-----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, JDuMQczDx1eSU66FMkrsqABcb6PZgTDsqtd5csdBZ8G/GIWV6QPiuMP8dHSbOzxb 0FOtUMIPlflRCkzFzCvLog== 0001072613-03-000844.txt : 20030515 0001072613-03-000844.hdr.sgml : 20030515 20030515164817 ACCESSION NUMBER: 0001072613-03-000844 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 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: 03705717 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 form10-qsb_11953.txt LIFEWAY FOODS, INC. FORM 10-QSB ================================================================================ 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, 2003 [ ] 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 (IRS Employer of 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) 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 14, 2003, the issuer had 4,218,444 shares of common stock, no par value, outstanding. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] ================================================================================ INDEX PART I - FINANCIAL INFORMATION.................................................3 ITEM 1. FINANCIAL STATEMENTS.................................................3 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, 2003 AND 2002 AND DECEMBER 31, 2002...................3 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 AND THE YEAR ENDED DECEMBER 31, 2002.............................4 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY MARCH 31, 2003 AND........................5 DECEMBER 31, 2002.........................................................5 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS MARCH 31, 2003 AND 2002 AND DECEMBER 31, 2002.......................6 LIFEWAY FOODS, INC. AND SUBSIDIARY........................................7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 AND 2002........7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................13 ITEM 3. CONTROLS AND PROCEDURES..............................................14 PART II - OTHER INFORMATION...................................................14 ITEM 1. LEGAL PROCEEDINGS.................................................14 ITEM 2. CHANGES IN SECURITIES.............................................14 ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............14 ITEM 5. OTHER INFORMATION.................................................14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................16 SIGNATURES AND CERTIFICATIONS.................................................17 -2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, 2003 AND 2002 AND DECEMBER 31, 2002
(Unaudited) March 31, December 31, ------------------------------ ------------ 2003 2002 2002 ------------ ------------ ------------ ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 2,787,724 $ 1,160,120 $ 2,731,656 Marketable securities 5,643,829 5,155,707 4,171,594 Accounts receivable, net of allowance for doubtful accounts of $15,000 at March 31, 2003, March 31, 2002 and December 31, 2002 1,730,870 1,468,561 1,435,221 Other receivables 58,380 58,380 60,251 Inventories 773,684 859,261 720,503 Prepaid expenses and other current assets 3,969 33,550 1,276 Deferred income taxes 439,754 719,411 692,262 ------------ ------------ ------------ TOTAL CURRENT ASSETS 11,438,210 9,454,990 9,812,763 PROPERTY, PLANT, AND EQUIPMENT, NET 3,903,407 4,865,456 4,472,349 ------------ ------------ ------------ TOTAL ASSETS $ 15,341,617 $ 14,320,446 $ 14,285,112 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Current maturities of notes payable $ 31,271 $ 74,150 $ 31,128 Margin account -- 198,107 -- Accounts payable 698,259 603,418 639,398 Accrued expenses 154,587 166,125 183,528 Income taxes payable 249,694 124,725 397,907 ------------ ------------ ------------ TOTAL CURRENT LIABILITIES 1,133,811 1,166,525 1,251,961 NOTES PAYABLE 492,502 955,549 500,377 DEFERRED INCOME TAXES 407,920 462,797 452,856 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) (319,478) (679,956) Retained earnings 8,593,750 6,519,351 7,600,477 Accumulated other comprehensive loss, net of tax (1,100,677) (958,565) (1,334,870) ------------ ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 13,307,384 11,735,575 12,079,918 ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,341,617 $ 14,320,446 $ 14,285,112 ============ ============ ============
-3- LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 AND THE YEAR ENDED DECEMBER 31, 2002
