-----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, NYu/ShO1m/Q613EGlABWntAdjsj4OlS2Ky3KIL1FLJ/yjokqqwGuMZPxdLOlWoWX +/bgu6ypMy9FhmoHJq7g2w== 0001072613-05-001223.txt : 20050516 0001072613-05-001223.hdr.sgml : 20050516 20050516172248 ACCESSION NUMBER: 0001072613-05-001223 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050516 DATE AS OF CHANGE: 20050516 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: 05836125 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 form10qsb_13494.txt FORM 10QSB FOR PERIOD ENDED 3/31/05 ================================================================================ 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, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to __________ Commission file number: 0-17363 LIFEWAY FOODS, INC. - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in it charter) Illinois 36-3442829 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 6431 WEST OAKTON, MORTON GROVE, ILLINOIS 60053 - -------------------------------------------------------------------------------- (Address of principal executive offices) (847) 967-1010 - -------------------------------------------------------------------------------- (Issuer's telephone number) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of April 15, 2005, the issuer had 8,412,388 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 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........17 ITEM 3. CONTROLS AND PROCEDURES..........................................19 PART II - OTHER INFORMATION..................................................19 ITEM 5. OTHER INFORMATION.................................................19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................19 SIGNATURE....................................................................21 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004
(UNAUDITED) YEAR ENDED THREE MONTHS ENDED MARCH 31, DECEMBER 31, ---------------------------- ------------ 2005 2004 2004 ------------ ------------ ------------ ASSETS - ------ Current assets Cash and cash equivalents $ 5,434,032 $ 4,632,830 $ 5,773,285 Marketable securities 6,895,472 6,615,579 6,741,987 Accounts receivable, net of allowance for doubtful accounts of $15,000 at March 31, 2005 and 2004 and December 31, 2004 2,522,971 2,006,629 2,024,036 Other receivables 105,759 160,968 72,137 Inventories 996,245 795,370 905,697 Prepaid expenses and other current assets -- 5,485 7,260 Deferred income taxes 89,535 27,288 -- Refundable income taxes 103,451 343,023 258,617 ------------ ------------ ------------ TOTAL CURRENT ASSETS 16,147,465 14,587,172 15,783,019 PROPERTY AND EQUIPMENT, NET 3,432,149 3,617,411 3,420,138 Intangible assets Goodwill 75,800 -- 75,800 Other intangible assets, net of amortization of $43,185 and $26,990 at March 31, 2005 and December 31, 2004 392,815 -- 409,010 ------------ ------------ ------------ TOTAL INTANGIBLE ASSETS 468,615 -- 484,810 TOTAL ASSETS $ 20,048,229 $ 18,204,583 $ 19,687,967 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Current maturities of notes payable $ 8,934 $ 24,248 $ 8,784 Accounts payable 789,247 739,253 641,651 Accrued expenses 125,017 100,634 195,541 Deferred income taxes - current portion -- -- 36,214 ------------ ------------ ------------ TOTAL CURRENT LIABILITIES 923,198 864,135 882,190 NOTES PAYABLE 460,940 468,768 463,541 DEFERRED INCOME TAXES 406,468 448,590 424,039 STOCKHOLDERS' EQUITY Common stock 6,509,267 6,509,267 6,509,267 Paid-in-capital 72,089 -- 64,314 Stock subscription receivable -- (15,000) -- Treasury stock, at cost (870,831) (679,956) (649,039) Retained earnings 12,599,866 10,587,615 11,874,475 Accumulated other comprehensive income (loss), net of taxes (52,768) 21,164 119,180 ------------ ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 18,257,623 16,423,090 17,918,197 ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,048,229 $ 18,204,583 $ 19,687,967 ============ ============ ============
See accompanying notes to financial statements 3 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEAR ENDED DECEMBER 31, 2004
(UNAUDITED) YEAR ENDED THREE MONTHS ENDED MARCH 31, DECEMBER 31, ---------------------------- ------------ 2005 2004 2004 ------------ ------------ ------------ Sales $ 4,656,860 $ 3,935,079 $ 16,319,210 Cost of goods sold 2,577,956 2,099,198 9,034,971 ------------ ------------ ------------ GROSS PROFIT 2,078,904 1,835,881 7,284,239 Operating expenses 1,155,180 882,029 4,333,788 ------------ ------------ ------------ INCOME FROM OPERATIONS 923,724 953,852 2,950,451 Other income (expense): Interest and dividend income 65,276 41,124 185,575 Interest expense (7,442) (7,611) (31,441) Gain (loss) on sale of marketable securities, net 198,140 268,367 354,128 Gain (loss) on marketable securities classified as trading 3,516 -- (16,487) ------------ ------------ ------------ Total other income (expense) 259,490 301,880 491,775 ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 1,183,214 1,255,732 3,442,226 Provision for income taxes 457,823 490,533 1,390,167 ------------ ------------ ------------ NET INCOME $ 725,391 $ 765,199 $ 2,052,059 ============ ============ ============ BASIC AND DILUTED EARNINGS PER COMMON SHARE 0.09 0.09 0.24 ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,432,653 8,436,888 8,439,159 ============ ============ ============ COMPREHENSIVE INCOME - -------------------- NET INCOME $ 725,391 $ 765,199 $ 2,052,059 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on marketable securities (net of taxes) (56,722) 21,422 170,107 Less reclassification adjustment for (gains) losses included in net income (net of taxes) (115,226) (156,495) (207,164) ------------ ------------ ------------ COMPREHENSIVE INCOME $ 553,443 $ 630,126 $ 2,015,002 ============ ============ ============
