10QSB 1 form10-q_11271.txt LIFEWAY FOODS, INC. FORM 10-QSB DATED 3/31/2002 ================================================================================ 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, 2002 [ ] 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 its 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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the issuer filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] 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 MAY 1, 2002, THE ISSUER HAD 4,268,844 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] ================================================================================ INDEX PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Lifeway Foods, Inc. and Subsidiary March 31, 2002 and 2001, and December 31, 2001 F-1 Consolidated Statements of Financial Condition December 31, 2001 and March 31, 2002 and 2001 (unaudited) F-2 Consolidated Statements of Income and Comprehensive Income (Loss) for the year ended December 31, 2001 and for the three months ended March 31, 2002 and 2001 (unaudited) F-3 Consolidated Statements of Changes in Stockholders' Equity for the year ended December 31, 2001 and for the three months ended March 31, 2002 (unaudited) F-4 Consolidated Statements of Cash Flows for the year ended December 31, 2001 and for the three months ended March 31, 2002 and 2001 (unaudited) F-5 Notes to Financial Statements (unaudited) F-6 - F-13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS 2 PART II - OTHER INFORMATION 3 SIGNATURES 4 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LIFEWAY FOODS, INC. AND SUBSIDIARY FINANCIAL STATEMENTS MARCH 31, 2002 AND 2001 F-1 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, 2002 AND 2001 AND DECEMBER 31, 2001
(Unaudited) March 31, ----------------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ ASSETS ------ Current assets Cash and cash equivalents $ 1,160,120 $ 1,832,127 $ 936,949 Marketable securities 5,155,707 4,279,098 5,754,986 Accounts receivable, net of allowance for doubtful accounts of $15,000 at March 31, 2002 and December 31, 2001 and $0 at March 31, 2001 1,468,561 1,437,486 1,316,626 Other receivables 58,380 5,434 52,602 Inventories 859,261 794,740 800,773 Prepaid expenses and other current assets 33,550 -- 33,686 Deferred income taxes 719,411 169,138 560,543 ------------ ------------ ------------ Total current assets 9,454,990 8,518,023 9,456,165 Property, plant, and equipment, net 4,865,456 5,028,100 5,020,865 ------------ ------------ ------------ Total assets $ 14,320,446 $ 13,546,123 $ 14,477,030 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities Current maturities of notes payable $ 74,150 $ 688,141 $ 90,249 Margin account 198,107 -- 431,795 Accounts payable 603,418 594,300 543,401 Accrued expenses 166,125 174,831 163,715 Income taxes payable 124,725 93,171 144,916 ------------ ------------ ------------ Total current liabilities 1,166,525 1,550,443 1,374,076 Notes payable 955,549 522,843 1,116,410 Deferred income taxes 462,797 381,962 436,265 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 (319,478) -- (287,033) Retained earnings 6,519,351 5,179,579 6,071,793 Accumulated other comprehensive loss, net of tax (958,565) (582,971) (728,748) ------------ ------------ ------------ Total stockholders' equity 11,735,575 11,090,875 11,550,279 ------------ ------------ ------------ Total liabilities and stockholders' equity $ 14,320,446 $ 13,546,123 $ 14,477,030 ============ ============ ============
See accompanying notes to financial statements F2 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 AND THE YEAR ENDED DECEMBER 31, 2001
(Unaudited) March 31, ----------------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ Sales $ 2,887,853 $ 2,636,440 $ 10,683,983 Cost of goods sold 1,523,281 1,547,227 6,448,992 ------------ ------------ ------------ Gross profit 1,364,572 1,089,213 4,234,991 Operating expenses 648,540 657,219 2,797,747 ------------ ------------ ------------ Income from operations 716,032 431,994 1,437,244 Other income (expense): Interest and dividend income 37,274 71,972 232,173 Interest expense (20,091) (24,888) (107,425) Gain on sale of marketable securities, net 36,020 84,984 249,522 ------------ ------------ ------------ Total other income 53,203 132,068 374,270 ------------ ------------ ------------ Income before provision for income taxes 769,235 564,062 1,811,514 Provision for income taxes 321,677 235,349 590,587 ------------ ------------ ------------ Net income $ 447,558 $ 328,713 $ 1,220,927 ============ ============ ============ Earnings per share common share 0.10 0.08 0.28 ============ ============ ============ Weighted average shares outstanding 4,269,736 4,318,444 4,318,158 ============ ============ ============ COMPREHENSIVE INCOME (LOSS) --------------------------- Net income $ 447,558 $ 328,713 $ 1,220,927 Other comprehensive income (loss), net of tax: Unrealized losses on marketable securities (net of tax benefits of $168,480, $381,128 and $129,492) (235,592) (389,698) (537,505) Less reclassification adjustment for gains included in net income 5,775 11,840 13,870 ------------ ------------ ------------ Comprehensive income (loss) $ 217,741 $ (49,145) $ 697,292 ============ ============ ============