(Unaudited) March 31, December 31, ------------------------------ ------------ 2003 2002 2002 ------------ ------------ ------------ SALES $ 3,308,557 $ 2,887,853 $ 12,212,236 Cost of goods sold 1,825,956 1,523,281 6,744,086 ------------ ------------ ------------ GROSS PROFIT 1,482,601 1,364,572 5,468,150 Operating expenses 844,621 648,540 2,890,504 ------------ ------------ ------------ INCOME FROM OPERATIONS 637,980 716,032 2,577,646 Other income (expense): Interest and dividend income 33,447 37,274 187,358 Interest expense (7,644) (20,091) (74,675) Gain (Loss) on sale of marketable securities, net (346,556) 36,020 17,554 Gain on sale of Assets 1,246,287 -- -- Other than temporary reductions of marketable securities -- -- (235,861) ------------ ------------ ------------ Total other income (expense) 925,534 53,203 (105,624) ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 1,563,514 769,235 2,472,022 Provision for income taxes 570,241 321,677 943,338 ------------ ------------ ------------ NET INCOME $ 993,273 $ 447,558 $ 1,528,684 ============ ============ ============ EARNINGS PER COMMON SHARE 0.24 0.10 0.36 ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,218,444 4,269,736 4,265,761 ============ ============ ============ COMPREHENSIVE INCOME - -------------------- NET INCOME $ 993,273 $ 447,558 $ 1,528,684 Other comprehensive income (loss), net of tax: Unrealized losses on marketable securities (net of tax benefits of $55,882, $168,480 and $50,574) 30,450 (235,592) (716,160) Less reclassification adjustment for gains included in net income 203,743 5,775 110,038 ------------ ------------ ------------ COMPREHENSIVE INCOME $ 1,227,466 $ 217,741 $ 922,562 ============ ============ ============
-4- LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY MARCH 31, 2003 AND DECEMBER 31, 2002
COMMON STOCK, NO PAR VALUE 10,000,000 SHARES # OF ACCUMULATED AUTHORIZED SHARES OTHER ---------------------- OF STOCK COMPREHENSIVE # OF SHARES # OF SHARES TREASURY COMMON SUBSCRIPTION TREASURY RETAINED INCOME, ISSUED OUTSTANDING STOCK STOCK RECEIVABLE STOCK EARNINGS NET OF TAX ---------- ---------- --------- ---------- --------- ---------- ---------- ----------- 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) Other comprehensive income: Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- -- -- -- -- (606,122) Purchase of Treasury Stock -- (55,000) 55,000 -- -- (392,923) -- -- Net income for the year ended December 31, 2002 -- -- -- -- -- -- 1,528,684 -- ---------- ---------- --------- ---------- --------- ---------- ---------- ----------- BALANCES AT DECEMBER 31, 2002 4,318,444 4,218,444 100,000 $6,509,267 $ (15,000) $ (679,956) $7,600,477 $(1,334,870) Other comprehensive income: Unrealized gains on securities, net of taxes and reclassification adjustment -- -- -- -- -- -- -- 234,193 Net income for the three months ended March 31, 2003 -- -- -- -- -- -- 993,273 -- ---------- ---------- --------- ---------- --------- ---------- ---------- ----------- BALANCES AT MARCH 31, 2003 (UNAUDITED) 4,318,444 4,218,444 100,000 $6,509,267 $ (15,000) $ (679,956) $8,593,750 $(1,100,677) ========== ========== ========= ========== ========= ========== ========== ===========
-5- LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS MARCH 31, 2003 AND 2002 AND DECEMBER 31, 2002
(Unaudited) March 31, March 31, December 31, ------------------------------ ------------ 2003 2002 2002 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: - ------------------------------------- NET INCOME $ 993,273 $ 447,558 $ 1,528,684 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 165,211 204,201 807,680 Gain (Loss) on sale of marketable securities, net 346,556 (36,020) (17,554) Gain on sales of Assets (1,246,287) Other than temporary reductions of marketable securities -- -- 235,861 Deferred income taxes 43,454 (27,381) (64,581) (Increase) decrease in operating assets: Accounts receivable (295,649) (151,935) (118,595) Other receivables 1,871 (5,778) (7,649) Inventories (53,181) (58,488) 80,270 Prepaid expenses and other current assets (2,693) 136 32,410 Increase (decrease) in operating liabilities: Accounts payable 58,861 60,017 95,997 Accrued expenses (28,941) 2,410 19,813 Income taxes payable (148,213) (20,191) 252,991 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES (165,738) 414,529 2,845,327 CASH FLOWS FROM INVESTING ACTIVITIES: - ------------------------------------- Purchase of marketable securities (2,029,176) (328,717) (3,316,411) Sales of marketable securities 608,696 574,482 4,024,827 Sales of Assets 1,712,659 -- -- Purchases of property, plant and equipment (62,641) (48,792) (259,164) Change in margin account -- (233,688) (431,795) ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 229,538 18,047 17,457 CASH FLOWS FROM FINANCING ACTIVITIES: - ------------------------------------- Repayment of notes payable (7,732) (176,960) (675,154) Purchase of treasury stock -- (32,445) (392,923) ------------ ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES (7,732) (209,405) (1,068,077) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 56,068 223,171 1,794,707 Cash and cash equivalents at the beginning of the period 2,731,656 936,949 936,949 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,787,724 $ 1,160,120 $ 2,731,656 ============ ============ ============
