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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number: 0-17363
LIFEWAY FOODS, INC.
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(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 August 12, 2004, the issuer had
8,438,888 shares of common stock, no par value, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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INDEX
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1. FINANCIAL STATEMENTS...............................................3
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF
JUNE 30, 2004 AND 2003 AND DECEMBER 31, 2003............................3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004
AND 2003 AND THE YEAR ENDED DECEMBER 31, 2003...........................4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX
MONTHS ENDED JUNE 30, 2004 AND THE YEAR ENDED DECEMBER 31, 2003.........5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2004 AND 2003 AND THE YEAR ENDED DECEMBER 31, 2003.............6
NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30,
2004 AND 2003 AND THE YEAR ENDED DECEMBER 31, 2004......................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.........14
ITEM 3. CONTROLS AND PROCEDURES...........................................16
PART II - OTHER INFORMATION...................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............17
ITEM 5. OTHER INFORMATION.................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................17
SIGNATURE.....................................................................19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF JUNE 30, 2004 AND
2003 AND DECEMBER 31, 2003
(Unaudited)
June 30, December 31,
--------------------------------- ------------
2004 2003 2003
------------ ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,241,815 $ 3,599,263 $ 4,597,819
Marketable securities 6,548,911 6,302,523 6,302,606
Accounts receivable, net of allowance for doubtful
accounts of $15,000 1,921,537 1,730,772 1,800,141
Other receivables 63,535 165,767
87,473
Inventories 991,041 794,086 811,572
Prepaid expenses and other current assets 791
524 1,068
Deferred income taxes 286,334 27,038
51,480
Prepaid income taxes 376,808 306,171
------------ ------------ ------------
TOTAL CURRENT ASSETS 15,219,589 12,777,581 14,011,905
PROPERTY, PLANT, AND EQUIPMENT, NET 3,531,856 3,906,075 3,732,731
------------ ------------ ------------
TOTAL ASSETS $ 18,751,445 $ 16,683,656 $ 17,744,636
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable $ 38,198 $ 30,387 $ 28,289
Accounts payable 802,035 648,998 795,321
Accrued expenses 151,667 182,947 183,600
Income taxes payable -- 693,157 --
------------ ------------ ------------
Total current liabilities 991,900 1,555,489 1,007,210
NOTES PAYABLE 447,084 485,789 472,509
DEFERRED INCOME TAXES 434,837 423,064 471,953
STOCKHOLDERS' EQUITY
Common stock 6,509,267 6,509,267 6,509,267
Paid-in capital -- --
28,270
Stock subscription receivable (5,000) (15,000) (15,000)
Treasury stock, at cost (666,366) (679,956) (679,956)
Retained earnings 11,019,724 9,284,833 9,822,416
Accumulated other comprehensive income (loss), net of tax (8,271) (879,830) 156,237
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,877,624 14,219,314 15,792,964
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,751,445 $ 16,683,656 $ 17,744,636
============ ============ ============
See accompanying Notes to Financial Statements.
3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 AND THE YEAR ENDED
DECEMBER 31, 2003
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, December 31,
-------------------------- -------------------------- -----------
2004 2003 2004 2003 2003
----------- ----------- ----------- ----------- -----------
SALES $ 4,002,093 $ 3,775,853 $ 7,937,172 $ 7,084,410 $14,877,788
Cost of goods sold 2,265,802 1,733,935 4,365,000 3,559,891 7,840,782
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 1,736,291 2,041,918 3,572,172 3,524,519 7,037,006
Operating expenses 1,049,402 938,160 1,931,431 1,782,776 3,558,362
----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 686,889 1,103,758 1,640,741 1,741,743 3,478,644
Other income (expense):
Interest and dividend income 34,085 36,730 75,209 70,174 96,850
Interest expense (7,907) (7,777) (15,518) (15,421) (41,205)
Gain (loss) on sale of marketable securities, net 40,962 15,848 309,329 (330,709) (1,293,579)
Gain on sale of assets -- -- -- 1,246,287 1,246,287
Loss on marketable securities classified as trading (27,758) -- (27,758) -- --
Other income -- -- -- -- 89,490
----------- ----------- ----------- ----------- -----------
Total other income (expense) 39,382 44,801 341,262 970,331 97,843
----------- ----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 726,271 1,148,559 1,982,003 2,712,074 3,576,487
Provision for income taxes 294,162 457,477 784,695 1,027,718 1,354,548
----------- ----------- ----------- ----------- -----------
NET INCOME $ 432,109 $ 691,082 $ 1,197,308 $ 1,684,356 $ 2,221,939
=========== =========== =========== =========== ===========
EARNINGS PER COMMON SHARE 0.05 0.08 0.14 0.20 0.26
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,437,544 8,436,888 8,437,544 8,436,888 8,436,888
=========== =========== =========== =========== ===========
COMPREHENSIVE INCOME
NET INCOME $ 432,109 $ 691,082 $ 1,197,308 $ 1,684,356 $ 2,221,939
Other comprehensive income (loss), net of tax:
Unrealized (gains) losses on marketable
securities (net of tax benefits) (47,050) 790,315 (25,628) 821,040 212,634
Less reclassification adjustment for (gains)
losses included in net income
(net of tax benefits) 17,615 (569,743) (138,880) (366,000) 1,278,473
----------- ----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 402,674 $ 911,654 $ 1,032,800 $ 2,139,396 $ 3,713,046
=========== =========== =========== =========== ===========
See accompanying Notes to Financial Statements.
