its evaluation of the current status of
receivables, and unusual circumstances, if any. Accounts are
considered past due if payment is not made on a timely basis in
accordance with the Company's credit terms. Accounts considered
uncollectible are charged against the allowance.
Inventories
-----------
Inventories are stated at lower of cost or market, cost being
determined by the first-in, first-out method.
Property and equipment
----------------------
Property and equipment are stated at lower of depreciated cost or
fair value. Depreciation is computed using the straight-line method.
When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized.
Property and equipment are being depreciated over the following
useful lives:
Category Years
-------------------------- ---------
Buildings and improvements 31 and 39
Machinery and equipment 5 - 12
Office equipment 5 - 7
Vehicles 5
Income taxes
------------
Deferred income taxes arise from temporary differences resulting
from income and expense items reported for financial accounting and
tax purposes in different periods. Deferred taxes are classified as
current or non-current, depending on the classification of the
assets and liabilities to which they relate. Deferred taxes arising
from temporary differences that are not related to an asset or
liability are classified as current or non-current depending on the
periods in which the temporary differences are expected to reverse.
The principal sources of temporary differences are different
depreciation methods for financial statement and tax purposes,
unrealized gains or losses related to marketable securities,
capitalization of indirect costs for tax purposes, and the use of an
allowance for doubtful accounts for financial statement purposes.
Treasury stock
--------------
Treasury stock is recorded using the cost method.
Advertising costs
-----------------
The Company expenses advertising costs as incurred. During the year
2003 and for the three months ended March 31, 2004 and 2003,
approximately $629,500, $214,581, and $199,534, respectively, were
expensed.
Earning per common share
------------------------
Earnings per common share were computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding during the year. During the year 2003 and
the three month period ended March 31, 2004, diluted and basic
earnings per share were the same, as no dilutive effect was caused
by outstanding options.
8
NOTE 3 - MARKETABLE SECURITIES
The cost and fair value of marketable securities available for sale are as
follows:
(Unaudited) Unrealized Unrealized Fair
March 31, 2004 Cost Gains Losses Value
-------------- ----------- ----------- ----------- -----------
Equities/mutual funds $ 3,718,091 $ 95,725 $ (62,081) $ 3,751,735
Preferred securities 75,505 3,925 -- 79,430
Certificates of deposit 150,000 -- (2,790) 147,210
Corporate bonds 775,010 2,524 (160) 777,374
Municipal bonds,
maturing within five
years 907,244 4,544 (9) 911,779
Government agency
obligations, maturing
after five years 953,234 -- (5,183) 948,051
----------- ----------- ----------- -----------
Total $ 6,579,084 $ 106,718 $ (70,223) $ 6,615,579
=========== =========== =========== ===========
(Unaudited) Unrealized Unrealized Fair
March 31, 2003 Cost Gains Losses Value
-------------- ----------- ----------- ----------- -----------
Equities $ 4,156,822 $ 18,162 $(1,520,517) $ 2,654,467
Preferred securities 100,000 -- (8,000) 92,000
Municipal bonds,
Maturing within
five years 2,884,703 12,659 -- 2,897,362
----------- ----------- ----------- -----------
Total $ 7,141,525 $ 30,821 $(1,528,517) $ 5,643,829
=========== =========== =========== ===========
Unrealized Unrealized Fair
December 31, 2003 Cost Gains Losses Value
----------------- ----------- ----------- ----------- -----------
Equities $ 2,326,722 $ 315,348 $ (48,837) $ 2,593,233
Preferred securities 200,505 2,985 (80) 203,410
Certificates of deposit 150,000 -- 150,000
Corporate bonds 500,005 (1,333) 498,672
Municipal bonds,
maturing within
five years 2,405,067 1,545 (10) 2,406,602
Government agency
obligation 450,000 689 -- 450,689
----------- ----------- ----------- -----------
Total $ 6,032,299 $ 320,567 $ (50,260) $ 6,302,606
=========== =========== =========== ===========
Proceeds from the sale of marketable securities were $3,025,285, $2,862,610 and
$608,696 during the year 2003 and for the three months ended March 31, 2004 and
2003, respectively.
