-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CgkGmOH5Ylw1/z+br2KNd+KAEm/qEkpur9ZziU5QjBmDYHGK7RKjhOmS2202Gsaw yWZ+3763HRoB+FLtoe5bcg== 0001072613-02-001764.txt : 20021118 0001072613-02-001764.hdr.sgml : 20021118 20021114192617 ACCESSION NUMBER: 0001072613-02-001764 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFEWAY FOODS INC CENTRAL INDEX KEY: 0000814586 STANDARD INDUSTRIAL CLASSIFICATION: DAIRY PRODUCTS [2020] IRS NUMBER: 363442829 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-17363 FILM NUMBER: 02827804 BUSINESS ADDRESS: STREET 1: 6431 W OAKTON CITY: MORTON GROVE STATE: IL ZIP: 60053 BUSINESS PHONE: 7089671010 MAIL ADDRESS: STREET 1: 6431 W OAKTON CITY: MORTON GROVE STATE: IL ZIP: 60053 10QSB 1 form10q_11600.txt FORM 10-QSB (QTR. ENDED SEPTEMBER 30, 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 September 30, 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 it charter) ILLINOIS 36-3442829 - ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 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 November 14, 2002, the issuer had 4,268,444 shares of common stock, no par value, outstanding. Transitional Small Business Disclosure Format (Check one): Yes [_] No [X] ================================================================================ INDEX PAGE ---- PART I - FINANCIAL INFORMATION.................................................3 ITEM 1. FINANCIAL STATEMENTS..........................................3 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 2002 AND 2001 AND DECEMBER 31, 2001..................................................................3 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 AND THE YEAR ENDED DECEMBER 31, 2001.....................................................4 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SEPTEMBER 30, 2002 AND DECEMBER 31, 2001.....................................................5 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS SEPTEMBER 30, 2002 AND 2001 AND DECEMBER 31, 2001..........6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................15 PART II - OTHER INFORMATION...................................................17 ITEM 1. LEGAL PROCEEDINGS............................................17 ITEM 2. CHANGES IN SECURITIES........................................17 ITEM 3. DEFAULTS UPON SENIOR SECURITIES..............................17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........17 ITEM 5. OTHER INFORMATION - NONE.....................................17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................18 SIGNATURES....................................................................19 -2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 2002 AND 2001 AND DECEMBER 31, 2001
SEPTEMBER 30, SEPTEMBER 30, 2002 2001 DECEMBER 31, (UNAUDITED) (UNAUDITED) 2001 ------------ ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 1,385,520 $ 415,731 $ 936,949 Marketable securities 4,902,476 5,403,173 5,754,986 Accounts receivable, net of allowance for doubtful accounts of $15,000 at September 30, 2002 and December 31, 2001 and $0 at September 30, 2001 1,558,312 1,498,505 1,316,626 Other receivables 70,083 27,278 52,602 Inventories 794,802 819,678 800,773 Prepaid expenses and other current assets 26,828 -- 33,686 Deferred income taxes 697,305 450,165 560,543 ------------ ------------ ------------ Total current assets 9,435,326 8,614,530 9,456,165 ------------ ------------ ------------ Property, plant, and equipment, net 4,587,013 4,981,216 5,020,865 ------------ ------------ ------------ Total assets $ 14,022,339 $ 13,595,746 $ 14,477,030 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of notes payable $ 63,432 $ 655,878 $ 90,249 Margin account -- -- 431,795 Accounts payable 629,563 506,116 543,401 Accrued expenses 206,065 224,716 163,715 Income taxes payable 278,884 203,021 144,916 ------------ ------------ ------------ Total current liabilities 1,177,944 1,589,731 1,374,076 ------------ ------------ ------------ Long-term liabilities 467,724 508,463 1,116,410 Deferred income taxes 421,344 397,178 436,265 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 (322,378) -- (287,033) Retained earnings 7,402,366 5,651,673 6,071,793 Accumulated other comprehensive loss, net of tax (1,618,928) (1,045,566) (728,748) ------------ ------------ ------------ Total stockholders' equity 11,955,327 11,100,374 11,550,279 ------------ ------------ ------------ Total liabilities and stockholders' equity $ 14,022,339 $ 13,595,746 $ 14,477,030 ============ ============ ============