4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS
ENDED JUNE 30, 2004 AND THE YEAR
ENDED DECEMBER 31, 2003
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES #
AUTHORIZED OF SHARES
------------------------ OF STOCK
# OF SHARES # OF SHARES TREASURY COMMON PAID-IN SUBSCRIPTION TREASURY
ISSUED OUTSTANDING STOCK STOCK CAPITAL RECEIVABLE STOCK
----------- ----------- -------- ------------ ------- ------------ ----------
BALANCES AT DECEMBER 31, 2002 8,636,888 8,436,888 200,000 $6,509,267 $ -- $(15,000) $(679,956)
Other comprehensive income:
Unrealized gains (losses)
on securities, net of
taxes and reclassification
adjustment -- -- -- -- -- -- --
Net income for the year
Ended December 31, 2003 -- -- -- -- -- -- --
----------- ----------- -------- ------------ ------- ----------- ----- ----
BALANCES AT DECEMBER 31, 2003 8,636,888 8,436,888 200,000 $6,509,267 -- $(15,000) $(679,956)
Issuance of treasury stock -- 2,000 (2,000) -- 28,270 -- 13,590
Other comprehensive income:
Unrealized gains (losses)
on securities, net of
taxes and reclassification
adjustment -- -- -- -- -- -- --
Payment on subscription
receivable -- -- -- -- -- 10,000 --
Net income for the six
months Ended June 30, 2004 -- -- -- -- -- -- --
----------- ----------- -------- ------------ ------- ----------- ---------
BALANCES AT JUNE 30, 2004
(UNAUDITED) 8,636,888 8,438,888 198,000 $6,509,267 $28,270 $(5,000) $(666,366)
=========== =========== ======== ============ ======= =========== =========
ACCUMULATED
OTHER
COMPREHENSIVE
RETAINED INCOME (LOSS),
EARNINGS NET OF TAX TOTAL
---------- ------------- -----------
BALANCES AT DECEMBER 31, 2002 $7,600,477 $(1,334,870) $12,079,918
Other comprehensive income:
Unrealized gains (losses)
on securities, net of
taxes and reclassification
adjustment -- 1,491,107 1,491,107
Net income for the year
Ended December 31, 2003 2,221,939 -- 2,221,939
---------- ------------ -----------
BALANCES AT DECEMBER 31, 2003 $9,822,416 $156,237 $15,792,964
Issuance of treasury stock -- -- 41,860
Other comprehensive income:
Unrealized gains (losses)
on securities, net of
taxes and reclassification
adjustment -- (164,508) (164,508)
Payment on subscription
receivable -- -- 10,000
Net income for the six
months Ended June 30, 2004 1,197,308 -- 1,197,308
----------- ------------ -----------
BALANCES AT JUNE 30, 2004
(UNAUDITED) $11,019,724 $(8,271) $16,877,624
=========== ============ ===========
See accompanying Notes to Financial Statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND
2003 AND THE YEAR ENDED DECEMBER 31, 2003
(Unaudited)
June 30, December 31,
---------------------------- -----------
2004 2003 2003
---------------------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,197,308 $ 1,684,356 $ 2,221,939
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 315,315 340,803 688,309
Gain (loss) on sale of marketable securities, net (309,329) 330,709 1,293,579
Loss on marketable securities classified as trading 27,758 -- --
Gain on sales of assets -- (1,246,287) (1,246,287)
Deferred income taxes 58,335 57,421 9,084
(Increase) decrease in operating assets:
Accounts receivable (121,396) (295,551) (364,920)
Other receivables 78,294 (3,284) (105,516)
Inventories (179,469) (73,583) (91,069)
Prepaid income taxes (70,637) -- (306,171)
Prepaid expenses and other current assets 267 208 485
Increase (decrease) in operating liabilities:
Accounts payable 6,714 9,600 155,923
Accrued expenses (31,933) (581) 72
Income taxes payable -- 295,250 (397,907)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 971,227 1,099,061 1,857,521
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (5,111,087) (4,555,562) (4,283,532)
Sales of marketable securities 4,861,951 2,867,678 3,025,285
Sales of assets --- 1,712,659 1,712,660
Purchases of property and equipment (114,439) (240,900) (415,064)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (363,575) (216,125) 39,349
CASH FLOWS FROM FINANCING ACTIVITIES:
Reissuance of treasury stock 41,860 -- --
Payment on stock subscription receivable 10,000 -- --
Repayment of notes payable (15,516) (15,329) (30,707)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 36,344 (15,329) (30,707)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 643,996 867,607 1,866,163
Cash and cash equivalents at the beginning of the year 4,597,819 2,731,656 2,731,656
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,241,815 $ 3,599,263 $ 4,597,819
=========== =========== ===========
See accompanying Notes to Financial Statements.