See accompanying notes to financial statements 4 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND THE YEAR ENDED DECEMBER 31, 2004
COMMON STOCK, NO PAR VALUE 10,000,000 SHARES AUTHORIZED # OF SHARES --------------------------- OF # OF SHARES # OF SHARES TREASURY COMMON PAID IN ISSUED OUTSTANDING STOCK STOCK CAPITAL ------------ ------------ ------------ ------------ ------------ BALANCES AT DECEMBER 31, 2003 $ 8,636,888 $ 8,436,888 $ 200,000 $ 6,509,267 $ -- Issuance of treasury stock -- 4,550 (4,550) -- 64,314 Other comprehensive income: Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- -- -- Payment on subscription receivable -- -- -- -- -- Net income for the year ended December 31, 2004 -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCES AT DECEMBER 31, 2004 $ 8,636,888 $ 8,441,438 $ 195,450 $ 6,509,267 $ 64,314 Issuance of treasury stock -- 550 (550) -- 7,775 Redemption of stock -- (29,600) 29,600 -- -- Other comprehensive income: Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- -- -- Net income for the three months ended March 31, 2005 -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCES AT MARCH 31, 2005 (UNAUDITED) 8,636,888 8,412,388 224,500 $ 6,509,267 $ 72,089 ============ ============ ============ ============ ============ ACCUMULATED OTHER STOCK COMPREHENSIVE SUBSCRIPTION TREASURY RETAINED INCOME (LOSS), RECEIVABLE STOCK EARNINGS NET OF TAX TOTAL ------------ ------------ ------------ ------------ ------------ BALANCES AT DECEMBER 31, 2003 $ (15,000) $ (679,956) $ 9,822,416 $ 156,237 $ 15,792,964 Issuance of treasury stock -- 30,917 -- -- 95,231 Other comprehensive income: Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- (37,057) (37,057) Payment on subscription receivable 15,000 -- -- -- 15,000 Net income for the year ended December 31, 2004 -- -- 2,052,059 -- 2,052,059 ------------ ------------ ------------ ------------ ------------ BALANCES AT DECEMBER 31, 2004 $ -- $ (649,039) $ 11,874,475 $ 119,180 $ 17,918,197 Issuance of treasury stock -- 3,737 -- -- 11,512 Redemption of stock -- (225,529) -- -- (225,529) Other comprehensive income: Unrealized losses on securities, net of taxes and reclassification adjustment -- -- -- (171,948) (171,948) Net income for the three months ended March 31, 2005 -- -- 725,391 -- 725,391 ------------ ------------ ------------ ------------ ------------ BALANCES AT MARCH 31, 2005 (UNAUDITED) $ -- $ (870,831) $ 12,599,866 $ (52,768) $ 18,257,623 ============ ============ ============ ============ ============
See accompanying notes to financial statements 5 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEAR ENDED DECEMBER 31, 2004
(UNAUDITED) YEAR ENDED THREE MONTHS ENDED MARCH 31, DECEMBER 31, ---------------------------- ------------ 2005 2004 2004 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: - ------------------------------------- NET INCOME $ 725,391 $ 765,199 $ 2,052,059 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 140,742 155,905 669,994 Gain on sale of marketable securities, net (198,140) (268,367) (354,128) (Gain)/Loss on marketable securities classified as trading (3,516) -- 16,487 Deferred income taxes (22,343) 75,127 45,560 Treasury stock issued for services 11,512 -- 95,231 (Increase) decrease in operating assets: Accounts receivable (498,935) (206,488) (223,895) Other receivables (33,622) 4,799 93,630 Inventories (90,548) 16,202 (94,125) Refundable income taxes 155,166 (36,852) 47,554 Prepaid expenses and other current assets 7,260 (4,694) (6,469) Increase (decrease) in operating liabilities: Accounts payable 147,596 (56,069) (153,670) Accrued expenses (70,524) (82,966) 11,941 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 270,039 361,796 2,200,169 CASH FLOWS FROM INVESTING ACTIVITIES: - ------------------------------------- Purchase of marketable securities (1,910,623) (3,141,028) (6,265,671) Sales of marketable securities 1,665,869 2,862,610 6,096,652 Purchases of property and equipment (136,558) (40,585) (330,411) Acquisition of Ilya's Farms, Inc. net of assets acquired -- -- (511,800) ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (381,312) (319,003) (1,011,230) CASH FLOWS FROM FINANCING ACTIVITIES: - ------------------------------------- Proceeds from stock subscription receivable -- -- 15,000 Purchases of treasury stock (225,529) -- -- Repayment of notes payable (2,451) (7,782) (28,473) ------------ ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES (227,980) (7,782) (13,473) ------------ ------------ ------------ Net increase/(decrease) in cash and cash equivalents (339,253) 35,011 1,175,466 Cash and cash equivalents at the beginning of the period 5,773,285 4,597,819 4,597,819 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 5,434,032 $ 4,632,830 $ 5,773,285 ============ ============ ============
See accompanying notes to financial statements 6 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004 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 by distributors. The Company also distributes some of its products to Eastern Europe. During the year ended December 31, 2004 and for the three months ended March 31, 2005 and 2004, export sales of the Company were approximately $37,050, $0 and $221,000, respectively. On July 23, 2004, LFIE acquired certain assets and inventory of Ilya's Farms, Inc., a Pennsylvania corporation, for a total purchase price of $575,600. The asset acquisition included approximately $63,800 of tangible assets (including certain manufacturing equipment, a delivery truck and inventory) as well as intangible assets such as the brand name "Ilya's Farms" and the recipes and manufacturing processes previously used by Ilya's Farms, Inc. At present, LFIE manufactures and distributes certain cream cheese products under the brand names "Ilya's Farms" and under Lifeway Foods in the Philadelphia, Pennsylvania metropolitan area. 