See accompanying notes to financial statements. -3- LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 AND THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ------------------------------ YEAR ENDED SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, DECEMBER 31, 2002 2001 2002 2001 2001 ------------ ------------ ------------ ------------ ------------ Sales $ 3,074,987 $ 2,662,178 $ 8,965,423 $ 8,044,596 $ 10,683,983 Cost of goods sold 1,586,497 1,617,573 4,870,278 4,809,586 6,448,992 ------------ ------------ ------------ ------------ ------------ Gross profit 1,488,490 1,044,605 4,095,145 3,235,010 4,234,991 Operating expenses 749,984 692,755 2,132,695 2,119,699 2,797,747 ------------ ------------ ------------ ------------ ------------ Income from operations 738,506 351,850 1,962,450 1,115,311 1,437,244 ------------ ------------ ------------ ------------ ------------ Other income (expense): Interest and dividend income 67,188 57,418 157,825 180,109 232,173 Interest expense (19,314) (20,675) (58,645) (75,092) (107,425) Gain (loss) on sale of marketable securities, net (2,947) 58,282 36,391 171,917 249,522 ------------ ------------ ------------ ------------ ------------ Total other income 44,927 95,025 135,571 276,934 374,270 ------------ ------------ ------------ ------------ ------------ Income before provision for income taxes 783,433 446,875 2,098,021 1,392,245 1,811,514 Provision for income taxes 252,074 207,025 767,448 591,437 590,587 ------------ ------------ ------------ ------------ ------------ Net income 531,359 239,850 1,330,573 800,808 1,220,927 ============ ============ ============ ============ ============ Earnings per common share 0.12 0.06 0.31 0.19 0.28 ============ ============ ============ ============ ============ Weighted average shares outstanding 4,268,904 4,318,444 4,268,904 4,318,444 4,318,158 ============ ============ ============ ============ ============ COMPREHENSIVE INCOME Net income $ 531,359 $ 239,850 $ 1,330,573 $ 800,808 $ 1,220,927 Other comprehensive income (loss), net of tax: Unrealized losses on marketable securities (net of tax benefits) (96,142) (427,363) (793,332) (825,184) (537,505) Less reclassification adjustment for gains (losses) included in net income (98,833) (27,109) (96,848) (15,269) 13,870 ------------ ------------ ------------ ------------ ------------ Comprehensive income (loss) $ 366,384 $ (214,622) $ 440,393 $ (39,645) $ 697,292 ============ ============ ============ ============ ============
See accompanying notes to financial statements. -4- LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
Common Stock, No Par Value 10,000,000 Shares Accumulated Authorized # of Other ------------------------- Shares of Stock Treasury Comprehensive # of Shares # of Shares Treasury Common Subscription Stock, Retained Income, Issued Outstanding Stock Stock Receivable at Cost Earnings Net of Tax ----------- ----------- ---------- ----------- ----------- ----------- ----------- ----------- Balances at December 31, 2000 4,318,444 4,318,444 -- $ 6,509,267 $ (15,000) $ -- $ 4,850,866 $ (205,113) Other comprehensive income (loss): Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- -- -- -- -- (523,635) Purchase of Treasury Stock -- (45,000) 45,000 -- -- (287,033) -- -- Net income for the year ended December 31, 2001 -- -- -- -- -- -- 1,220,927 -- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ----------- Balances at December 31, 2001 4,318,444 4,273,444 45,000 6,509,267 (15,000) (287,033) 6,071,793 (728,748) Purchase of treasury stock -- (5,000) 5,000 -- -- (35,345) -- -- Other comprehensive income (loss): Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- -- -- -- -- (890,180) Net income for the nine months ended September 30, 2002 -- -- -- -- -- -- 1,330,573 -- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ----------- Balances at September 30, 2002 (Unaudited) 4,318,444 4,268,444 50,000 6,509,267 $ (15,000) $ (322,378) $ 7,402,366 $(1,618,928) =========== =========== ========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements -5- LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS SEPTEMBER 30, 2002 AND 2001 AND DECEMBER 31, 2001
(Unaudited) SEPTEMBER 30, ------------------------------ DECEMBER 31, 2002 2001 2001 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 1,330,573 $ 800,808 $ 1,220,927 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 606,735 571,168 777,350 Gain (loss) on sale of marketable securities, net (36,391) (171,917) (249,522) Deferred income taxes 735 57,468 47,952 Provision for doubtful accounts -- -- 15,000 (Increase) decrease in operating assets: Accounts receivable (241,686) (316,845) (149,966) Other receivables (17,481) (27,278) (52,602) Inventories 5,971 100,333 119,238 Prepaid expenses and other current assets 6,858 -- (33,686) Increase (decrease) in operating liabilities: Accounts payable 86,162 (11,509) 25,776 Accrued expenses 42,350 (17,754) (4,105) Income taxes payable 133,968 138,467 80,362 ------------ ------------ ------------ Net cash provided by operating activities 1,917,794 1,122,941 1,796,724 Cash flows from investing activities: Purchase of marketable securities (5,493,045) (7,437,318) (9,246,972) Sales of marketable securities 5,339,349 5,896,672 7,687,102 Purchases of property, plant and equipment (172,884) (532,769) (712,798) Change in margin account (431,795) -- 357,145 ------------ ------------ ------------ Net cash used in investing activities (758,375) (2,073,415) (1,915,523) Cash flows from financing activities: Repayment of notes payable (675,503) (70,836) (94,320) Purchase of treasury stock (35,345) -- (287,033) Net cash used in financing activities (710,848) (70,836) (381,353) Net increase (decrease) in cash and cash equivalents 448,571 (1,021,370) (500,152) Cash and cash equivalents at the beginning of the period 936,949 1,437,101 1,437,101 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 1,385,520 $ 415,731 $ 936,949 ============ ============ ============