6
NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND
2003 AND THE YEAR ENDED DECEMBER 31, 2004
These financial statements include all adjustments which, in the opinion of
management, are necessary in order to make the financial statements not
misleading.
NOTE 1 - NATURE OF BUSINESS
Lifeway Foods, Inc. (the "Company") commenced operations in February 1986
and incorporated under the laws of the state of Illinois on May 19, 1986.
The Company's principal business activity is the production of dairy
products. Specifically, the Company produces Kefir, a drinkable product
which is similar to but distinct from yogurt, in several flavors sold
under the name "Lifeway's Kefir;" a plain farmer's cheese sold under the
name "Lifeway's Farmer's Cheese;" a fruit sugar-flavored product similar
in consistency to cream cheese sold under the name of "Sweet Kiss;" and a
dairy beverage, similar to Kefir, with increased protein and calcium, sold
under the name "Basics Plus." The Company also produces several soy-based
products under the name "Soy Treat" and a vegetable-based seasoning under
the name "Golden Zesta." The Company currently distributes its products
throughout the Chicago Metropolitan area through local food stores. In
addition, the 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 2003 and for the six
months ended June 30, 2004 and 2003, export sales of the Company were
approximately $221,000, $37,050, and $108,857, respectively.
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 costs in cost of
sales.
Cash and cash equivalents
-------------------------
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
The Company maintains cash deposits at several institutions located in the
greater Chicago, Illinois metropolitan area. Deposits at each institution
are insured up to $100,000 by the Federal Deposit Insurance Corporation or
the Securities Investor Protector Corporation.
BANK BALANCES OF AMOUNTS REPORTED BY FINANCIAL INSTITUTIONS ARE
CATEGORIZED AS FOLLOWS AT JUNE 30, 2004.
June 30, June 30, December 31,
2004 2003 2003
----------- ----------- -----------
Amounts insured $ 400,000 $ 400,000 $ 400,000
Uninsured and uncollateralized
amounts 5,069,650 3,238,984 4,212,259
----------- ----------- -----------
Total bank balances $ 5,469,650 $ 3,638,984 $ 4,612,259
=========== =========== ===========
Marketable securities
---------------------
Marketable securities are classified as available-for-sale and trading and
are stated at market value. Gains and losses related to marketable
securities sold are determined by the specific identification method.
7
Accounts receivable
-------------------
Credit terms are extended to customers in the normal course of business.
The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral.
Accounts receivable are recorded at their estimated net realizable value,
net of an allowance for doubtful accounts. The Company's estimate of the
allowance for doubtful accounts is based upon historical experience, its
evaluation of the current status of receivables, and unusual
circumstances, if any. Accounts are considered past due if payment is not
made on a timely basis in accordance with the Company's credit terms.
Accounts considered uncollectible are charged against the allowance.
Inventories
-----------
Inventories are stated at lower of cost or market, cost being determined
by the first-in, first-out method.
Property and equipment
----------------------
Property and equipment are stated at lower of depreciated cost or fair
value. Depreciation is computed using the straight-line method. When
assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant
renewals and betterments are capitalized.
Property and equipment are being depreciated over the following useful
lives:
Category Years
-------------------------- ---------
Buildings and improvements 31 and 39
Machinery and equipment 5 - 12
Office equipment 5 - 7
Vehicles 5
Income taxes
------------
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax
purposes in different periods. Deferred taxes are classified as current or
non-current, depending on the classification of the assets and liabilities
to which they relate. Deferred taxes arising from temporary differences
that are not related to an asset or liability are classified as current or
non-current depending on the periods in which the temporary differences
are expected to reverse.
