================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.
----------------------------------------------------------------
(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 November 12, 2004, the issuer
had 8,440,888 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
SEPTEMBER 30, 2004 AND 2003 AND DECEMBER 31, 2003.......................3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003 AND THE YEAR ENDED DECEMBER 31, 2003...........................4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2004 AND THE YEAR ENDED DECEMBER 31, 2003....5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003 AND THE YEAR ENDED DECEMBER 31, 2003........6
NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2004 AND 2003 AND THE YEAR ENDED DECEMBER 31, 2003......................7
PART II - OTHER INFORMATION...................................................14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.........14
ITEM 3. CONTROLS AND PROCEDURES...........................................16
ITEM 6. EXHIBITS .........................................................16
SIGNATURE.....................................................................18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 2004 AND 2003 AND DECEMBER 31, 2003
(Unaudited)
September 30, December 31,
--------------------------------- ------------
2004 2003 2003
------------ ------------ ------------
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 5,348,135 $ 4,246,835 $ 4,597,819
Marketable securities 6,727,867 6,272,488 6,302,606
Accounts receivable, net of allowance for doubtful
accounts of $15,000 at September 30, 2004 and
2003 and December 31, 2003 1,943,032 1,878,129 1,800,141
Other receivables 80,582 57,537 165,767
Inventories 915,951 875,472 811,572
Prepaid expenses and other current assets 8,344 932 791
Deferred income taxes 90,937 240,208 27,038
Prepaid income taxes 68,042 -- 306,171
------------ ------------ ------------
TOTAL CURRENT ASSETS 15,182,890 13,571,601 14,011,905
PROPERTY AND EQUIPMENT, NET 3,482,524 3,805,183 3,732,731
INTANGIBLE ASSETS 511,800 -- --
------------ ------------ ------------
TOTAL ASSETS $ 19,177,214 $ 17,376,784 $ 17,744,636
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current maturities of notes payable $ 11,716 $ 30,521 $ 28,289
Accounts payable 701,145 771,306 795,321
Accrued expenses 186,591 94,237 183,600
Income taxes payable -- 647,265 --
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 899,452 1,543,329 1,007,210
NOTES PAYABLE 465,796 478,024 472,509
DEFERRED INCOME TAXES 426,895 398,788 471,953
STOCKHOLDERS' EQUITY
Common stock 6,509,267 6,509,267 6,509,267
Paid-In-Capital 56,540 --
Stock subscription receivable (5,000) (15,000) (15,000)
Treasury stock, at cost (652,776) (679,956) (679,956)
Retained earnings 11,534,832 9,991,674 9,822,416
Accumulated other comprehensive income (loss), net of tax (57,792) (849,342) 156,237
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 17,385,071 14,956,643 15,792,964
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,177,214 $ 17,376,784 $ 17,744,636
============ ============ ============
3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003 AND THE YEAR ENDED DECEMBER 31, 2003
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
---------------------------- ---------------------------- ------------
2004 2003 2004 2003 2003
------------ ------------ ------------ ------------ ------------
SALES $ 4,138,606 $ 3,837,100 $ 12,075,778 $ 10,921,510 $ 14,877,788
Cost of goods sold 2,239,553 1,907,802 6,604,554 5,467,692 7,840,782
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 1,899,053 1,929,298 5,471,224 5,453,818 7,037,006
Operating expenses 1,157,906 871,192 3,089,336 2,653,974 3,558,362
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 741,147 1,058,106 2,381,888 2,799,844 3,478,644
Other income (expense):
Interest and dividend income 49,689 24,595 124,897 94,769 96,850
Interest expense (7,584) (7,743) (23,103) (23,164) (41,205)
Gain (loss) on sale of marketable
securities, net 12,386 39,711 321,716 (293,348) (1,293,579)
Gain on sale of assets -- -- -- 1,246,287 1,246,287
Gain (loss) on marketable securities
classified as trading 15,681 -- (12,077) -- --
Other income -- -- -- -- 89,490
------------ ------------ ------------ ------------ ------------
Total other income 70,172 56,563 411,433 1,024,544 97,843
------------ ------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 811,319 1,114,669 2,793,321 3,824,388 3,576,487
Provision for income taxes 296,210 405,473 1,080,905 1,433,191 1,354,548
------------ ------------ ------------ ------------ ------------
NET INCOME $ 515,109 $ 709,196 $ 1,712,416 $ 2,391,197 $ 2,221,939