See accompanying notes to financial statements -6- 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 nine months ended September 30, 2002 and 2001, export sales of the Company were approximately $154,000, $40,294, and $36,330, 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: -7- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 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 Protection Corporation. Bank balances of amounts reported by financial institutions are categorized as follows at September 30, 2002. Amounts insured $ 354,235 Uninsured and uncollateralized amounts 1,451,104 ------------- Total bank balances $ 1,805,339 ============= 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 period. -8- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 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. Advertising costs - ----------------- The Company expenses advertising costs as incurred. During the year 2001 and for the nine months ended September 30, 2002 and 2001, approximately $473,800, $297,185, and $344,578, respectively, were expensed. -9- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 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 September 30, 2002 Cost Gains Losses Value - ------------------ ------------ ------------ ------------ ------------ Equities - common $ 3,196,120 $ 7,941 $ (2,292,884) $ 911,177 Equities - preferred 125,000 -- (17,050) 107,950 Municipal bonds, maturing within five years 3,863,322 20,027 -- 3,883,349 ------------ ------------ ------------ ------------ Total $ 7,184,442 $ 27,968 $ (2,309,934) $ 4,902,476 ============ ============ ============ ============ Unrealized Unrealized Fair September 30, 2001 Cost Gains Losses Value - ------------------ ------------ ------------ ------------ ------------ Equities $ 6,994,605 $ 28,998 $ (1,550,230) $ 5,473,373 Options, maturing within one year (52,488) -- (17,712) (70,200) ------------ ------------ ------------ ------------ Total $ 6,942,117 $ 28,998 $ (1,567,942) $ 5,403,173 ============ ============ ============ ============ 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 ============ ============ ============ ============
-10- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 Proceeds from the sale of marketable securities were $7,687,102, $5,339,349, and $5,896,672 during the year 2001 and during the nine month periods ended September 30, 2002 and 2001, respectively. Gross gains of $249,522, $36,391, and $171,917, were realized on these sales during the year 2001 and for the nine months ended September 30, 2002 and 2001, respectively. Note 4 - INVENTORIES Inventories consist of the following: (Unaudited) September 30, ----------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ Finished goods $ 433,186 $ 427,021 $ 273,932 Production supplies 222,228 230,489 280,897 Raw materials 139,388 162,168 245,944 ------------ ------------ ------------ Total inventories $ 794,802 $ 819,678 $ 800,773 ============ ============ ============ Note 5 - PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of the following: (Unaudited) September 30, ----------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ Land $ 658,400 $ 658,400 $ 658,400 Buildings and improvements 2,743,593 2,679,885 2,727,986 Machinery and equipment 4,802,886 3,818,070 4,668,863 Vehicles 359,383 250,328 359,383 Office equipment 108,198 72,379 84,945 ------------ ------------ ------------ 8,672,460 8,253,746 8,499,577 Less accumulated depreciation 4,085,447 3,272,530 3,478,712 ------------ ------------ ------------ $ 4,587,013 $ 4,981,216 $ 5,020,865 ============ ============ ============ Depreciation expense during the year ended December 31, 2001 and for the nine months ended September 30, 2002 and 2001 was $777,350, $606,735, and $571,168, respectively. -11- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 Note 6 - NOTES PAYABLE Notes payable consist of the following:
(Unaudited) September 30, ----------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ Mortgage note payable to a bank, paid in full in 2002 $ -- $ 158,769 $ 155,506 Mortgage note payable to a bank, payable in monthly installments of $3,161 including interest at 7.25%. Collateralized by real estate -- 368,988 366,253 Note payable to a bank, paid in full in 2002 -- 7,628 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 483,868 628,432 614,779 Note payable to finance company -- 524 -- Notes payable to finance companies, payable in monthly installments of $1,851, including interest at 0%, due November 2004. Collateralized by vehicles 47,288 -- 63,952 ------------ ------------ ------------ Total notes payable 531,156 1,164,341 1,206,659 Less current maturities 63,432 655,878 90,249 ------------ ------------ ------------ Total long-term portion $ 467,724 $ 508,463 $ 1,116,410 ============ ============ ============