Gross gains (losses) of $(1,293,579), $268,367, and $(346,556), were realized on
these sales during the year 2003 and for the three months ended March 31, 2004
and 2003, respectively.
9
NOTE 4 - INVENTORIES
Inventories consist of the following:
(Unaudited)
March 31, December 31,
------------------------- -----------
2004 2003 2003
----------- ----------- -----------
Finished goods $ 349,431 $ 190,947 $ 436,291
Production supplies 232,432 259,715 231,376
Raw materials 213,507 323,022 143,905
----------- ----------- -----------
Total inventories $ 795,370 $ 773,684 $ 811,572
=========== =========== ===========
NOTE 5 - PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
(Unaudited)
March 31, December 31,
---------------------------------------
2004 2003 2003
------------------------- -----------
Land $ 470,900 $ 470,900 $ 470,900
Buildings and improvements 2,459,090 2,385,495 2,435,111
Machinery and equipment 5,176,788 4,868,390 5,138,822
Vehicles 359,383 359,383 380,743
Office equipment 78,763 67,783 78,763
----------- ----------- -----------
8,544,924 8,151,951 8,504,339
Less accumulated depreciation 4,927,513 4,248,544 4,771,608
----------- ----------- -----------
$ 3,617,411 $ 3,903,407 $ 3,732,731
=========== =========== ===========
Depreciation expense during the year ended December 31, 2003 and for the three
months ended March 31, 2004 and 2003 was $688,309, $155,905, and $165,212,
respectively.
10
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
(Unaudited)
March 31, December 31,
-------------------------- -----------
2004 2003 2003
----------- ----------- -----------
Mortgage note payable to a bank, payable in monthly
installments of $3,273 including interest at 6.25%,
with a balloon payment of $454,275 due September 25,
2006. Collateralized by real estate. 479,054 487,593 481,281
Notes payable to finance companies, payable in monthly
installments of $1,851, including interest at 0%, due
November 2004. Collateralized by vehicles. 13,962 36,180 19,517
----------- ----------- -----------
493,016 523,773 500,978
Total notes payable
Less current maturities 24,248 31,271 28,289
----------- ----------- -----------
Total long-term portion $ 468,768 $ 492,502 $ 472,509
=========== =========== ===========
Maturities of notes payables are as follows:
As of March 31,
2004 $ 24,248
2005 10,764
2006 10,256
2007 447,748
-------------
Total $ 493,016
=============
NOTE 7 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
(Unaudited)
For the Three Months Ended Year Ended
March 31, December 31,
-----------------------------------------
2004 2003 2003
----------- ----------- -----------
Current:
Federal $ 336,538 $ 427,825 $ 1,075,623
State 78,868 98,962 269,841
----------- ----------- -----------
Total current 415,406 526,787 1,345,464
Deferred 75,127 43,454 9,084
----------- ----------- -----------
Provision for income taxes $ 490,533 $ 570,241 $ 1,354,548
=========== =========== ===========
11
A reconciliation of the provision for income taxes and the income tax computed
at the statutory rate are as follows:
(Unaudited) For the
For the Three Months Ended Year Ended
March 31, December 31,
-------------------------- -----------
2004 2003 2003
----------- ----------- -----------
Federal income tax expense $ 396,208 $ 531,594 $ 1,161,643
computed at the statutory rate
State taxes, expense 90,413 112,572 257,507
Temporary book/tax differences
Depreciation (23,363) (44,936) (4,829)
Disallowed (allowed) capital
Losses -- -- 104,683
Other than temporary reductions
on marketable securities -- (8,784) (97,175)
Other 27,275 -- (58,044)
Permanent book/tax differences -- (20,205) (9,237)
----------- ----------- -----------
Provision for income taxes $ 490,533 $ 570,241 $ 1,354,548
=========== =========== ===========
Amounts for deferred tax assets and liabilities are as follows:
(Unaudited) For the
For the Three Months Ended Year Ended
March 31, December 31,
--------------------------- -----------
2004 2003 2003
----------- ----------- -----------
Non-current deferred tax liabilities arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $ (448,590) $ (407,920) $ (471,953)
----------- ----------- -----------