The principal sources of temporary differences are different depreciation
methods for financial statement and tax purposes, unrealized gains or
losses related to marketable securities, capitalization of indirect costs
for tax purposes, and the use of an allowance for doubtful accounts for
financial statement purposes.
Treasury stock
--------------
Treasury stock is recorded using the cost method.
Advertising costs
-----------------
The Company expenses advertising costs as incurred. During the year 2003
and for the six months ended June 30, 2004 and 2003, approximately
$629,500, $409,461, and $327,863, 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. Because the Company has no stock options
outstanding, diluted and basic earnings per share were the same during the
year 2003 and the six month period ended June 30, 2004, as no dilutive
effect was caused by outstanding options.
8
NOTE 3 - MARKETABLE SECURITIES
The cost and fair value of marketable securities classified as available
for sale and trading are as follows:
Loss on
Marketable
Securities
(Unaudited) Unrealized Unrealized Classified Fair
June 30, 2004 Cost Gains Losses as Trading Value
----------- ----------- ----------- ----------- -----------
Equities/mutual funds $ 3,605,678 $ 113,749 $ (90,838) $ -- $ 3,628,589
Preferred securities 75,505 820 (2,245) -- 74,080
Certificates of deposit 150,000 -- (8,460) -- 141,540
Corporate bonds 1,474,120 -- (26,309) -- 1,447,811
Municipal bonds,
maturing within five
years 132,224 -- (808) -- 131,416
Government agency
obligations, maturing
after five years 1,153,234 -- -- (27,758) 1,125,476
----------- ----------- ----------- ----------- -----------
Total $ 6,590,761 $ 114,569 $ (128,660) $ (27,758) $ 6,548,912
=========== =========== =========== =========== ===========
Loss on
Marketable
Securities
(Unaudited) Unrealized Unrealized Classified Fair
June 30, 2003 Cost Gains Losses as Trading Value
------------- ----------- ----------- ----------- ----------- -----------
Equities $ 4,213,620 $ 157,134 $(1,285,615) $ -- $ 3,085,139
Preferred securities 100,000 2,430 -- -- 102,430
Certificates of deposit 180,000 -- (15) -- 179,985
Municipal bonds,
Maturing within
five years 2,931,477 3,492 -- -- 2,934,969
----------- ----------- ----------- ----------- -----------
Total $ 7,425,097 $ 163,056 $(1,285,630) $ -- $ 6,302,523
=========== =========== =========== =========== ===========
Loss on
Marketable
Securities
Unrealized Unrealized Classified Fair
December 31, 2003 Cost Gains Losses as Trading Value
----------------- ----------- ----------- ----------- ----------- -----------
Equities $ 2,326,722 $ 315,348 $ (48,837) $ -- $ 2,593,233
Preferred securities 200,505 2,985 (80) -- 203,410
Certificates of deposit 150,000 -- -- -- 150,000
Corporate bonds 500,005 -- (1,333) -- 498,672
Municipal bonds,
maturing within --
five years 2,405,067 1,545 (10) 2,406,602
Government agency obligation 450,000 689 -- -- 450,689
----------- ----------- ----------- ----------- -----------
Total $ 6,032,299 $ 320,567 $ , (50,260) -- $ 6,302,606
=========== =========== =========== =========== ===========
Proceeds from the sale of marketable securities were $3,025,285, $4,861,951, and
$2,867,678 during the year 2003 and for the six months ended June 30, 2004 and
2003, respectively.
9
Gross gains (losses) of $(1,293,579), $309,329, and $(330,709), were realized on
these sales during the year 2003 and for the six months ended June 30, 2004 and
2003, respectively.
NOTE 4 - INVENTORIES
Inventories consist of the following:
(Unaudited)
June 30,
------------------------ December 31,
2004 2003 2003
---------- ---------- ----------
Finished goods $ 510,352 $ 331,506 $ 436,291
Production supplies 244,197 266,606 231,376
Raw materials 236,492 195,974 143,905
---------- ---------- ----------
Total inventories $ 991,041 $ 794,086 $ 811,572
========== ========== ==========
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
(Unaudited)
June 30,
------------------------ December 31,
2004 2003 2003
---------- ---------- ----------
Land $ 470,900 $ 470,900 $ 470,900
Buildings and improvements 2,439,321 2,419,592 2,435,111
Machinery and equipment 5,249,052 4,984,660 5,138,822
Vehicles 380,743 380,743 380,743
Office equipment 78,763 74,315 78,763
---------- ---------- ----------
8,618,779 8,330,210 8,504,339
Less accumulated depreciation 5,086,923 4,424,135 4,771,608
---------- ---------- ----------
$3,531,856 $3,906,075 $3,732,731
========== ========== ==========
Depreciation expense during the year ended December 31, 2003 and for the six
months ended June 30, 2004 and 2003 was $688,309, $315,315, and $340,803,
respectively.