-6- LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 AND 2002 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 ended December 31, 2002 and for the three months ended March 31, 2003 and 2002, export sales of the Company were approximately $123,700, $58,075, and $19,867, 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. In January 2003, the Company sold the building and the land that housed LFIE for $1,800,000 and recognized a gain of $1,246,287 on this transaction 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 consolidated 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 banking institution are insured up to $100,000 by the Federal Deposit Insurance Corporation and deposits at each non-banking financial services institution are insured by the Securities Investor Protection Corporation. Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Bank balances of amounts reported by financial institutions are categorized as follows at March 31, 2003. Amounts insured $ 400,000 Uninsured and uncollateralized amounts 2,553,294 ----------- Total bank balances $ 2,953,294 =========== -7- 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. Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Treasury stock - -------------- Treasury stock is recorded using the cost method. Advertising costs - ----------------- The Company expenses advertising costs as incurred. During the year 2002 and for the three months ended March 31, 2003 and 2002, approximately $422,800, $199,534, and $71,700, 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 the year ended December 31, 2002 and the three months ended March 31, 2003 and 2002, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant. -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, 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 =========== =========== =========== =========== (Unaudited) 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 =========== =========== =========== =========== (Unaudited) Unrealized Unrealized Fair December 31, 2002 Cost Gains Losses Value - ----------------- ----------- ----------- ----------- ----------- Equities $ 3,055,406 $ 361 $(1,892,469) $ 1,163,298 Preferred securities 125,000 -- (15,210) 109,790 Municipal bonds, maturing within five years 2,887,226 11,280 -- 2,898,506 ----------- ----------- ----------- ----------- Total $ 6,067,632 $ 11,641 $(1,907,679) $ 4,171,594 =========== =========== =========== ===========
At December 31, 2002, certain securities were written down to their estimated realizable values, because, in the opinion of management, the decline in market value of those securities was considered to be other than temporary. Proceeds from the sale of marketable securities were $4,024,827, $608,696, and $574,482 during the year 2002 and for the three months ended March 31, 2003 and 2002, respectively. Gross gains (losses) of $17,554, $(346,556), and $36,020, were realized on these sales during the year ended December 31, 2002 and for the three months ended March 31, 2003 and 2002, respectively. -9- Note 4 - INVENTORIES Inventories consist of the following: (Unaudited) March 31, ---------------------------- December 31, 2003 2002 2002 ---------- ---------- ---------- Finished goods $ 190,947 $ 157,244 $ 362,550 Production supplies 259,715 241,451 213,841 Raw materials 323,022 460,566 144,112 ---------- ---------- ---------- Total inventories $ 773,684 $ 859,261 $ 720,503 ========== ========== ========== Note 5 - PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of the following: (Unaudited) March 31, ---------------------------- December 31, 2003 2002 2002 ---------- ---------- ---------- Land $ 658,400 $ 658,400 $ 470,900 Buildings and improvements 2,385,495 2,731,070 2,798,436 Machinery and equipment 4,868,390 4,714,571 4,834,323 Vehicles 359,383 359,383 359,383 Office equipment 67,783 84,945 108,199 ---------- ---------- ---------- Subtotal 8,151,951 8,758,741 8,548,369 Less accumulated depreciation 4,248,544 3,682,913 4,286,392 ---------- ---------- ---------- Total $4,865,456 $4,472,349 $3,903,407 ========== ========== ========== Depreciation expense during the year ended December 31, 2002 and for the three months ended March 31, 2003 and 2002 was $807,680, $165,212, and $204,201, respectively. Note 6 - NOTES PAYABLE Notes payable consist of the following:
(Unaudited) March 31, ------------------------- December 31, 2003 2002 2002 ---------- ---------- ---------- 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 487,593 363,391 489,770 Mortgage note payable to a bank. Paid in full -- 607,910 --
-10- Note 6 - NOTES PAYABLE - continued
(Unaudited) March 31, ---------------------------- December 31, 2003 2002 2002 ---------- ---------- ---------- Notes payable to finance companies, payable in monthly installments of $1,851, including interest at 0%, due November 2004. Collateralized by vehicles 36,180 58,398 41,735 ---------- ---------- ---------- Total notes payable 523,773 531,505 1,029,699 Less current maturities 31,271 74,150 31,128 ---------- ---------- ---------- Total long-term portion $ 492,502 $ 955,549 $ 500,377 ========== ========== ==========
Maturities of notes payables are as follows: As of March 31, 2004 $ 31,271 2005 23,598 2006 10,256 2007 458,648 Total $523,773 Note 7 - PROVISION FOR INCOME TAXES The provision for income taxes consists of the following: (Unaudited) For the Three Months Ended For the March 31, Year Ended ------------------------------ December 31, 2003 2002 2002 ----------- ----------- ----------- Current: Federal $ 427,825 $ 239,247 $ 815,764 State 98,962 55,049 192,155 ----------- ----------- ----------- Total current 526,787 294,296 1,007,919 Deferred 43,454 27,381 (64,581) ----------- ----------- ----------- Provision for income taxes $ 570,241 $ 321,677 $ 943,338 =========== =========== =========== 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, 2003 2002 2002 ---------- ---------- ---------- Federal income tax expense $ 531,594 $ 261,540 $ 840,487 computed at the statutory rate State taxes, expense 112,572 55,385 177,986 Temporary book/tax differences Depreciation (44,936) 9,445 15,893 Other than temporary reductions on marketable securities -- -- 97,175 Other (8,784) (12,143) (15,538) Permanent book/tax differences (20,205) 7,450 (172,665) ---------- ---------- ---------- Provision for income taxes $ 570,241 $ 321,677 $ 943,338 ========== ========== ==========
-11- Note 7 - PROVISION FOR INCOME TAXES - continued Amounts for deferred tax assets and liabilities are as follows:
(Unaudited) For the Three Months For the Year Ended March 31, Ended ----------------------------- December 31, 2003 2002 2002 ---------- ---------- ---------- Non-current deferred tax liabilities arising from: Temporary differences - principally Book/tax, accumulated depreciation $ (407,920) $ (462,797) $ (452,856) Current deferred tax assets arising from: Book/tax, allowance for unrealized losses 617,050 670,337 781,167 Book/tax, other than temporary reductions on marketable securities -- -- 97,175 Book/tax, other 42,704 49,074 33,920 Less: valuation allowance (220,000) -- (220,000) ---------- ---------- ---------- Total deferred tax assets 439,754 719,411 692,262 ---------- ---------- ---------- Net deferred tax asset $ 31,834 $ 256,614 $ 239,406 ========== ========== ==========
Note 8 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes are as follows: (Unaudited) For the Three Months For the Year Ended March 31, Ended ---------------------------- December 31, 2003 2002 2002 ---------- ---------- ---------- Interest $ 7,643 $ 20,091 $ 74,675 Income taxes $ 675,000 $ 308,000 $ 787,522 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 shares of the Company's common stock. 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 December 31, 2002 and at March 31, 2003 and 2002. The option price, number of shares, grant date, and vesting terms of any options granted or shares issued are determined at the discretion of the Company's Board of Directors. As of December 31, 2002, March 31, 2003 and 2002, there were no stock options outstanding or exercisable. -12- 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, 2003: Carrying Fair Amount Value ------------------ ------------------ Cash and cash equivalents $ 2,787,724 $ 2,787,724 Marketable securities $ 5,643,829 $ 5,643,829 Notes payable $ 523,773 $ 553,517 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 Comparison of quarter ended March 31, 2003 to quarter ended March 31, 2002 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, for the fiscal year ended December 31, 2002. RESULTS OF OPERATIONS Sales increased by $420,704 (approximately 15%) to $3,308,557 during the three month period ended March 31, 2003 from $2,887,853 during the same three month period in 2002. This increase in sales was primarily attributable to increased advertising of existing products. Other income increased by $873,331 to $925,534 during the three month period ended March 31, 2003 from $52,203 during the same three month period in 2002. This increase was primarily attributable to a 