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, LFI Enterprises, Inc. All significant intercompany accounts and transactions have been eliminated. Use of estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition ------------------- Sales represent sales of Company produced dairy products that are recorded at the time of shipment. In addition, shipping costs invoiced to the customers are included in net sales and the related cost in cost of sales. 7 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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 and Philadelphia, Pennsylvania metropolitan areas. Deposits at each institution are insured up to $100,000 by the Federal Deposit Insurance Corporation or the Securities Investor Protector Corporation. Bank balances of amounts reported by financial institutions are categorized as follows:
(UNAUDITED) MARCH 31, DECEMBER 31, ----------------------- ----------- 2005 2004 2004 ---------- ---------- ----------- Amounts insured $ 500,000 $ 400,000 $ 472,341 Uninsured and uncollateralized amounts 5,303,533 4,337,104 5,456,188 ---------- ---------- ----------- Total bank balances $5,803,533 $4,737,104 $ 5,928,529 ========== ========== ===========
Marketable securities --------------------- Marketable securities are classified as available-for-sale or trading and are stated at fair value or quoted prices. Gains and losses related to marketable securities sold are determined by the specific identification method. Accounts receivable ------------------- Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. Accounts receivable are recorded at invoice amounts, and reduced to their estimated net realizable value by recognition of an allowance for doubtful accounts. The Company's estimate of the allowance for doubtful accounts is based upon historical experience, its evaluation of the current status of specific receivables, and unusual circumstances, if any. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company's credit terms. Accounts considered uncollectible are charged against the allowance. Inventories ----------- Inventories are stated at lower of cost or market, cost being determined by the first-in, first-out method. Property and equipment ---------------------- Property and equipment are stated at depreciated cost or fair value where depreciated cost is not recoverable. 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 8 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Intangible assets ----------------- The Company accounts for intangible assets at historical cost. Intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. Goodwill represents the excess purchase price over the fair value of the net tangible and other intangible assets acquired. Goodwill is not amortized. The Company amortizes other intangible assets over their estimated useful lives, as disclosed in the table below. Goodwill is reviewed for impairment at least annually. The Company will perform its annual impairment test on July 23 (or the first business day immediately following that date). Since the Company only has one reporting unit, the test is based on a fair value approach applied for the entire company. The Company will review intangible assets and their related useful lives at least once a year to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable. This review is called an impairment assessment. The Company will conduct more frequent impairment assessments if certain conditions exist, including: a change in the competitive landscape, any internal decisions to pursue new or different strategies, a loss of a significant customer, or a significant change in the market place including changes in the prices paid for the Company's products or changes in the size of the market for the Company's products. If the estimate of an intangible asset's remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. Intangible assets are being amortized over the following useful lives: CATEGORY YEARS -------------------------- --------- Recipes 4 Customer lists and other customer related intangibles 8 Lease agreement 7 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 and amortization methods for financial statement and tax purposes, unrealized gains or losses related to marketable securities, capitalization of indirect costs for tax purposes, and the recognition of an allowance for doubtful accounts for financial statement purposes. Treasury stock -------------- Treasury stock is recorded using the cost method. 9 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Advertising costs ----------------- The Company expenses advertising costs as incurred. During the years ended December 31, 2004 and for the three months ended March 31, 2005 and 2004, approximately $909,179, $272,191 and $214,581, of such costs 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 period. For all periods presented, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant. NOTE 3 - ACQUISITION OF ILYA'S FARMS, INC. On July 23, 2004, LFI Enterprises, Inc., an Illinois corporation and wholly owned subsidiary of Lifeway ("LFIE"), acquired certain assets of Ilya's Farms, Inc., a Pennsylvania corporation. The aggregate purchase price was $575,600, paid by LFIE in cash from its current assets. As a result of the acquisition LFIE now manufactures and distributes certain cream cheese products under the brand name "Ilya's Farms" in the Philadelphia, Pennsylvania metropolitan area. The results of operations of the acquired business have been included in the consolidated financial statements since the acquisition