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
(Unaudited)
June 30,
----------------------- December 31
2004 2003 2003
---------- ---------- ----------
Mortgage note payable to a bank,
payable in monthly installments
of $3,273 including interest at
6.25%, with a balloon payment of
$454,275 due September 25, 2006.
Collateralized by real estate. $ 476,874 $ 485,551 $ 481,281
Notes payable to finance companies,
payable in monthly installments of
$1,851, including interest at 0%,
due November 2004. Collateralized
by vehicles. 8,408 30,625 19,517
---------- ---------- ----------
Total notes payable 485,282 516,176 500,978
Less current maturities 38,198 30,387 28,289
---------- ---------- ----------
Total long-term portion $ 447,084 $ 485,789 $ 472,509
========== ========== ==========
10
Maturities of notes payables are as follows:
As of June 30,
2004 $ 38,198
2005 29,180
2006 417,904
-----------
Total $ 485,282
===========
NOTE 7 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
(Unaudited) For the
For the Six Months Ended Year Ended
June 30, December 31,
--------------------------- ------------
2004 2003 2003
------------ ------------ ------------
Current:
Federal $ 591,271 $ 788,330 $ 1,075,623
State 135,089 181,967 269,841
------------ ------------ ------------
Total current 726,360 970,297 1,345,464
Deferred 58,335 57,421 9,084
------------ ------------ ------------
Provision for income taxes $ 784,695 $ 1,027,718 $ 1,354,548
============ ============ ============
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 Six Months Ended Year Ended
June 30, December 31,
--------------------------- ------------
2004 2003 2003
------------ ------------ ------------
Federal income tax expense
computed at the statutory
rate $ 673,881 $ 922,105 $ 1,216,005
State taxes, expense 95,493 130,722 172,387
Permanent book/tax differences 15,321 (25,109) (33,844)
------------ ------------ ------------
Provision for income taxes $ 784,695 $ 1,027,718 $ 1,354,548
============ ============ ============
11
Amounts for deferred tax assets and liabilities are as follows:
(Unaudited) For the
For the Six Months Ended Year Ended
June 30, December 31,
------------------------ ---------
2004 2003 2003
--------- --------- ---------
Non-current deferred tax liabilities
arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $(434,837) $(423,064) $(471,953)
--------- --------- ---------
Current deferred tax liability arising from:
Book/tax, unrealized gains on
marketable securities -- -- (114,070)
Current deferred tax assets arising from:
Book/tax, unrealized losses on
marketable securities 5,820 462,500 --
Book/tax, capital loss carryforward -- -- 104,683
Book/tax, other 45,660 43,834 36,425
Less valuation allowance -- (220,000) --
--------- --------- ---------
Total deferred tax assets 51,480 286,334 27,038
--------- --------- ---------
Net deferred tax asset (liability) $(383,357) $(136,730) $(444,915)
========= ========= =========
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows:
(Unaudited) For the Year
For the Six Months Ended
Ended June 30, December 31,
------------------------ ----------
2004 2003 2003
---------- ---------- ----------
Interest $ 15,518 $ 15,421 $ 41,205
Income taxes $ 797,687 $ 675,000 $2,055,000
NOTE 9 - STOCK OPTION PLANS
The Company has a registration statement on file with the Securities and
Exchange Commission in connection with an Employee and Consulting Services
and Compensation Plan covering up to 300,000 of the Company's common stock
shares. Pursuant to the Plan, the Company may issue common stock or
options to purchase common stock to certain consultants, service
providers, and employees of the Company. There were 234,300 shares
available for issuance under the Plan at June 30 and December 31, 2003 and
at June 30, 2004. The terms of this Plan do not require an adjustment in
the number of shares as a result of the stock split; therefore, no
adjustment has been made.
The option price, number of shares, grant date, and vesting terms are
determined at the discretion of the Company's Board of Directors.
As of December 31, 2003, June 30, 2004 and 2003, there were no stock
options outstanding or exercisable.
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 shall vest in the third quarter of 2004.
12
NOTE 10 - STOCK SPLIT
On February 12, 2004, the Board of Directors of the Company declared a
two-for-one stock split of the common stock of the Company payable on
March 8, 2004 to all of the Company's shareholders of record as of
February 27, 2004.
As a result of the stock split, shareholders received two shares of common
stock for every one share held on the record date. Upon completion of the
split, the total number of shares of common stock outstanding increased
from 4,218,444 to 8,436,888.