See accompanying notes to financial statements F3 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND THE YEAR ENDED DECEMBER 31, 2001
Common Stock, No Par Value 10,000,000 Shares Authorized # of Shares ------------------------- of # of Shares # of Shares Treasury Common Issued Outstanding Stock Stock ---------- ---------- ---------- ---------- Balances at December 31, 2000 4,318,444 4,318,444 -- $6,509,267 Other comprehensive income: Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- -- Purchase of Treasury Stock -- (45,000) 45,000 -- Net income for the year ended December 31, 2000 -- -- -- -- ---------- ---------- ---------- ---------- Balances at December 31, 2001 4,318,444 4,273,444 45,000 6,509,267 Purchase of treasury stock -- (4,600) 4,600 -- Other comprehensive income: Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- -- Net income for the three months ended March 31, 2002 -- -- -- -- ---------- ---------- ---------- ---------- Balances at March 31, 2002 (Unaudited) 4,318,444 4,268,844 49,600 $6,509,267 ========== ========== ========== ========== Accumulated Other Stock Comprehensive Subscription Treasury Retained Income, Receivable Stock Earnings Net of Tax ---------- ---------- ---------- ---------- Balances at December 31, 2000 $ (15,000) $ -- $4,850,866 $ (205,113) Other comprehensive income: Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- (523,635) Purchase of Treasury Stock -- (287,033) -- -- Net income for the year ended December 31, 2000 -- -- 1,220,927 -- ---------- ---------- ---------- ---------- Balances at December 31, 2001 (15,000) (287,033) 6,071,793 (728,748) Purchase of treasury stock -- (32,445) -- -- Other comprehensive income: Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- (229,817) Net income for the three months ended March 31, 2002 -- -- 447,558 -- ---------- ---------- ---------- ---------- Balances at March 31, 2002 (Unaudited) $ (15,000) $ (319,478) $6,519,351 $ (958,565) ========== ========== ========== ==========
See accompanying notes to financial statements F4 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 AND THE YEAR ENDED DECEMBER 31, 2001
(Unaudited) March 31, December 31, ------------------------------- ----------- 2002 2001 2001 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 447,558 $ 328,713 $ 1,220,927 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 204,201 179,971 777,350 Gain on sale of marketable securities, net (36,020) (84,984) (249,522) Deferred income taxes (27,381) 3,926 47,952 Provision for doubtful accounts -- -- 15,000 (Increase) decrease in operating assets: Accounts receivable (151,935) (255,826) (149,966) Other receivables (5,778) (5,434) (52,602) Inventories (58,488) 125,271 119,238 Prepaid expenses and other current assets 136 -- (33,686) Increase (decrease) in operating liabilities: Accounts payable 60,017 76,675 25,776 Accrued expenses 2,410 (67,639) (4,105) Income taxes payable (20,191) 28,617 80,362 ----------- ----------- ----------- Net cash provided by operating activities 414,529 329,290 1,796,724 Cash flows from investing activities: Purchase of marketable securities (273,955) (4,017,334) (9,246,972) Sales of marketable securities 574,482 4,295,719 7,687,102 Purchases of property, plant and equipment (48,792) (188,456) (712,798) Change in margin account (233,688) -- 357,145 ----------- ----------- ----------- Net cash provided by (used in) investing activities 18,047 89,929 (1,915,523) Cash flows from financing activities: Repayment of notes payable (176,960) (24,193) (94,320) Purchase of treasury stock (32,445) -- (287,033) ----------- ----------- ----------- Net cash used in financing activities (209,405) (24,193) (381,353) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 223,171 395,026 (500,152) Cash and cash equivalents at the beginning of the year 936,949 1,437,101 1,437,101 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 1,160,120 $ 1,832,127 $ 936,949 =========== =========== ===========