date. The following table summarizes the values of the assets and inventory acquired at the date of acquisition, July 23, 2004. ASSETS AND INVENTORY ACQUIRED VALUE ------------------------------ --------- Machinery and equipment $ 38,200 Inventory 25,600 Intangible assets 511,800 --------- Total aggregate purchase price $ 575,600 ========= Intangible assets, and the related accumulated amortization, consist of the following as of March 31, 2005: ACCUMULATED COST AMORTIZATION --------- ------------ Recipes $ 43,600 $ 7,267 Customer lists and other customer related intangibles 305,200 27,613 Lease acquisition 87,200 8,305 Goodwill 75,800 -- --------- ------------ $ 511,800 $ 43,185 ========= ============ 10 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004 NOTE 3 - ACQUISITION OF ILYA'S FARMS, INC. - CONTINUED Amortization expense is expected to be as follows for the 12 months ending March 31: 2006 $ 64,777 2007 64,777 2008 64,777 2009 60,235 2010 50,244 Thereafter 88,005 ---------- $ 392,815 ========== Amortization expense during the three months ended March 31, 2005 and year ended December 31, 2004 was $16,195 and $26,990. Goodwill amortization, for tax purposes, totaled $8,530 and $2,527 for the three months ended March 31, 2005 and year ended December 31, 2004. NOTE 4 - MARKETABLE SECURITIES The cost and fair value of marketable securities classified as available for sale and trading are as follows:
LOSS ON MARKETABLE SECURITIES UNREALIZED UNREALIZED CLASSIFIED FAIR MARCH 31, 2005 (UNAUDITED) COST GAINS LOSSES AS TRADING VALUE -------------------------- ------------ ------------ ------------ ------------ ------------ Equities and Mutual Funds $ 3,824,477 $ 152,989 $ (184,109) -- $ 3,793,357 Preferred Securities 65,000 200 (2,262) -- 62,938 Certificates of Deposit 150,000 -- (7,530) -- 142,470 Corporate Bonds 2,333,986 50 (49,948) -- 2,284,088 Municipal bonds, maturing within five years 24,875 715 -- -- 25,590 Government agency obligations, maturing after five years 600,000 -- -- (12,971) 587,029 ------------ ------------ ------------ ------------ ------------ Total $ 6,998,338 $ 153,954 $ 243,849 (12,971) $ 6,895,472 ============ ============ ============ ============ ============
11 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004 NOTE 4 - MARKETABLE SECURITIES - CONTINUED
LOSS ON MARKETABLE SECURITIES UNREALIZED UNREALIZED CLASSIFIED FAIR MARCH 31, 2004 (UNAUDITED) COST GAINS LOSSES AS TRADING VALUE -------------------------- ------------ ------------ ------------ ------------ ------------ Equities/Mutual Funds $ 3,718,091 $ 95,725 $ (62,081) $ -- $ 3,751,735 Preferred Securities 75,505 3,925 -- -- 79,430 Certificates of Deposit 150,000 -- (2,790) -- 147,210 Corporate Bonds 775,010 2,524 (160) -- 777,374 Municipal bonds, maturing within five years 907,244 4,544 (9) -- 911,779 Government agency Obligations, maturing After five years 953,234 -- (5,183) -- 948,051 ------------ ------------ ------------ ------------ ------------ Total $ 6,579,084 $ 106,718 $ (70,223) $ -- $ 6,615,579 ============ ============ ============ ============ ============ LOSS ON MARKETABLE SECURITIES UNREALIZED UNREALIZED CLASSIFIED FAIR DECEMBER 31, 2004 COST GAINS LOSSES AS TRADING VALUE ----------------- ------------ ------------ ------------ ------------ ------------ Equities and Mutual Funds $ 3,414,459 $ 341,230 $ (120,991) $ -- $ 3,634,698 Preferred Securities 65,000 596 -- -- 65,596 Certificates of Deposit 150,000 -- (4,935) -- 145,065 Corporate Bonds 1,639,275 -- (14,862) -- 1,624,413 Municipal bonds, maturing within five years 132,226 1,992 -- -- 134,218 Government agency obligations, maturing after five years 1,154,484 -- -- (16,487) 1,137,997 ------------ ------------ ------------ ------------ ------------ Total $ 6,555,444 $ 343,818 $ (140,788) $ (16,487) $ 6,741,987 ============ ============ ============ ============ ============
Proceeds from the sale of marketable securities were $6,096,652, $1,665,869 and $2,862,610 during the year ended December 31, 2004 and for the three months ended March 31, 2005 and 2004, respectively. 12 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004 NOTE 4 - MARKETABLE SECURITIES - CONTINUED Gross gains of $354,128, $198,140 and $268,367 were realized on these sales during the year ended December 31, 2004 and for the three months ended March 31, 2005 and 2004, respectively. NOTE 5 - INVENTORIES Inventories consist of the following: (UNAUDITED) MARCH 31, DECEMBER 31, --------------------------- ------------ 2005 2004 2004 ------------ ------------ ------------ Finished goods $ 444,519 $ 349,431 $ 404,206 Production supplies 326,986 232,432 297,791 Raw materials 224,740 213,507 203,700 ------------ ------------ ------------ Total inventories $ 996,245 $ 795,370 $ 905,697 ============ ============ ============ NOTE 6 - PROPERTY AND EQUIPMENT Property and equipment consist of the following: (UNAUDITED) MARCH 31, DECEMBER 31, --------------------------- ------------ 2005 2004 2004 ------------ ------------ ------------ Land $ 470,900 $ 470,900 $ 470,900 Buildings and improvements 2,483,007 2,459,090 2,481,257 Machinery and equipment 5,476,656 5,176,788 5,394,932 Vehicles 459,815 359,383 408,898 Office equipment 80,930 78,763 78,763 ------------ ------------ ------------ 8,971,308 8,544,924 8,834,750 Less accumulated depreciation 5,539,159 4,927,513 5,414,612 ------------ ------------ ------------ Total property and equipment $ 3,432,149 $ 3,617,411 $ 3,420,138 ============ ============ ============ Depreciation expense during the year ended December 31, 2004 and for the three months ended March 31, 2005 and 2004 was $643,004, $124,547 and $155,905, respectively. NOTE 7 - NOTES PAYABLE Notes payable consist of the following: (UNAUDITED) MARCH 