The earnings per share calculations as presented on the consolidated
statements of income and comprehensive income and the number of shares
issued and outstanding per statement of changes in stockholders' equity
have been adjusted to reflect split adjusted share amounts.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, none of
which are held for trading purposes, are as follows at June 30, 2004:
Carrying Fair
Amount Value
----------- -----------
Cash and cash equivalents $ 5,241,815 $ 5,241,815
Marketable securities $ 6,548,911 $ 6,548,911
Notes payable $ 485,282 $ 461,711
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 12 - SUBSEQUENT EVENTS
On July 26, 2004 the wholly-owned subsidiary of the Company (LFI
Enterprises, Inc.) purchased the assets of Ilya's Farms, Inc. for
$575,600. The acquisition included approximately $64,000 of tangible
assets (including certain manufacturing equipment, a delivery truck) and
inventory and the recipes and manufacturing processes previously used by
Ilya's Farms, Inc. As a post-closing matter, Ilya's Farms, Inc. also is
expected to assign to the Company the rights to the brand name "Ilya's
Farms." The Company provided a guaranty of payment for the transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
COMPARISON OF QUARTER ENDED JUNE 30, 2004 TO QUARTER ENDED JUNE 30, 2003
The following analysis should be read in conjunction with the unaudited
financial statements of the Company and related notes included elsewhere in this
quarterly report and the audited financial statements and Management's
Discussion and Analysis contained in our Form 10-KSB, as amended by Form
10-KSB/A, for the fiscal year ended December 31, 2003.
RESULTS OF OPERATIONS
Sales increased by $226,240 (approximately 6%) to $4,002,093 during the three
month period ended June 30, 2004, from $3,775,853 during the same three month
period in 2003. In the six months ended June 30, 2004, sales increased $852,762
over the same six month period in 2003. This increase was primarily attributable
to continued growth in sales of Lifeway's products to existing customers. In
June 2003, Lifeway's new customer Sav-A-Lot placed its initial orders of
Lifeway's products in order to stock its shelves. Therefore, the initial
Sav-A-Lot orders were substantially larger than the re-stocking orders Lifeway
received and fulfilled during the three months ended June 30, 2004. Save-A-Lot,
the 13th largest grocery chain in the United States, operates more than 1,000
Sav-A-Lot and Supervalu food stores nationwide.
13
Cost of goods sold as a percentage of sales was 56% for the three months ended
June 30, 2004, compared to 46% for the same three month period in 2003. Cost of
goods sold increased by $531,867 to $2,265,802 during the three month period
ending June 30, 2004 (approximately 31%) from $1,733,935 during the same three
month period in 2003. In the six months ended June 30, 2004, cost of goods sold
increased $805,109 (approximately 23%) over the same six month period in 2003.
The price of milk, our largest cost of goods component, rose approximately 80%
during this same six month period. The largest component of the increase in the
cost of goods sold during the first six months of 2004 was a milk price increase
of approximately 110% during the three months ended June 30, 2004
Lifeway anticipates improved gross profit margins for the balance of 2004 as the
price of milk has sharply declined in July and thus far in August 2004, and
expects milk prices to continue to decline to levels seen in periods prior to
this one.
Operating expenses increased approximately 12% during the three month period
ended June 30, 2004 compared to the same three month period in 2003. For the six
month period ended June 30, 2004, operating expenses increased approximately
8.3% compared to the same six month period in 2003. This increase is primarily
attributable to two expenses: (1) a $41,860 expense recognized in connection
with the vesting in the second quarter 2004 of 2,000 shares (valued at $20.93
per share at the time of grant) of a total of 5,100 shares of Company stock
granted to Lifeway employees on February 12, 2004 and (2) a one-time expense of
approximately $42,185 to list additional Company shares on The Nasdaq Stock
Market following the stock split declared by Lifeway's Board of Directors on
February 12, 2004. The $41,860 stock grant expense is also accounted for as a
positive cash flow associated with the reissuance of treasury stock for the
purposes of employee equity awards, as discussed below. Lifeway will recognize
the same expense in the third quarter of 2004 due to the vesting of a further
2,000 shares of the total 5,100 shares awarded.
Net income decreased approximately 38% during the three month period ended June
30, 2004 compared to the same three month period in 2003. This decreased is
primarily attributable to the increase in the cost of goods sold due to the 110%
increase in the price of milk discussed above. In the six month period ended
June 30, 2004, net income decreased approximately 29% compared to the same six
month period in 2003. This decrease is primarily attributable to the fact that
in 2003 Lifeway had a one-time gain from the sale of property of $1,246,287.