Maturities of notes payables are as follows: As of September 30, 2003 $ 63,432 2004 63,432 2005 44,922 2006 41,220 2007 318,150 --------- Total $ 531,156 ========= -12- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 Note 7 - PROVISION FOR INCOME TAXES The provision for income taxes consists of the following: (Unaudited) For the Nine Months Ended For the September 30, Year Ended ----------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ Current: Federal $ 618,335 $ 433,509 $ 435,620 State 148,378 100,460 107,015 ------------ ------------ ------------ Total current 776,713 533,969 542,635 Deferred 735 57,468 47,952 ------------ ------------ ------------ Provision for income taxes $ 767,448 $ 591,437 $ 590,587 ============ ============ ============ A reconciliation of the provision for income taxes and the income tax computed at the statutory rate are as follows: (Unaudited) For the Nine Months Ended For the September 30, Year Ended ----------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ Federal income tax expense computed at the statutory rate $ 671,367 $ 465,653 $ 570,953 State taxes, expense 152,946 99,963 132,240 Temporary book/tax differences Depreciation 39,152 -- (38,950) Other (38,001) -- (18,071) Permanent book/tax differences (58,016) 25,821 (55,585) ------------ ------------ ------------ Provision for income taxes $ 767,448 $ 591,437 $ 590,587 ============ ============ ============ -13- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 Amounts for deferred tax assets and liabilities are as follows: (Unaudited) September 30, ----------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ Non-current deferred tax liabilities arising from: Temporary differences - principally Book/tax, accumulated depreciation $ (421,344) $ (397,178) $ (436,265) Current deferred tax assets arising from: Book/tax, allowance for unrealized losses 953,038 448,845 510,620 Book/tax, inventory 34,267 -- 49,923 Book/tax, options -- (1,320) -- Valuation allowance (290,000) -- -- ------------ ------------ ------------ Total deferred tax assets 697,305 450,165 560,543 ------------ ------------ ------------ Net deferred tax asset (liability) $ 275,961 $ 52,987 $ 124,278 ============ ============ ============ The valuation allowance of $290,000, $0, and $0 as of September 30, 2002, September 30, 2001 and December 31, 2001, respectively, represents a provision for uncertainty as to the realization of deferred tax assets resulting from the increase in unrealized losses from marketable securities in the current period. Note 8 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes are as follows: (Unaudited) For the Nine Months For the Year Ended September 30, Ended ----------------------------- December 31, 2002 2001 2001 ------------ ------------ ------------ Interest $ 58,645 $ 75,092 $ 107,424 Income taxes $ 601,758 $ 395,502 $ 505,518 Non-cash investing and financing transactions during 2001 include the purchase of vehicles via notes payable for $65,802 and the refinancing of debt for $618,214. 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 September 30, 2002 and 2001. -14- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 September 30, 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 September 30, 2002: Carrying Fair Amount Value ------------ ------------ Cash and cash equivalents $ 1,385,520 $ 1,385,520 Marketable securities 4,902,476 4,902,476 Notes payable 531,156 553,976 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The third quarter was the first full quarter Lifeway Foods has operated under the new management of CEO Julie Smolyansky. The Company has achieved another record quarter for sales and showed exceptional gross and operating margin growth. Management implemented several cost cutting measures that helped push this operating margin growth. The Company also lowered its advertising expenses while at the same time sales increased for both the three months and nine months ended September 30, 2002. These factors, along with several other positive initiatives helped fuel the Company to record success. The following is a summary of the operations for the three months and nine months ended September 30, 2002. (1) Material Changes in Results of Operations Nine-month period ended September 30, 2002 compared to the nine-month period ended September 30, 2001 Sales increased by $920,827, up to $8,965,423 during the nine month period ended September 30, 2002, from $8,044,596 during the same nine month period in 2001 (an 11% increase). This increase is attributable to a vigorous yet cost effective marketing initiative undertaken by management. Even though sales increased by 11% from the nine-month period in 2001 to the nine-month period in 2002, the Company's advertising expenses decreased 14% for the same nine-month period. -15- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 Cost of goods sold, as a percentage of