31, DECEMBER 31, --------------------------- ------------ 2005 2004 2004 ------------ ------------ ------------ 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 $ 469,874 $ 479,054 $ 472,325 Notes payable to finance companies; paid in full November 2004 -- 13,962 -- ------------ ------------ ------------ Total notes payable 469,874 493,016 472,325 Less current maturities 8,934 24,248 8,784 ------------ ------------ ------------ Total long-term portion $ 460,940 $ 468,768 $ 463,541 ============ ============ ============ 13 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004 Maturities of notes payables are as follows: As of March 31, 2005 $ 8,934 2006 460,940 ------------ Total $ 469,874 ============ NOTE 8 - PROVISION FOR INCOME TAXES The provision for income taxes consists of the following: (UNAUDITED) FOR THE FOR THE THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, --------------------------- ------------ 2005 2004 2004 ------------ ------------ ------------ Current: Federal $ 384,812 $ 336,538 $ 1,084,557 State 95,354 78,868 260,050 ------------ ------------ ------------ Total current 480,166 415,406 1,334,607 Deferred (22,343) 75,127 45,560 ------------ ------------ ------------ Provision for income taxes $ 457,823 $ 490,533 $ 1,390,167 ============ ============ ============ A reconciliation of the provision for income taxes and the income tax computed at the statutory rate are as follows: (UNAUDITED) FOR THE FOR THE THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, --------------------------- ------------ 2005 2004 2004 ------------ ------------ ------------ Federal income tax expense computed at the statutory rate $ 372,925 $ 395,782 $ 1,084,921 State taxes, expense 86,375 91,668 251,283 Permanent book/tax differences (1,477) 3,083 53,963 ------------ ------------ ------------ Provision for income taxes $ 457,823 $ 490,533 $ 1,390,167 ============ ============ ============ 14 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004 Amounts for deferred tax assets and liabilities are as follows: (UNAUDITED) FOR THE FOR THE THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------------- ------------ 2005 2004 2004 ------------ ------------ ------------ Non-current deferred tax liabilities arising from: Temporary differences - principally Book/tax, accumulated depreciation $ (406,468) $ (448,590) $ (424,039) Current deferred tax liability arising from: Book/tax, unrealized losses (gains) on marketable securities 37,127 (15,072) (83,850) Current deferred tax assets arising from: Book/tax, inventory 52,408 42,360 47,636 ------------ ------------ ------------ Total current deferred tax assets (liabilities) 89,535 27,288 (36,214) ------------ ------------ ------------ Net deferred tax asset (liability)$ (316,933) $ (421,302) $ (460,253) ============ ============ ============ NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes are as follows: (UNAUDITED) FOR THE YEAR FOR THE THREE MONTHS ENDED ENDED MARCH 31, DECEMBER 31, --------------------------- ------------ 2005 2004 2004 ------------ ------------ ------------ Interest $ 7,442 $ 7,611 $ 31,441 Income taxes $ 325,372 $ 452,000 $ 1,298,348 NOTE 10 - 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 600,000 of the Company's common stock shares. Pursuant to such 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 468,000 shares available for issuance under the Plan at December 31, 2004 and at March 31, 2005 and 2004. The option price, number of shares, grant date, and vesting terms are determined at the discretion of the Company's Board of Directors. As of December 31, 2004 and at March 31, 2005 and 2004, there were no stock options outstanding or exercisable. 15 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 AND DECEMBER 31, 2004 NOTE 10 - STOCK OPTION PLANS - CONTINUED On February 12, 2004, Lifeway's Board of Directors approved awards of an aggregate amount of 5,100 shares to be awarded under its Employee and Consulting Services and Compensation Plan to certain employees and consultants for services rendered to the Company. The stock awards were made on April 1, 2004 and have vesting periods that vary from six months to one year, depending upon the individual grantee. The expense for the awards is measured as of April 1, 2004 at $20.93 per share for 5,100 shares, or a total stock award expense of $106,743. This expense is being recognized as the stock awards vest beginning with the recognition of $41,860 for 2,000 shares vested on April 1, 2004. There were a total of 4,550 vested shares resulting in a stock award expense of $95,231 for the year ended December 31, 2004, and an additional 550 shares vested during the quarter ended March 31, 2005 for an additional expense of $11,512. NOTE 11 - STOCK SPLIT On February 12, 2004, the Board of Directors of the Company declared a two-for-one stock split of the common stock of the Company payable on March 8, 2004 to all of the Company's shareholders of record as of February 27, 2004. As a result of the stock split, shareholders received two shares of common stock for every one share held on the record date. Upon completion of the split, the total number of shares of common stock outstanding increased from 4,218,444 to 8,436,888. The earnings per share calculations as presented on the consolidated statements of income and comprehensive income and the number of shares issued and outstanding per statement of changes in stockholders' equity have been adjusted to reflect split adjusted share amounts. NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of the Company's financial instruments is as follows at:
--------------------------- --------------------------- (UNAUDITED) MARCH 31, 2005 DECEMBER 31, 2004 --------------------------- --------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------ ------------ ------------ Cash and cash equivalents $ 5,434,032 $ 5,434,032 $ 5,773,285 $ 5,773,285 Marketable securities $ 6,895,472 $ 6,895,472 $ 6,741,987 $ 6,741,987 Notes payable $ 469,874 $ 466,069 $ 472,325 $ 469,696
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. NOTE 13 - PENDING LITIGATION On December 4, 2004 a former employee requested a Motion for Summary Judgment on the issue of Liability in a lawsuit filed against the Company by the former employee. The motion was granted on February 10, 2005 and on February 18, 2005 the case was referred to a Magistrate Judge for a settlement conference. The lawsuit alleges non payment of overtime wages in violation of federal employment laws, with an estimated amount between $7,500 and $15,000. The suit was filed in the United States District Court for the Northern District of Illinois on behalf of all employees who were classified as non-exempt during 2001 through 2003. Outside counsel for the company has advised that at this stage in the proceedings he cannot offer an opinion as to the probable outcome. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION COMPARISON OF QUARTER ENDED MARCH 31, 2005 TO QUARTER ENDED MARCH 31, 2004 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, 2004. RESULTS OF OPERATIONS Sales increased by $721,781 (approximately 18%) to $4,656,860 during the three month period ended March 31, 2005 from $3,935,079 during the same three month period in 2004. This increase is primarily attributable to increased sales and awareness of Lifeway existing drinkable dairy product, including La Fruta, and its flagship line, Kefir. Sav a Lot, which was one of Lifeway's largest customers, and accounted for $362,000 in sales in the first quarter 2004, ceased ordering in the second quarter of 2004, and therefore was absent from the first quarter of 2005. Lifeway's wholly-owned subsidiary, LFI Enterprises, Inc. ("LFIE") accounted for $213,644 of total sales revenues during the first quarter 2005. Of the total $213,644 revenues from LFIE, $97,275 was earned due to sales of Lifeway's Kefir and Farmer Cheese products sent from our Morton Grove, Illinois facility to Philadelphia, Pennsylvania for distribution in the tri-state area of Pennsylvania, New Jersey and New York. The remaining $116,369 of LFIE revenues for the first quarter 2005 were earned from sales of the Cream Cheese Gourmet line of products acquired from Ilya's Farms, Inc. in the third quarter of 2004. Cost of goods sold as a percentage of sales was approximately 55% during the first quarter 2005, compared to about 53% during the same period in 2004. This increase is directly related to the increased cost of milk during this period. The average cost of milk, Lifeway's largest cost of goods sold component, increased approximately 25% in the first quarter 2005 compared to the same period in 2004. Even though the price of milk experienced such a dramatic increase, Lifeway was able to maintain strong relative gross margins by more efficiently using our other material components. Operating expenses as a percentage of sales was approximately 25% during the first quarter 2005, compared to about 22% during the same period in 2004. This increase is primarily attributable to an overall increase in utility expenses and rising insurance and professional fees associated with the Sarbanes-Oxley Act of 2002 and other regulatory compliance requirements. Provision for income taxes was $457,823 during the first quarter 2005 compared with $490,533 during the same period in 2004. Income taxes are discussed in Note 8 of the Notes to Consolidated Financial Statements. SOURCES AND USES OF CASH Net cash used in financing activities was $227,980 during the quarter ended March 31, 2005, which is an increase of $220,198 compared to the same period in 2004. This increase is primarily attributable to the purchase of treasury stock. The Company purchased 29,600 shares of its treasury stock at a cost of $225,529 in the first quarter 2005. During the quarter ended March 31, 2005, Lifeway's cash used in investing activities totalled $381,312 due to a rebalancing of our portfolio in our continued efforts to move away from higher-risk securities towards large cap value, higher dividend yielding and tax-advantaged equities. Our efforts in this regard during the first calendar quarter of 2005 also are reflected by a gain of $198,140 on the sale of marketable securities evident on the Company's consolidated income statement, which appears in this quarterly report. We believe, given the current market conditions, this asset allocation strategy offers a positive risk-reward ratio for our Company. 17 A significant portion of our assets are held in marketable securities. The majority of our marketable securities are classified as available-for-sale on our balance sheet, while the mortgage-backed securities are classified as trading. All of these securities are stated thereon at market value as of the end of the applicable period. Gains and losses on the portfolio are determined by the specific identification method. We anticipate being able to fund the Company's foreseeable liquidity requirements internally. We continue to explore potential acquisition opportunities in our industry in order to boost sales while leveraging our distribution system to consolidate and lower costs. OTHER DEVELOPMENTS On February 12, 2004, Lifeway's Board of Directors approved awards of an aggregate amount of 5,100 shares to be awarded under its Employee and Consulting Services and Compensation Plan to certain employees and consultants for services rendered to the Company. The stock awards were made on April 1, 2004 and have vesting periods that vary from six months to one year, depending upon the individual grantee. The expense for the awards is measured as of April 1, 2004 at $20.93 per share for 5,100 shares, or a total stock award expense of $106,743. This expense will be recognized as the stock awards vest beginning with the recognition of $41,860 for 2,000 shares vested on April 1, 2004. An additional 2,000 shares of the total 5,100 vested in the third quarter of 2004. 