============ ============ ============ ============ ============
EARNINGS PER COMMON SHARE 0.06 0.08 0.20 0.28 0.26
============ ============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 8,440,207 8,436,888 8,438,433 8,436,888 8,436,888
============ ============ ============ ============ ============
COMPREHENSIVE
INCOME
NET INCOME $ 515,109 $ 709,196 $ 1,712,416 $ 2,391,197 $ 2,221,939
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
marketable securities
(net of tax benefits) (11,245) 33,092 (25,827) 1,076,482 212,634
Less reclassification adjustment
for (gains) losses
included in net income
(net of tax benefits) (5,140) (4,954) (188,202) (370,954) 1,278,473
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 498,724 $ 737,334 $ 1,498,387 $ 3,096,725 $ 3,713,046
============ ============ ============ ============ ============
4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
AND THE YEAR ENDED DECEMBER 31, 2003
COMMON STOCK, NO PAR
VALUE
10,000,000 SHARES # OF
AUTHORIZED SHARES
-------------------------- OF PAID STOCK
# OF SHARES # OF SHARES TREASURY COMMON IN SUBSCRIPTION
ISSUED OUTSTANDING STOCK STOCK CAPITAL RECEIVABLE
----------- ----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2002 8,636,888 8,436,888 200,000 $ 6,509,267 $ -- $ (15,000)
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)
Issuance of treasury stock 4,000 4,000 (4,000) -- 56,540 --
Other comprehensive income:
Unrealized gains (losses) on
securities, net of
taxes and reclassification (214,029) (214,029)
adjustment -- -- -- --
Payment on subscription
receivable -- -- -- -- -- 10,000
Net income for the nine months
ended September 30, 2004 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30,
2004 (UNAUDITED) 8,640,888 8,440,888 196,000 $ 6,509,267 $ 56,540 $ (5,000)
=========== =========== =========== =========== =========== ===========
ACCUMULATED
OTHER
COMPREHENSIVE
TREASURY RETAINED INCOME (LOSS),
STOCK EARNINGS NET OF TAX TOTAL
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2002 $ (679,956) $ 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 $ (679,956) $ 9,822,416 $ 156,237 $15,792,964
Issuance of treasury stock 27,180 -- -- 83,720
Other comprehensive income:
Unrealized gains (losses) on
securities, net of
taxes and reclassification
adjustment -- -- -- --
Payment on subscription
receivable -- -- -- 10,000
Net income for the nine months
ended September 30, 2004 -- 1,712,416 -- 1,712,416
----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30,
2004 (UNAUDITED) $ (652,776) $11,534,832 $ (57,792) $17,385,071
=========== =========== =========== ===========
5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 AND THE YEAR ENDED
DECEMBER 31, 2003
(Unaudited)
Nine Months Ended Year Ended
September 30, December 31,
------------------------------ ------------
2004 2003 2003
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,712,416 $ 2,391,197 $ 2,221,939
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 474,876 514,523 688,309
(Gain) loss on sale of marketable securities, net (321,716) 293,348 1,293,579
Loss on marketable securities classified as trading 12,077 -- --
Gain on sale of assets -- (1,246,287) (1,246,287)
Deferred income taxes 45,779 31,466 9,084
(Increase) decrease in operating assets:
Accounts receivable (142,891) (442,908) (364,920)
Other receivables 85,184 2,714 (105,516)
Inventories (104,379) (154,969) (91,069)
Prepaid income taxes 238,129 344 (306,171)
Prepaid expenses and other current assets (7,553) -- 485
Increase (decrease) in operating liabilities:
Accounts payable (94,176) 131,908 155,923
Accrued expenses 2,991 (89,291) 72
Income taxes payable -- 249,358 (397,907)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,900,737 1,681,403 1,857,521
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (5,790,781) (6,913,611) (4,283,532)
Sales of marketable securities 5,306,395 5,371,415 3,025,285
Sales of assets -- 1,712,660 1,712,660
Purchases of property and equipment (224,669) (313,728) (415,064)
Acquisition of Ilya's Farms, Inc., net of assets acquired (511,800) -- --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,220,855) (143,264) 39,349
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of treasury stock 83,720 -- --
Receipt of stock subscription receivable 10,000 -- --
Repayment of notes payable (23,286) (22,960) (30,707)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 70,434 (22,960) (30,707)
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 750,316 1,515,179 1,866,163
Cash and cash equivalents at the beginning of the period 4,597,819 2,731,656 2,731,656
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 5,348,135 $ 4,246,835 $ 4,597,819