Current deferred tax liability arising from:
Book/tax, unrealized gains and
marketable securities (15,072) -- (114,070)
Current deferred tax assets arising from:
Book/tax, capital loss carryforward -- 617,050 104,683
Book/tax, other 42,360 42,704 36,425
Less valuation allowance -- (220,000) --
----------- ----------- -----------
Total deferred tax assets 27,288 439,754 27,038
----------- ----------- -----------
Net deferred tax asset (liability) $ (421,302) $ 31,834 $ (444,915)
=========== =========== ===========
12
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows:
(Unaudited) For the
For the Three Months Ended Year Ended
March 31, December 31,
--------------------------- -----------
2004 2003 2003
----------- ----------- -----------
Interest $ 7,611 $ 7,643 $ 41,205
Income taxes $ 452,000 $ 675,000 $ 2,055,000
NOTE 9 - STOCK OPTION PLANS
The Company has a registration statement on file with the Securities and
Exchange Commission in connection with a Consulting Service Compensation
Plan covering up to 300,000 of the Company's common stock shares. Pursuant
to the Plan, the Company may issue common stock or options to purchase
common stock to certain consultants, service providers, and employees of
the Company. There were 234,300 shares available for issuance under the
Plan at March 31 and December 31, 2003 and at March 31, 2004. The terms of
this Plan do not require or permit an adjustment in the number of shares as
a result of the stock split; therefore, no adjustment has been made.
The option price, number of shares, grant date, and vesting terms are
determined at the discretion of the Company's Board of Directors.
As of December 31, 2003, March 31, 2004 and 2003, there were no stock
options outstanding or exercisable.
NOTE 10 - STOCK SPLIT
On February 12, 2004, the Board of Directors of the Company declared a
two-for-one stock split of the common stock of the Company payable on March
8, 2004 to all of the Company's shareholders of record as of February 27,
2004.
As a result of the stock split, shareholders received two shares of common
stock for every one share held on the record date. Upon completion of the
split, the total number of shares of common stock outstanding increased
from 4,218,444 to 8,436,888.
The earnings per share calculations as presented on the consolidated
statements of income and comprehensive income and the number of shares
issued and outstanding per statement of changes in stockholders' equity
have been adjusted to reflect split adjusted share amounts.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, none of
which are held for trading purposes, are as follows at March 31, 2004:
Carrying Fair
Amount Value
------------ ------------
Cash and cash equivalents $ 4,632,830 $ 4,632,830
Marketable securities $ 6,615,579 $ 6,615,579
Notes payable $ 493,016 $ 469,069
The carrying values of cash and cash equivalents, and marketable securities
approximate fair values. The fair value of the notes payable is based on the
discounted value of contractual cash flows. The discount rate is estimated using
rates currently offered for debt with similar maturities.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
COMPARISON OF QUARTER ENDED MARCH 31, 2004 TO QUARTER ENDED MARCH 31, 2003
The following analysis should be read in conjunction with the unaudited
financial statements of the Company and related notes included elsewhere in this
quarterly report and the audited financial statements and Management's
Discussion and Analysis contained in our Form 10-KSB, as amended by Form
10-KSB/A, for the fiscal year ended December 31, 2003.
RESULTS OF OPERATIONS
Sales increased by $626,522 (approximately 19%) to $3,935,079 during the three
month period ended March 31, 2004 from $3,308,557 during the same three month
period in 2003. We believe that approximately half of the 2004 increase in sales
was attributable to a new customer as of June 2003, Sav-A-Lot, Ltd., which
represented sales of a significant number of 8 oz. bottles of Lifeway's LaFruta
line. Save-A-Lot, the 13th largest grocery chain in the United States, operates
more than 1000 Sav-A-Lot and Supervalu food stores nationwide.