See accompanying notes to financial statements F5 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 AND 2001 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 products are sold throughout the United States and Ontario, Canada. The Company also distributes some of its products internationally by exporting to Eastern Europe. During the year 2001 and for the three months ended March 31, 2002 and 2001, export sales of the Company were approximately $154,000, $19,867, and $31,796, respectively. On September 30, 1992, the Company formed a wholly owned subsidiary corporation, LFI Enterprises, Inc., (LFIE) incorporated in the state of Illinois. LFIE was formed for the purpose of operating a "Russian" theme restaurant and supper club on property acquired by the Company on October 9, 1992. The restaurant/supper club commenced operations in late November 1992. As of July 2001, the restaurant/supper club terminated all operations. 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. 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. F-6 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 AND 2001 Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Bank balances of amounts reported by financial institutions are categorized as follows at March 31, 2002. Amounts insured $ 300,000 Uninsured and uncollateralized amounts 802,751 -------------- Total bank balances $ 1,102,751 ============== 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. ACCOUNTS RECEIVABLE ------------------- The allowance for doubtful accounts is based on management's evaluation of outstanding accounts receivable at the end of the year. 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. F-7 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 AND 2001 Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued ADVERTISING COSTS ----------------- The Company expenses advertising costs as incurred. During the year 2001 and for the three months ended March 31, 2002 and 2001, approximately $473,800, $71,700, and $87,800, 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. For 2002 and 2001, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant. Note 3 - MARKETABLE SECURITIES The cost and fair value of marketable securities available for sale are as follows:
Unrealized Unrealized Fair March 31, 2002 Cost Gains Losses Value -------------- ----------- ----------- ----------- ----------- Equities $ 3,197,586 $ 14,115 $(1,508,034) $ 1,703,667 Preferred securities 384,875 -- (13,686) 371,189 Municipal bonds, maturing within five years 2,962,155 -- (113,042) 2,849,113 Government agency obligations, maturing after five years 248,755 -- (17,017) 231,738 ----------- ----------- ----------- ----------- Total $ 6,793,371 $ 14,115 $(1,651,779) $ 5,155,707 =========== =========== =========== =========== Unrealized Unrealized Fair March 31, 2001 Cost Gains Losses Value -------------- ----------- ----------- ----------- ----------- Equities $ 5,121,965 $ 42,227 $ (708,627) $ 4,455,565 Options, maturing within one year (86,900) 2,063 (91,630) (176,467) ----------- ----------- ----------- ----------- Total $ 5,035,065 $ 44,290 $ (800,257) $ 4,279,098 =========== =========== =========== ===========
F-8 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 AND 2001 Note 3 - MARKETABLE SECURITIES - continued
Unrealized Unrealized Fair December 31, 2001 Cost Gains Losses Value ----------------- ----------- ----------- ----------- ----------- Equities $ 3,447,853 $ 46,888 $(1,238,666) $ 2,256,075 Preferred securities 777,723 6,827 (6,240) 778,310 Municipal bonds, maturing within five years 2,554,622 -- (63,184) 2,491,438 Government agency obligations, maturing after five years 248,755 -- (7,392) 241,363 Options, maturing within one year (34,600) 22,400 -- (12,200) ----------- ----------- ----------- ----------- Total $ 6,994,353 $ 76,115 $(1,315,482) $ 5,754,986 =========== =========== =========== ===========
Proceeds from the sale of marketable securities were $7,687,102, $574,482, and $4,295,719 during the year 2001 and for the three months ended March 31, 2002 and 2001, respectively. Gross gains of $249,522, $36,020, and $84,984, were realized on these sales during the year 2001 and for the three months ended March 31, 2002 and 2001, respectively. Note 4 - INVENTORIES Inventories consist of the following: (Unaudited) March 31, ------------------------ December 31, 2002 2001 2000 -------- -------- -------- Finished goods $157,244 $425,876 $273,932 Production supplies 241,451 217,303 280,897 Raw materials 460,566 151,561 245,944 -------- -------- -------- Total inventories $859,261 $794,740 $800,773 ======== ======== ======== F-9 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 AND 2001 Note 5 - PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of the following: (Unaudited) March 31, -------------------------- December 31, 2002 2001 2000 ---------- ---------- ---------- Land $ 658,400 $ 658,400 $ 658,400 Buildings and improvements 2,731,070 2,646,809 2,727,986 Machinery and equipment 4,714,571 4,259,112 4,668,863 Vehicles 359,383 273,580 359,383 Office equipment 84,945 71,532 84,945 ---------- ---------- ---------- 8,548,369 7,909,433 8,499,577 Less accumulated depreciation 3,682,913 2,881,333 3,478,712 ---------- ---------- ---------- $4,865,456 $5,028,100 $5,020,865 ========== ========== ========== Depreciation expense during the year ended December 31, 2001 and for the three months ended March 31, 2002 and 2001 was $777,350, $204,201, and $179,971, respectively. Note 6 - NOTES PAYABLE Notes payable consist of the following:
(Unaudited) For the three months ended March 31, ---------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ Mortgage note payable to a bank, paid in full in 2002. $ -- $ 163,514 $ 155,506 Mortgage note payable to a bank, payable in monthly installments of $3,161 including interest at 7.25%, with a balloon payment of $343,151 due August 2003. Collateralized by real estate. 363,391 374,169 366,253 Note payable to a bank, paid in full in 2002. -- 10,484 6,169 Mortgage note payable to a bank, payable in monthly installments of principal of $3,435 plus interest at 6.51%, with a balloon payment of $412,142 due November 2006. Collateralized by real estate. 607,910 659,086 614,779
F-10 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 AND 2001 Note 6 - NOTES PAYABLE - continued
(Unaudited) March 31, ---------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ Note payable to finance company, matured October 2001. -- 3,731 -- Notes payable to finance companies, payable in monthly installments of $1,851, including interest at 0%, due November 2004. Collateralized by vehicles. 58,398 -- 63,952 ------------ ------------ ------------ Total notes payable 1,029,699 1,210,984 1,206,659 Less current maturities 74,150 688,141 90,249 ------------ ------------ ------------ Total long-term portion $ 955,549 $ 522,843 $ 1,116,410 ============ ============ ============
Maturities of notes payables are as follows: As of March 31, 2002 $ 74,150 2003 416,104 2004 55,177 2005 41,214 2006 443,054 ------------- Total $ 1,029,699 ============= Note 7 - PROVISION FOR INCOME TAXES The provision for income taxes consists of the following: (Unaudited) For The March 31, Year Ended ------------------------ December 31, 2002 2001 2001 -------- --------- -------- Current: Federal $239,247 $165,282 $435,620 State 55,049 38,835 107,015 -------- -------- -------- Total current 294,296 204,117 542,635 Deferred 27,381 31,232 47,952 -------- -------- -------- Provision for income taxes $321,677 $235,349 $590,587 ======== ======== ======== F-11 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 AND 2001 Note 7 - PROVISION FOR INCOME TAXES - continued A reconciliation of the provision for income taxes and the income tax computed at the statutory rate are as follows: (Unaudited) For the three months ended For the March 31, Year Ended --------------------------- December 31, 2002 2001 2001 --------- --------- --------- Federal income tax expense $ 261,540 $ 191,781 $ 570,953 computed at the statutory rate State taxes, expense 55,385 40,613 132,240 Temporary book/tax differences Depreciation 9,445 (7,960) (38,950) Other (12,143) (23,965) (18,071) Permanent book/tax differences 7,450 34,880 (55,585) --------- --------- --------- Provision for income taxes $ 321,677 $ 235,349 $ 590,587 ========= ========= ========= Amounts for deferred tax assets and liabilities are as follows:
(Unaudited) March 31, ----------------------- December 31, 2002 2001 2001 --------- --------- --------- Non-current deferred tax liabilities arising from: Temporary differences - principally Book/tax, accumulated depreciation $(462,797) $(381,962) $(436,265) Current deferred tax assets arising from: Book/tax, allowance for unrealized losses 670,337 136,539 510,620 Book/tax, inventory 49,074 32,599 49,923 --------- --------- --------- Total deferred tax assets 719,411 169,138 560,543 --------- --------- --------- Net deferred tax asset (liability) $ 256,614 $(212,824) $ 124,278 ========= ========= =========
Note 8 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes are as follows: (Unaudited) For the Three Months For the Ended March 31, Year Ended ------------------------ December 31, 2002 2001 2000 -------- -------- -------- Interest $ 20,091 $ 24,888 $107,425 Income taxes $308,000 $175,500 $505,500 Non-cash investing and financing transactions during 2001 include the purchase of vehicles via note payables for $65,802 and the refinancing of debt for $618,214. F-12 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 AND 2001 Note 9 - STOCK OPTION PLANS The Company has a registration statement filed 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, 2002 and 2001. 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 March 31, 2002 and 2001, there were no stock options outstanding or exercisable. Note 10 - 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, 2002: Carrying Fair Amount Value ---------- ---------- Cash and cash equivalents $1,160,120 $1,160,120 Marketable securities $5,155,707 $5,155,707 Notes payable $1,029,699 $ 928,441 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. F-13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (1) MATERIAL CHANGES IN RESULTS OF OPERATIONS Sales increased by $251,413, up to $2,887,853 during the three month period ending March 31, 2002, from $2,636,440 during the same three month period in 2001 (a 9.5% increase). This increase is primarily attributable to increased sales of existing products. Net income increased by $118,845, up to $447,558 for the three month period ending March 31, 2002, from $328,713 during the same three month period