============ ============ ============
6
NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND
2003 AND THE YEAR ENDED DECEMBER 31, 2003.
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 by
distributors. The Company also distributes some of its products
internationally by exporting to Eastern Europe. During the year 2003 and
for the nine months ended September 30, 2004 and 2003, export sales of the
Company were approximately $221,000, $37,050, and $164,282, respectively.
On September 30, 1992, the Company formed a wholly owned subsidiary
corporation, LFI Enterprises, Inc., (LFIE) incorporated in the state of
Illinois. LFIE was formed for the purpose of operating a "Russian" theme
restaurant and supper club on property acquired by the Company on October
9, 1992. The restaurant/supper club commenced operations in late November
1992. As of July 2001, the restaurant/supper club terminated all
operations. In January 2003, the Company sold the building and the land
that housed LFIE for $1,712,659 and recognized a gain of $1,246,287 on this
transaction. On July 23, 2004, LFIE acquired certain assets and inventory
of Ilya's Farms, Inc., a Pennsylvania corporation, for a total purchase
consideration of $575,600. The asset acquisition transaction between LFIE
and Ilya's Farms, Inc. included approximately $64,000 of tangible assets
(including certain manufacturing equipment, a delivery truck and inventory)
as well 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
name "Ilya's Farms" in the Philadelphia, Pennsylvania metropolitan area.
The majority of the Company's revenues are derived from the sale of the
Company's principal products.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, 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 requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents
-------------------------
All highly liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents.
The Company maintains cash deposits at several institutions located in
the greater Chicago, Illinois metropolitan area. Deposits at each
institution are insured up to $100,000 by the Federal Deposit
Insurance Corporation or the Securities Investor Protector
Corporation.
Bank balances of amounts reported by financial institutions are
categorized as follows:
(Unaudited)
September 30, December 31,
------------------------- ----------
2004 2003 2003
---------- ---------- ----------
Amounts insured $ 500,000 $ 400,000 $ 400,000
Uninsured and uncollateralized amounts 5,041,913 4,029,060 4,212,259
---------- ---------- ----------
Total bank balances $5,541,913 $4,429,060 $4,612,259
========== ========== ==========
7
Marketable securities
---------------------
Marketable securities are classified as both available-for-sale and as
trading, depending on the type of security and management's intent,
and are stated at market value. Gains and losses related to marketable
securities sold are determined by the specific identification method.
Accounts receivable
-------------------
The allowance for doubtful accounts is based on management's
evaluation of outstanding accounts receivable at the end of the year.
Inventories
-----------
Inventories are stated at lower of cost or market, cost being
determined by the first-in, first-out method.
Property and equipment
----------------------
Property and equipment are stated at lower of depreciated cost or fair
value. Depreciation is computed using the straight-line method. When
assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in income for the period. The
cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized.
Property and equipment are being depreciated over the following useful
lives:
Category Years
--------------------------- -----------
Buildings and improvements 31 and 39
Machinery and equipment 5 - 12
Office equipment 5 - 7
Vehicles 5
Income taxes
------------
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax
purposes in different periods. Deferred taxes are classified as
current or non-current, depending on the classification of the assets
and liabilities to which they relate. Deferred taxes arising from
temporary differences that are not related to an asset or liability
are classified as current or non-current depending on the periods in
which the temporary differences are expected to reverse.