While sales increased by about 19%, our operating expenses increased by only
about 4% to $882,029 for the current fiscal quarter from $844,621 for the same
period last year. Such a small increase in operating expenses combined with a
significant sales growth this quarter (as compared to the same period in 2003)
resulted in an operating income increase of $315,872 (approximately 50%) to
$953,852 for the three months ended March 31, 2004 from $637,980 during the same
three month period in 2003.
Cost of goods sold as a percentage of sales was 53% for the three months ended
March 31, 2004, compared to 55% for the same three month period in 2003. Cost of
goods sold increased by $273,242 (approximately 15%) to $2,099,198 during the
three month period ending March 31, 2004 from $1,825,956 during the same three
month period in 2003. The price of milk, our largest cost of goods component,
rose approximately 20% during this same three month period.
Income not derived from operations (or "other income") decreased by $623,654 to
$301,880 during the three month period ended March 31, 2004 from $925,534 during
the same three month period in 2003. During the three month period ended March
31, 2003, Lifeway recognized a one-time gain on the sale of real property in the
amount of $1,246,287 offset by a loss on the sale of marketable securities, net
of $346,556. In the quarter ended March 31, 2003 compared to the same three
month period in 2004, the sale of the real property impacted the depreciation
and amortization item and both the sale of the real property and the loss on
marketable securities, net impacted income tax deferred and income tax payable
items.
SOURCES AND USES OF CASH
Net cash used in financing activities was $7,782 during the quarter ended March
31, 2004, which is essentially unchanged year-over-year from $7,732 during the
same period in 2003. In contrast, our operating activities during the three
month period ended March 31, 2004 generated positive net cash flows of $361,796,
whereas during the same period in 2003 our operating net cash flows decreased by
$165,738 due to the gain on the disposition of real property and the subsequent
use of all of the cash from such gain for investment in certificates of deposit
and other cash equivalents.
A significant portion of our assets are held in marketable securities. The
marketable securities are classified as available-for-sale on our balance sheet
and thus are stated thereon at market value as of the end of the applicable
period. Gains and losses on the portfolio are determined by the specific
identification method. Net cash provided by investing activities decreased by
$319,003 for the three months ended March 31, 2004 as compared to the increase
of $229,538 during the same period in 2003. The positive net investing activity
cash flow during the three month period ended March 31, 2003 was attributable to
a one-time gain from the sale of real property and investment of substantially
all of the proceeds of that sale in cash equivalents. However, during the three
month period ended March 31, 2004, Lifeway experienced negative investing cash
flows in the amount of $319,003 due to our continued efforts to move away from
higher-risk securities towards large cap value, higher dividend yielding and
tax-advantaged equities. Our efforts in this regard during the first calendar
quarter of 2004 also are reflected by a gain of $268,367 on the sale of
marketable securities evident on the Company's consolidated income statement,
which appears in this quarterly report. We believe, given the current market
conditions, this asset allocation strategy offers a positive risk-reward ratio
for our Company.
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We anticipate being able to fund the Company's foreseeable liquidity
requirements internally. We continue to explore potential acquisition
opportunities in our industry in order to boost sales while leveraging our
distribution system to consolidate and lower costs. We anticipate closing an
acquisition in 2004 or early 2005. We expect that we will be able to use our
available cash and cash equivalents as funding for an acquisition of this size.
We are also exploring opportunities in Eastern Canada that will meet our desire
to expand sales in that region.
OTHER DEVELOPMENTS
On February 12, 2004, Lifeway's Board of Directors approved awards of an
aggregate amount of 5,100 shares to be awarded under its Employee and Consulting
Services and Compensation Plan to certain employees and consultants for services
rendered to the Company. The stock awards were made on April 1, 2004 and have
vesting periods that vary from six months to one year, depending on the
individual grantee. The expense for the awards is measured as of April 1, 2004
at $20.93 per share for 5100 shares, or a total stock award expense of $106,743.