SOURCES AND USES OF CASH
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. Net cash used in investing activities
increased by $363,575 for the six months ended June 30, 2004 as compared to the
increase of $216,125 during the same period in 2003. The increase in the
negative net investing activity cash flow during the six month period ended June
30, 2004 relative to the same period in 2003 was attributable to the recognition
in 2003 of a one-time gain from the sale of real property and investment of
substantially all of the proceeds of that sale in cash equivalents, thus
providing positive cash flow from investing. During the six month period ended
June 30, 2004, Lifeway experienced negative cash flows from investing in the
amount of $363,575 due to our continued efforts to move away from higher-risk
securities towards large cap value, higher dividend yielding and tax-advantaged
equities. Our efforts in this regard during the first two calendar quarters of
2004 also are reflected in a gain of $309,329 on the sale of marketable
securities. We believe, given the current market conditions, this asset
allocation strategy offers a positive risk-reward ratio for our Company.
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 shall vest in the third quarter of
2004. In this paragraph, the share numbers and per share expense have been
adjusted to reflect the stock split as of March 8, 2004. The vesting of certain
of the restricted stock awards had the effect of positively impacting financing
activities because the shares were awarded out of
14
treasury shares. The stock award was recognized as a $41,860 expense ($20.93 per
share, reflecting fair market value on the date of grant) but also is treated as
a positive cash flow from financing activities because it was a reissuance of
treasury shares.
CRITICAL ACCOUNTING POLICIES
Lifeway's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The preparation of financial statements in
accordance with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
US GAAP provides the framework from which to make these estimates, assumptions
and disclosures. Lifeway chooses accounting policies within US GAAP that
management believes are appropriate to accurately and fairly report Lifeway's
operating results and financial position in a consistent manner. Management
regularly assesses these policies in light of current and forecasted economic
conditions and has discussed the development and selection of critical
accounting policies with its audit committee of the Board of Directors. For
further information concerning accounting policies, refer to Note 2 -- Nature of
Business and Significant Accounting Policies in the notes to the consolidated
financial statements.
FORWARD LOOKING STATEMENTS
In this report, in reports subsequently filed by Lifeway with the SEC on Form
10-QSB and filed or furnished on Form 8-K, and in related comments by
management, our use of the words "believe," "expect," "anticipate," "estimate,"
"forecast," "objective," "plan," "goal," "project," "explore,"
"priorities/targets," and similar expressions is intended to identify
forward-looking statements. While these statements represent our current
judgment on what the future may hold, and we believe these judgments are
reasonable, actual results may differ materially due to numerous important
factors that are described in this report and other factors that may be
described in subsequent reports which Lifeway may file with the SEC on Form
10-QSB and filed or furnished on Form 8-K, including but not limited to:
o Changes in economic conditions, commodity prices;
o Shortages of and price increase for fuel, labor strikes or work
stoppages, market acceptance of the Company's new products;
o Significant changes in the competitive environment;
o Changes in laws, regulations, and tax rates; and
o Management's ability to achieve reductions in cost and employment
levels, to realize production efficiencies and to implement capital
expenditures, all at of the levels and times planned by management.
ITEM 3. CONTROLS AND PROCEDURES
The Chief Executive Officer (who serves as the principal executive and financial
officer) conducted an evaluation of the effectiveness of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934 as of June 30, 2004. The Company has historically operated
on strictly monitored cost constraints; with that perspective, the Chief
Executive Officer concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in this
quarterly report has been made known to her. However, based upon the Company's
recent growth and improved cash position, as well as consultation with its
auditors, management intends to implement additional procedures to improve
internal controls in 2004. Specifically, an enhanced accounting software package
has been identified which will permit enhanced data recording and internal
reporting as well as additional on-site accounting staff and some changes to
internal control procedures.
As of the date of this quarterly report, there have been no known significant
changes in internal controls or in other factors that could significantly affect
these controls subject to the date of such evaluation.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 12, 2004, Lifeway held its annual meeting of shareholders of record as
of April 13, 2004. The shareholders voted to elect Lifeway's directors and to
ratify the appointment of Plante & Moran, PLLC as the Company's independent
auditors for 2004. The results of the shareholder vote were as follows:
MATTER VOTED UPON VOTES IN FAVOR VOTES WITHHELD ABSTENTIONS
------------------------------------------ -------------- -------------- -----------
(1) ELECTION OF DIRECTORS
Ludmila Smolyansky 8,193,820 50,868 N/A
Julie Smolyansky 8,200,120 44,568 N/A
Pol Sikar 8,195,377 49,311 N/A
Rick D. Salm 8,201,377 43,311 N/A
Renzo Bernardi 8,195,377 49,311 N/A
Thomas Kunz 8,201,377 43,311 N/A
(2) RATIFICATION OF PLANTE & MORAN, PLLC 6,480,163 36,707 1,727,818
ITEM 5. OTHER INFORMATION
On July 1, 2004, Thomas Kunz resigned from the board of directors of Lifeway.