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 2002, 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. Net income increased by $545,715 (approximately 122%) up to $993,273 for the three month period ended March 31, 2003 from $447,558 during the same three month period in 2002. Contributing to this increase were the previously discussed sale of real property offset by a change in the loss on sale of marketable securities, net. Cost of goods sold as a percentage of sales was 55% for the three months ended March 31, 2003, compared to 53% for the same three month period in 2002. Cost of goods sold increased by $302,675 to $1,825,956 during the three month period ending March 31, 2003 (approximately 20%) from $1,523,281during the same three month period in 2002. This increase was primarily due to increased costs of raw materials. Operating expenses increased by $196,081 (or approximately 30%) to $844,621 for the three month period ending March 31, 2003, up from $648,540 during the same three month period in 2002. This increase was primarily attributable to an increase in advertising expenses incurred ($199,534 versus $71,700) and increased cost of utilities. Earnings per share for the quarter ended March 31, 2003 were $.24, compared to $.10 for the same quarter of 2002 reflecting the impact of the sale of real property as well as the recognized loss on market securities, net. -13- LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2003, the Company had working capital in the amount of $10,304,399, cash and cash equivalents in the amount of $2,787,724, and marketable securities of $5,643,829. The Company expects all cash requirements to be met internally for the next 12-month period. Net cash used in operating activities decreased by $165,738, for the three months ended March 31, 2003. This decrease reflects the gain on the disposition of real property. Substantially all of the cash from the sale of the real property was invested in certificates of deposit and other cash equivalents as evidenced in the change in the purchase of marketable securities line item. Net cash provided by investing activities increased by $229,538 for the three months ended March 31, 2003. This increase was attributable to the sale of the real property and investment of substantially all of the proceed of that sale in cash equivalents. Net cash used in financing activities decreased by $7,732 for the three months ended March 31, 2003 compared to a decrease of $209,405 for the same three month period in 2002. This decrease was primarily attributable to the fact that the Company has repaid some of its notes payable since March 31, 2002. The Company held marketable securities with a fair market value of $5,643,829 as of March 31, 2003. These marketable securities have a cost basis of $7,141,525, which represents $1,497,695 in unrealized losses (net of unrealized gains) as of March 31, 2003. 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. ITEM 3. CONTROLS AND PROCEDURES The Chief Executive 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 within 90 days of filing this report. While the Company has limited resources and cost constraints, based on that evaluation, 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 them. 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 1. LEGAL PROCEEDINGS None. 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 -14- On May 15, 2003, the Company announced its financial results for the fiscal quarter ended March 31, 2003 and certain other information. A copy of the Company's press release announcing these financial results and certain other information is attached as Exhibit 99.2 hereto. 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. -15- 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). 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. 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). 21.2 List of Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 21.2 of Lifeway's Annual Report on Form 10-KSB for the year ended December 31, 1998 and filed on March 31, 1999). 