550 shares vested in the fourth quarter of 2004. The remaining 550 shares vested in the first quarter of 2005 and resulted in an expense of $11,512. CRITICAL ACCOUNTING POLICIES Lifeway's analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. Lifeway chooses accounting policies within US GAAP that management believes are appropriate to accurately and fairly report Lifeway's operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions and has discussed the development and selection of critical accounting policies with its audit committee of the Board of Directors. For further information concerning accounting policies, refer to Note 2 -- Summary of Significant Accounting Policies in the notes to the consolidated financial statements. FORWARD LOOKING STATEMENTS In this report, in reports subsequently filed by Lifeway with the SEC on Form 10-QSB and filed or furnished on Form 8-K, and in related comments by management, our use of the words "believe," "expect," "anticipate," "estimate," "forecast," "objective," "plan," "goal," "project," "explore," "priorities/targets," and similar expressions is intended to identify forward-looking statements. While these statements represent our current judgment on what the future may hold, and we believe these judgments are reasonable, actual results may differ materially due to numerous important factors that are described in this report and other factors that may be described in subsequent reports which Lifeway may file with the SEC on Form 10-QSB and filed or furnished on Form 8-K, including but not limited to: o Changes in economic conditions, commodity prices; o Shortages of and price increase for fuel, labor strikes or work stoppages, market acceptance of the Company's new products; o Significant changes in the competitive environment; o Changes in laws, regulations, and tax rates; and o Management's ability to achieve reductions in cost and employment levels, to realize production efficiencies and to implement capital expenditures, all at of the levels and times planned by management. 18 ITEM 3. CONTROLS AND PROCEDURES The Chief Executive Officer and the Chief Accounting Officer conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of March 31, 2005. The Company has historically operated on strictly monitored cost constraints; with that perspective, the Chief Executive Officer and the Chief Accounting 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. However, based upon the Company's recent growth and improved cash position, as well as consultation with its auditors, management intends to implement additional procedures to improve internal controls over financial reporting in 2005. Specifically, an enhanced accounting software package has been identified and continues to be evaluated which will permit enhanced data recording and internal reporting as well as additional on-site accounting staff and some changes to the Company's internal control procedures over financial reporting. 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 5. OTHER INFORMATION On May 16, 2005, the Company announced its financial results for the fiscal quarter ended March 31, 2005 and certain other information. A copy of the Company's press release announcing these financial results and certain other information is attached as Exhibit 99.1 hereto. The information contained in Exhibit 99.1 hereto is being furnished, and should not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities imposed by that Section. The information contained in Exhibit 99.1 shall not be incorporated by reference into any registration statement or other document or filing under the Securities Act of 1933, as amended, except as may be expressly set forth in a specific filing. The press release filed as an exhibit to this report includes "safe harbor" language pursuant to the Private Securities Litigation Reform Act of 1995, as amended, indicating that certain statements about the Company's business and other matters contained in the press release are "forward-looking." The press release also cautions investors that "forward-looking" statements may be different from actual operating results. Finally, the press release states that a more thorough discussion of risks and uncertainties which may affect the Company's operating results is included in the Company's reports on file with the Securities and Exchange Commission. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit Number Description - ------ ----------- 3.4 Amended and Restated By-laws (incorporated by reference to Exhibit No. 3.5 of Lifeway's Current Report on Form 8-dated and filed on December 10, 2002). (File No. 000-17363) 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). (File No. 000-17363) 19 11 Statement re: Computation of per share earnings (incorporated by reference to Note 2 of the Consolidated Financil Statements). 31.1 Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky. 32.1 Section 1350 Certification of Julie Smolyansky. 32.2 Section 1350 Certification of Edward P. Smolyansky. 