in 2001 (a 36% increase). Cost of goods sold as a percentage of sales was 53% for the three months ending March 31, 2002, compared to 59% for the same three month period in 2001. Despite the increases in production and sales, cost of goods sold decreased by $23,946, down to $1,523,281 during the three month period ending March 31, 2002, from $1,547,227 during the same three month period in 2001. This decrease is primarily due to decreased costs of raw materials and the Company's ability to obtain raw materials in bulk quantities at reduced prices. Despite the increased production, operating expenses remained virtually unchanged, decreasing by $8,679, down to $648,540 for the three month period ending March 31, 2002, from $657,219 during the same three month period in 2001. This decrease is primarily attributable to increased production and efficiency associated with the continuing automation of manufacturing functions. Earnings per share for the quarter ended March 31, 2002 were $.10, compared to $.08 for the same quarter of 2001. (2) LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2002, the Company had working capital in the amount of $8,288,465, cash and cash equivalents in the amount of $1,160,120, and marketable securities of $5,155,707. The Company expects all cash requirements can be met internally for the next 12-month period. Net cash provided by operating activities increased by 85,239 (or 26%), to $414,529 for the three months ended March 23, 2002, from $329,290 for the same three month period in 2001. Net cash used in financing activities increased by $185,212, to $209,405 for the three months ended March 31, 2002, from $24,193 for the same three month period in 2001. This difference was primarily due to the repayment of $176,960 in notes payable, representing the remaining mortgage on the Company's smaller processing plant and loans due for two company vehicles, as well as due to the purchase of 4,600 shares of the company's common stock in market transactions during the first quarter of 2002, which shares now constitute treasury stock, at a cost of $32,445. Total current liabilities as of March 31, 2002 was $1,166,525, a $383,918 decrease from $1,550,443 as of March 31, 2001. This decrease primarily due to the repayment of a mortgage note payable on the Company's smaller processing plant in the current year, as well as the reclassification of a mortgage note payable in 2001 from a current liability to a long-term liability, as a result of a refinancing of the note. Likewise, there was a corresponding increase in long-term liabilities due to the refinancing, with notes payable, a long term liability, increasing to $955,549 as of March 31, 2002, from $522,843 as of March 31, 2001. The Company held marketable securities with a fair market value of $5,155,707 as of March 31, 2002. These marketable securities have a cost basis of $6,793,371, which represents $1,637,664 in unrealized losses (net of unrealized gains) as of March 31, 2002. The Company is not aware of any circumstances or trends which would have a negative impact upon future sales or earnings. There have been no material fluctuations in the standard seasonal variations of the Company's business. The accompanying financial statements include all adjustments which in the opinion of management are necessary in order to make the financial statements not misleading. 2 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material developments in the pending legal proceeding described in the Company's annual report on Form 10-KSB for the year ended December 31, 2001. ITEM 2. CHANGES IN SECURITIES - None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - None. ITEM 5. OTHER INFORMATION - None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: Exhibit Number and Brief Description ------------------------------------ 3.4 Bylaws, as amended. (Incorporated by reference to Exhibit No. 3.4 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, and filed on March 29, 2000.) 3.5 Articles of Incorporation, as amended and currently in effect. (Incorporated by reference to Exhibit 3.5 of the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000 and filed on August 8, 2000.) 10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated June 5, 1995. (Incorporated by reference to Exhibit 10.1 of the Company'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 Company'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 Company'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 Company'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 Company's Current Report on Form 8-K dated December 24, 1999 and filed January 11, 2000.) (b) REPORTS ON FORM 8-K - None. 3 SIGNATURES 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. LIFEWAY FOODS, INC. By: /S/ MICHAEL SMOLYANSKY -------------------------------------------- Michael Smolyansky, Chief Executive Officer, Chief Financial and Accounting Officer, President, Treasurer and Director Date: May 15, 2002 4