99.2 Press Release dated May 15, 2003 regarding earnings for the quarter ended March 31, 2003. (b) Reports on Form 8-K. None. -16- SIGNATURES AND CERTIFICATIONS CERTIFICATION I, Julie Smolyansky, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Lifeway Foods, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Julie Smolyansky ---------------------------------------- Julie Smolyansky Chief Executive Officer, Chief Financial and Accounting Officer, President, Treasurer and Director -17- CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 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 March 31, 2003, 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. /s/ Julie Smolyansky ---------------------------------------- Julie Smolyansky Chief Executive Officer, Chief Financial and Accounting Officer, President, Treasurer and Director Date: May 15, 2003 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. LIFEWAY FOODS, INC. By: /s/ Julie Smolyansky ---------------------------------------- Julie Smolyansky Chief Executive Officer, Chief Financial and Accounting Officer, President, Treasurer and Director Date: May 15, 2003 -18- EX-10.14 3 ex10-14_11953.txt FIRST AMENDMENT TO SUPPORT AGREEMENT EXHIBIT 10.14 ------------- FIRST AMENDMENT TO SUPPORT AGREEMENT WITH THE DANNON COMPANY, INC. FIRST AMENDMENT TO SUPPORT AGREEMENT ------------------------------------ THIS FIRST AMENDMENT TO SUPPORT AGREEMENT, effective as of the 1st day of January, 2003 ("Effective Date"), by and between The Dannon Company, Inc. ("Dannon"), with its principal place of business at 120 White Plains Road, Tarrytown, NY 10591 and Lifeway Foods, Inc. ("Lifeway") with its principal place of business at 6431 W. Oakton, Morton Grove, IL 60053; WHEREAS, Dannon and Lifeway have previously entered into a Support Agreement dated December 24, 1999, for various services in connection with a purchase of shares in Lifeway by Dannon; and NOW THEREFORE, in consideration of the mutual covenants and promises set forth between the parties, and for other good and valuable consideration, the receipt of which is hereby acknowledged, Dannon and Lifeway hereby covenant and agree with the other as follows: 1. The Term of the Support Agreement shall be extended for one (1) year. The extension period commences January 1, 2003, and ends December 31, 2003, with all provisions of the Support Agreement remaining in full force and effect unless otherwise modified in writing signed by the Parties. IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Support Agreement as of the Effective Date. THE DANNON COMPANY, INC. LIFEWAY FOODS, INC. By: /s/ Thomas Kunz By: /s/ Julie Smolyansky ------------------------------ ------------------------------ Title: President Title: President & CEO --------------------------- --------------------------- Date: 2/11/2003 Date: 2/11/2003 ---------------------------- ---------------------------- EX-99.2 4 ex99-2_11953.txt PRESS RELEASE DATED MAY 15, 2003 EXHIBIT 99.2 ------------ PRESS RELEASE DATED MAY 15, 2003 Lifeway Foods, Inc. For Immediate Release Lifeway Foods, Inc. Reports Record First Quarter Results: Net Income Up 122% - ---------------------------------------------------------------------------- Morton Grove, IL, May 15, 2003 - Lifeway Foods, Inc. (Nasdaq: LWAY) today reported financial results for the first quarter ended March 31, 2003. Lifeway reported record revenues of $3.30 million, up 15 percent from last year's first quarter revenues of $2.89 million. Net income rose 122% to $993,273 or $.24 per share versus a net income of $447,558 or $.10 in 2002. Contributing to the change in net income and earnings per share was a non-recurring gain of about $1,246,287 from the disposition of real property and a change in the loss from the sales of marketable securities approximately equal to $382,576. Julie Smolyansky, President and CEO, commented, "We are extremely pleased with our first quarter results. Our sales continue to be strong and we continue to surpass our growth targets. In addition, we continue to penetrate the mainstream market with our staple products, and have seen much improved growth of our newer products such as SoyTreat(R), Organic Kefir, and especially, La Fruta. Smolyansky added, "With the addition of the new and improved packaging for our beverages coming in the later months, we feel even more confident that we can surpass our goals and achieve record revenues and profits for the current 2003 year." Lifeway is a manufacturer of cultured, probiotic and functional food products in the health food industry, and is America's leading supplier of the cultured dairy product known as kefir. The Company markets 12 flavors of kefir and does a successful business exporting its products to Canada. The Company also participates in the organic and soy markets with Lifeway OrganicTM, Organic Kefir and Kefir Cheese, and America's first soy kefir, called SoyTreat(R). For more information, contact Julie Smolyansky, President, Lifeway Foods, Inc. at (847) 967-1010 or e-mail at info@lifeway.net or visit www.lifeway.net. This news release contains forward-looking statements. Investors are cautioned that actual results may differ materially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, competitive pressures and other important factors detailed in the Company's reports filed with the Securities and Exchange Commission. -----END PRIVACY-ENHANCED MESSAGE-----