99.1 Press Release dated May 16, 2005- "Lifeway Foods, Inc. Reports First Quarter Results: Sales up 18%" (b) Reports on Form 8-K Current Report on Form 8-K dated January 13, 2005 and filed January 14, 2005 (File No 000-17363) 20 SIGNATURE In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 16, 2005 LIFEWAY FOODS, INC. By: /s/ Julie Smolyansky ------------------------------------- Julie Smolyansky Chief Executive Officer, President, and Director /s/ Edward P. Smolyansky ------------------------------------- Chief Financial and Accounting Officer and Treasurer 21 EXHIBIT INDEX ------------- Exhibit Number Description - ------ ----------- 31.1 Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky. 32.1 Section 1350 Certification of Julie Smolyansky. 32.2 Section 1350 Certification of Edward P. Smolyansky. 99.1 Press Release dated May 16, 2005- "Lifeway Foods Announces First Quarter Results." 22 EX-31.1 2 exh31-1_13494.txt 302 CERTIFICATION OF THE C.E.O. EXHIBIT 31.1 ------------ RULE 13A-14(A) / 15D-14(A) CERTIFICATION I, Julie Smolyansky, certify that: 1. I have reviewed this quarterly report of Lifeway Foods, Inc. on Form 10-QSB; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the liability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting presented. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; 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. Date: May 16, 2005 /s/ Julie Smolyansky ----------------------------------------- Julie Smolyansky, Chief Executive Officer, President, and Director EX-31.2 3 exh31-2_13494.txt 302 CERTIFICATION OF THE C.F.O. EXHIBIT 31.2 ------------ RULE 13A-14(A) / 15D-14(A) CERTIFICATION I, Edward P. Smolyansky, certify that: 1. I have reviewed this quarterly report of Lifeway Foods, Inc. on Form 10QSB; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the liability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting presented. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; 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. Date: May 16, 2005 /s/ Edward P. Smolyansky -------------------------------------- Chief Financial and Accounting Officer and Treasurer EX-32.1 4 exh32-1_13494.txt 906 CERTIFICATION OF THE C.E.O. EXHIBIT 32.1 ------------ SECTION 1350 CERTIFICATION I, Julie Smolyansky, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Lifeway Foods, Inc. (the "Company") on Form 10-QSB for three month period ended March 31, 2005: (1) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to such Form 10-QSB. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Date: May 16, 2005 /s/ Julie Smolyansky ----------------------------------------- Julie Smolyansky, Chief Executive Officer, President, and Director EX-32.2 5 exh32-2_13494.txt 906 CERTIFICATION OF THE C.F.O. EXHIBIT 32.2 ------------ SECTION 1350 CERTIFICATION I, Edward P. Smolyansky, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Lifeway Foods, Inc. (the "Company") on Form 10-QSB for three month period ended March 31, 2005: (1) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to such Form 10-QSB. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Date: May 16, 2005 /s/ Edward P. Smolyansky -------------------------------------- Chief Financial and Accounting Officer and Treasurer EX-99.1 6 exh99-1_13494.txt PRESS RELEASE DATED MAY 16, 2005 - ---------------------- LIFEWAY FOODS, INC. For Immediate Release - ---------------------- LIFEWAY FOODS, INC. REPORTS FIRST QUARTER RESULTS: SALES UP 18% Morton Grove, IL, May 16, 2005 - Lifeway Foods, Inc. (Nasdaq: LWAY) today reported financial results for the first quarter ended March 31, 2005. Lifeway reported record 1st quarter revenues of $4.66 million, up 18% from last year's first quarter revenues of $3.93 million. Excluding the one-time sales to the Sav-a-Lot account, which accounted for $362,000 in sales for first quarter 2004, the sales would have increased approximately 30 percent in 2005. Gross profit increased by 13% over the same time period. Net income was $725,391 or $.09 per split-adjusted share in 2005 versus a net income of $765,199 or $.09 per split-adjusted share in 2004. Contributing to the change in net income and earnings per share was a rise in legal and regulatory costs, as well as insurance and utility costs. Julie Smolyansky CEO states "In the first quarter we rolled out our full line of new packaging, and the results have been great as evident in our sales growth. "We feel very confident of the continued market penetration of our products, and the future success of Lifeway." Edward Smolyansky, CFO, commented, "We are extremely pleased with our first quarter results. The cost of milk, the largest component of our raw materials, increased approximately 25% in the first quarter 2005 from the same period a year ago. We feel comfortable we can continue to maintain strong margins even in the environment of high raw material prices, and an overall increase in the cost of doing business." "In addition, our cash flow from operations remains strong. We have finished our stock buyback, and our balance sheet continues to strengthen. We remained focused on creating shareholder value," added Smolyansky 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. LIFEWAY FOODS, INC. Condensed Statement of Income Three Months Ended MARCH 31, 2005 MARCH 31, 2004 ---------- ---------- Sales $4,656,860 $3,935,079 Cost of Goods Sold 2,577,956 2,099,198 ---------- ---------- Gross Profit 2,078,904 1,835,881 OPERATING EXPENSES 1,155,180 882,029 INCOME FROM OPERATIONS 923,724 953,852 INCOME BEFORE TAXES 1,183,214 1,255,732 Income taxes 457,823 490,533 ---------- ---------- NET INCOME $ 725,391 $ 765,199 EARNINGS PER SHARE $ .09 $ .09 ========== ========== WTG. AVE. SHARES 8,432,653 8,436,888 BALANCE SHEET THREE MONTHS ENDED MARCH 31, 2005 MARCH 31, 2004 ----------- ----------- CASH AND CASH EQUIVALENTS $ 5,434,032 $ 4,632,830 CURRENT ASSETS $16,147,465 $14,587,172 ----------- ----------- CURRENT LIABILITIES 923,198 864,135 STOCKHOLDERS EQUITY 18,257,623 16,423,090 -----END PRIVACY-ENHANCED MESSAGE-----