This expense will be recognized as the stock awards vest beginning on October 1,
2004, which is the earliest vesting date for the awards. In this paragraph, the
share numbers and per share expense have been adjusted to reflect the stock
split as of March 8, 2004.
Lifeway Foods prices for all its dairy products will be increased by
approximately 20% effective June 15, 2004. This price increase is in response to
the rising cost of milk, new packaging costs and an overall increase in the cost
of doing business. This is Lifeway's first major price increase in almost three
years. Lifeway Management does not expect that this price increase will have a
negative impact on its sales or gross margins as Lifeway's products are expected
to continue to be comparatively less expensive (on a per ounce basis) than many
of its competitors' products.
During the quarter ending June 30, 2004, the Company expects to incur a one time
expense of approximately $43,000 for listing additional shares on the Nasdaq
National Market System in connection with its March 2004 stock split.
CRITICAL ACCOUNTING POLICIES
Lifeway's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The preparation of financial statements in
accordance with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
US GAAP provides the framework from which to make these estimates, assumptions
and disclosures. Lifeway chooses accounting policies within US GAAP that
management believes are appropriate to accurately and fairly report Lifeway's
operating results and financial position in a consistent manner. Management
regularly assesses these policies in light of current and forecasted economic
conditions and has discussed the development and selection of critical
accounting policies with its audit committee of the Board of Directors. For
further information concerning accounting policies, refer to Note 2 -- Nature of
Business and Significant Accounting Policies in the notes to the consolidated
financial statements.
FORWARD LOOKING STATEMENTS
In this report, in reports subsequently filed by Lifeway with the SEC on Form
10-QSB and filed or furnished on Form 8-K, and in related comments by
management, our use of the words "believe," "expect," "anticipate," "estimate,"
"forecast," "objective," "plan," "goal," "project," "explore,"
"priorities/targets," and similar expressions is intended to identify
forward-looking statements. While these statements represent our current
judgment on what the future may hold, and we believe these judgments are
reasonable, actual results may differ materially due to numerous important
factors that are described in this report and other factors that may be
described in subsequent reports which Lifeway may file with the SEC on Form
10-QSB and filed or furnished on Form 8-K, including but not limited to:
o Changes in economic conditions, commodity prices;
o Shortages of and price increase for fuel, labor strikes or work
stoppages, market acceptance of the Company's new products;
o Significant changes in the competitive environment;
o Changes in laws, regulations, and tax rates; and
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o Management's ability to achieve reductions in cost and employment
levels, to realize production efficiencies and to implement capital
expenditures, all at of the levels and times planned by management.
ITEM 3. CONTROLS AND PROCEDURES
The Chief Executive Officer (who serves as the principal executive and
financial officer) conducted an evaluation of the effectiveness of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934 as of March 31, 2004. The Company has historically operated
on strictly monitored cost constraints; with that perspective, the Chief
Executive Officer concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in this
quarterly report has been made known to her. However, based upon the Company's
recent growth and improved cash position, as well as consultation with its
auditors, management intends to implement additional procedures to improve
internal controls in 2004. Specifically, an enhanced accounting software package
has been identified which will permit enhanced data recording and internal
reporting as well as additional on-site accounting staff and some changes to
internal control procedures.
As of the date of this quarterly report, there have been no known
significant changes in internal controls or in other factors that could
significantly affect these controls subject to the date of such evaluation.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 8, 2004, each issued share of the Company's common stock, no par value,
split into two shares pursuant to a stock split dividend declared by the Company
Board of Directors on February 12, 2004.
ITEM 5. OTHER INFORMATION
On May 13, 2004, following approval by its Audit Committee, the Company engaged
Plante & Moran, PLLC ("Plante Moran") as its independent auditor following the
May 1, 2004 merger of Plante Moran with the Company's former auditor, Gleeson,
Sklar, Sawyers & Cumpata.