sales, were 54% for the nine-month period ended September 30, 2002, compared to 60% for the same nine-month period in 2001. This decrease is attributable to decreased costs in raw materials and production supplies. Operating expenses increased by $12,996, up to $2,132,695 for the nine-month period ended September 30, 2002, from $2,119,699 during the same period in 2001. Net income increased by $529,765, up to $1,330,573 for the nine-month period ended September 30, 2002, from $800,808 during the same nine-month period in 2001 (a 66% increase). Earnings per share for the nine months ended September 30, 2002 were $.31, compared to $.19 for the same nine-month period of 2001. Quarter ended September 30, 2002 compared to the quarter ended September 30, 2001. Sales increased by $412,809, up to $3,074,987 during the three month period ending September 30, 2002, from $2,662,178 during the same three month period in 2001 (a 16% increase). This increase is attributable to a vigorous yet cost effective marketing initiative undertaken by management. Cost of goods sold, as a percentage of sales were 51% for the three-month period ending September 30, 2002, compared to 61% for the same three-month period in 2001. The decrease was a result of the Company's successful renegotiation of its vendor contracts for raw materials and production supplies. Operating expenses increased by $57,229, or 8%, up to $749,984 for the three-month period ending September 30, 2002, from $692,755 during the same three-month period in 2001. Despite a 16% increase in production, operating expenses only increased by 8%. This is primarily attributable to several cost saving measures associated with production that were implemented by management. Net income increased by $291,509, up to $531,359 for the three-month period ending September 30, 2002, from $239,850 during the same three-month period in 2001 (a 121% increase). Earnings per share for the quarter ended September 30, 2002 were $.12, compared to $.06 for the same quarter of 2001. (2) Liquidity and Capital resources As of September 30, 2002, the Company had working capital in the amount of $8,257,382, compared to $7,024,799 as of September 30, 2001, an increase of $1,232,583. This increase is attributable to an increase in current assets and decrease in current liabilities as described below. -16- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 Total current liabilities as of September 30, 2002 were $1,177,944, a $411,787 decrease from $1,589,731 as of September 30, 2001. This decrease is primarily due to the repayment of mortgage notes payable due in 2002, and August 2003. Total current assets as of September 30, 2002 were $9,435,326, an $820,796 increase from $8,614,530 as of September 30, 2001. This increase is primarily due to an increase in cash and cash equivalents. The Company held marketable securities with a fair market value of $4,902,476 as of September 30, 2002. These marketable securities have a cost basis of $7,184,442 which represents $2,281,966 in unrealized losses (net of unrealized gains) as of September 30, 2002. Net cash provided by operating activities increased by $794,853 (or 70%) to $1,917,794 for the nine months ended September 30, 2002, from $1,122,941 for the same nine-month period in 2001. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 8, 2002, the court entered an order dismissing 19 of 20 counts against the Company in the lawsuit filed by Fresh Made, Inc. The Company continues to vigorously defend the remaining count. ITEM 2. CHANGES IN SECURITIES - None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None. ITEM 5. OTHER INFORMATION - None -17- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 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 3.4 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999 and filed 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 quarterly period ended September 30, 2000 and filed August 8, 2000.) 10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated September 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. -18- 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/ JULIE SMOLYANSKY ---------------------------------------- Julie Smolyansky Chief Executive Officer, Chief Financial and Accounting Officer, President, Treasurer and Director Date: November 14, 2002 CERTIFICATION Solely for the purposes of complying with, and to the extent required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies, in her capacity as an officer of Lifeway Foods, Inc. (the "Company"), that, to her knowledge, the Quarterly Report of the Company on Form 10-QSB for the period ended September 30, 2002, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in the report fairly presents, in all material respects, the Company's financial condition and results of operations. By: /s/ JULIE SMOLYANSKY ---------------------------------------- Julie Smolyansky Chief Executive Officer, Chief Financial and Accounting Officer, President, Treasurer and Director DATE: November 14, 2002 -19- -----END PRIVACY-ENHANCED MESSAGE-----