Mr. Kunz was also the President of Danone Foods, Inc. ("Danone") and has been a
director pursuant to the terms of that certain Stockholders Agreement dated as
of October 1, 1999 among Danone, Lifeway and certain individual Lifeway
stockholders (the "Stockholders Agreement"). Under the Stockholders Agreement,
Danone is entitled to designate one of the directors on the Lifeway board.
Effective July 1, 2004, Mr. Kunz ceased to be the President of Danone, Inc. and
was no longer designated to represent Danone on the Lifeway board of directors.
Danone has designated its new President, Juan Carlos, to occupy the board seat
formerly held by Mr. Kunz. Accordingly, the Lifeway board of directors has
approved Mr. Carlos to fill the vacancy on the board created as a result of Mr.
Kunz's resignation.
On August 16, 2004, the Company announced its financial results for the fiscal
quarter ended June 30, 2004 and certain other information. A copy of the
Company's press release announcing these financial results and certain other
information is attached as Exhibit 99.1 hereto. The information contained in
Exhibit 99.1 hereto is being furnished, and should not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liabilities imposed by that Section. The information
contained in Exhibit 99.1 shall not be incorporated by reference into any
registration statement or other document or filing under the Securities Act of
1933, as amended, except as may be expressly set forth in a specific filing. The
press release filed as an exhibit to this report includes "safe harbor" language
pursuant to the Private Securities Litigation Reform Act of 1995, as amended,
indicating that certain statements about the Company's business and other
matters contained in the press release are "forward-looking." The press release
also cautions investors that "forward-looking" statements may be different from
actual operating results. Finally, the press release states that a more thorough
discussion of risks and uncertainties which may affect the Company's operating
results is included in the Company's reports on file with the Securities and
Exchange Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
Number
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).
16
10.10 Stock Purchase Agreement with Danone Foods, Inc., dated October 1,
1999 (incorporated by reference to Exhibit 10.10 of the Registrant's
Current Report on Form 8-K dated October 1, 1999, and filed October
12, 1999).
10.11 Stockholders' Agreement with Danone Foods, Inc. dated October 1, 1999
(incorporated by reference to Exhibit 10.11 of the Registrant's
Current Report on Form 8-K dated October 1, 1999, and filed October
12, 1999).
10.12 Letter Agreement dated December 24, 1999 amending the Stockholders'
Agreement with Danone Foods, Inc. dated October 1, 1999 (incorporated
by reference to Exhibit 10.12 of the Registrant's Current Report on
Form 8-K dated December 24, 1999 and filed January 11, 2000).
10.13 Support Agreement with The Dannon Company, Inc. dated December 24,
1999 (incorporated by reference to Exhibit 10.13 of the Registrant's
Current Report on Form 8-K dated December 24, 1999 and filed January
11, 2000).
10.14 First Amendment to Support Agreement with The Dannon Company, Inc.,
dated February 11, 2003 (incorporated by reference to Exhibit 10.14
of the Registrant's Quarterly Report for the quarter ended March 31,
2003 on Form 10-QSB dated and filed May 15, 2003).
10.15 Employment Agreement, dated September 12, 2002, between Lifeway
Foods, Inc. and Julie Smolyansky (incorporated by reference to
Exhibit 10.14 of Amendment No. 2 filed April 30, 2003 to Lifeway's
Quarterly Report on Form 10-QSB/A for the quarter ended September 30,
2002).
11 Statement re: computation of per share earnings (incorporated by
reference to Note 2 of the Consolidated Financial Statements).
31.1 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
99.1 Press release dated August 16, 2004 regarding earnings for the
quarter ended June 30, 2004.
(b) Reports on Form 8-K.
On June 3, 2004, the Company filed a Current Report on Form 8-K with
disclosures in Items 4 and 7 regarding the merger of the Company's certifying
accountant, Gleeson, Sklar, Sawyers & Cumpata, LLP, into Plante & Moran, PLLC on
May 13, 2004.
On June 10, 2004 and June 15, 2004, the Company filed amendments on Forms
8-K/A to its Current Report on Form 8-K filed on June 3, 2004 with amendments to
its disclosures in Item 4 regarding the merger of the Company's certifying
accountant, Gleeson, Sklar, Sawyers & Cumpata, LLP, into Plante & Moran, PLLC on
May 13, 2004.
17
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: August 16, 2004
LIFEWAY FOODS, INC.
By: /s/ Julie Smolyansky
------------------------------
Julie Smolyansky
Chief Executive Officer, Chief Financial
and Accounting Officer, President,
Treasurer and Director
18