On May 17, 2004, the Company announced its financial results for the fiscal
quarter ended March 31, 2004 and certain other information. A copy of the
Company's press release announcing these financial results and certain other
information is attached as Exhibit 99.1 hereto. The information contained in
Exhibit 99.1 hereto is being furnished, and should not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liabilities imposed by that Section. The information
contained in Exhibit 99.1 shall not be incorporated by reference into any
registration statement or other document or filing under the Securities Act of
1933, as amended, except as may be expressly set forth in a specific filing. The
press release filed as an exhibit to this report includes "safe harbor" language
pursuant to the Private Securities Litigation Reform Act of 1995, as amended,
indicating that certain statements about the Company's business and other
matters contained in the press release are "forward-looking." The press release
also cautions investors that "forward-looking" statements may be different from
actual operating results. Finally, the press release states that a more thorough
discussion of risks and uncertainties which may affect the Company's operating
results is included in the Company's reports on file with the Securities and
Exchange Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.4 Amended and Restated By-laws (incorporated by reference to Exhibit No.
3.5 of Lifeway's Current Report on Form 8-K dated and filed on December
10, 2002).
3.5 Articles of Incorporation, as amended and currently in effect
(incorporated by reference to Exhibit 3.5 of Lifeway's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 2000 and filed on August
8, 2000).
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10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated
June 5, 1995 (incorporated by reference to Lifeway's Registration
Statement on Form S-8, File No. 33-93306).
10.10 Stock Purchase Agreement with Danone Foods, Inc., dated October 1, 1999
(incorporated by reference to Exhibit 10.10 of the Registrant's Current
Report on Form 8-K dated October 1, 1999, and filed October 12, 1999).
10.11 Stockholders' Agreement with Danone Foods, Inc. dated October 1, 1999
(incorporated by reference to Exhibit 10.11 of the Registrant's Current
Report on Form 8-K dated October 1, 1999, and filed October 12, 1999).
10.12 Letter Agreement dated December 24, 1999 amending the Stockholders'
Agreement with Danone Foods, Inc. dated October 1, 1999 (incorporated by
reference to Exhibit 10.12 of the Registrant's Current Report on Form
8-K dated December 24, 1999 and filed January 11, 2000).
10.13 Support Agreement with The Dannon Company, Inc. dated December 24, 1999
(incorporated by reference to Exhibit 10.13 of the Registrant's Current
Report on Form 8-K dated December 24, 1999 and filed January 11, 2000).
10.14 First Amendment to Support Agreement with The Dannon Company, Inc.,
dated February 11, 2003 (incorporated by reference to Exhibit 10.14 of
the Registrant's Quarterly Report for the quarter ended March 31, 2003
on Form 10-QSB dated and filed May 15, 2003).
10.15 Employment Agreement, dated September 12, 2002, between Lifeway Foods,
Inc. and Julie Smolyansky (incorporated by reference to Exhibit 10.14 of
Amendment No. 2 filed April 30, 2003 to Lifeway's Quarterly Report on
Form 10-QSB/A for the quarter ended September 30, 2002).
11 Statement re: computation of per share earnings (incorporated by
reference to Note 2 of the Consolidated Financial Statements).
31.1 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
99.1 Press release dated May 17, 2004 regarding earnings for the quarter
ended March 31, 2004.
(b) Reports on Form 8-K.
On February 13, 2004, the Company filed a Current Report on Form 8-K with
disclosures in Items 5 and 7 regarding the stock split which occurred March 8,
2004.
On March 29, 2004, the Company filed a Current Report on Form 8-K with
disclosures in Items 7 and 12 regarding the Company's results of operations and
financial condition for the year ended December 31, 2003.
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SIGNATURE
In accordance with the requirements of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 17, 2004
LIFEWAY FOODS, INC.
By: /s/ Julie Smolyansky
-------------------------------
Julie Smolyansky
Chief Executive Officer, Chief
Financial and Accounting Officer,
President, Treasurer and Director
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