The principal sources of temporary differences are different
depreciation methods for financial statement and tax purposes,
unrealized gains or losses related to marketable securities,
capitalization of indirect costs for tax purposes, and the use of an
allowance for doubtful accounts for financial statement purposes.
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 nine months ended September 30, 2004 and 2003,
approximately $629,500, $619,852, and $488,656, respectively, were
expensed.
Earning per common share
------------------------
Earnings per common share were computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding during the year. For each of 2004 and 2003,
diluted and basic earnings per share were the same, respectively, as
the effect of dilutive securities options outstanding was not
significant.
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
Unrealized Unrealized Classified as Fair
September 30, 2004 Cost Gains Losses Trading Value
------------------ ---------- ---------- ---------- ---------- ----------
Equities/Mutual Funds $3,713,163 $ 101,144 $ (188,299) $ -- $3,626,008
Preferred Securities 75,505 1,825 -- -- 77,330
Certificates of Deposit 150,000 -- (7,440) -- 142,560
Corporate Bonds 1,614,275 -- (8,177) -- 1,606,098
Municipal bonds,
maturing within five
years 132,224 2,490 -- -- 134,714
Government agency
obligations, maturing
after five years 1,153,234 -- -- (12,077) 1,141,157
---------- ---------- ---------- ---------- ----------
Total $6,838,401 $ 105,459 $ (203,916) $ (12,077) $6,727,867
========== ========== ========== ========== ==========
Loss on
Marketable
Securities
Unrealized Unrealized Classified as Fair
September 30, 2003 Cost Gains Losses Trading Value
------------------ ---------- ---------- ---------- ---------- ----------
Equities $4,253,095 $ 192,142 $(1,199,398) $ -- $3,245,839
Preferred securities 150,505 700 (25) -- 151,180
Corporate Bonds 475,005 444 -- -- 475,449
Municipal bonds,
maturing within
five years 2,406,478 401 (6,859) -- 2,400,020
---------- ---------- ---------- ---------- ----------
Total $7,285,083 $ 193,687 $(1,206,282) $ -- $6,272,488
========== ========== ========== ========== ==========
Loss on
Marketable
Securities
Unrealized Unrealized Classified as Fair
December 30, 2003 Cost Gains Losses 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
========== ========== ========== ========== ==========
9
Proceeds from the sale of marketable securities were $3,025,285,
$5,306,395, and $5,371,416 during the year 2003 and for the nine
months ended September 30, 2004 and 2003, respectively.
Gross gains (losses) of $(1,293,579), $321,716, and $(293,348), were
realized on these sales during the year 2003 and for the nine months
ended September 30, 2004 and 2003, respectively.
Note 4 - INVENTORIES
Inventories consist of the following:
(Unaudited)
September 30, December 31,
------------------------- ----------
2004 2003 2003
---------- ---------- ----------
Finished goods $ 386,700 $ 398,548 $ 436,291
Production supplies 308,766 283,212 231,376
Raw materials 220,485 193,712 143,905
---------- ---------- ----------
Total inventories $ 915,951 $ 875,472 $ 811,572
========== ========== ==========
Note 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
(Unaudited)
September 30, December 31,
------------------------- ----------
2004 2003 2003
---------- ---------- ----------
Land $ 470,900 $ 470,900 $ 470,900
Buildings and improvements 2,453,681 2,423,812 2,435,111
Machinery and equipment 5,316,766 5,049,938 5,138,822
(Unaudited)
September 30, December 31,
------------------------- ----------
2004 2003 2003
---------- ---------- ----------
Vehicles 408,898 380,743 380,743
Office equipment 78,763 77,645 78,763
---------- ---------- ----------
8,729,008 8,403,038 8,504,339
Less accumulated depreciation 5,246,484 4,597,855 4,771,608
---------- ---------- ----------
$3,482,524 $3,805,183 $3,732,731
========== ========== ==========
Depreciation expense during the year ended December 31, 2003 and for
the nine months ended September 30, 2004 and 2003 was $688,309,
$474,876, and $514,523, respectively.
Note 6 - NOTES PAYABLE
Notes payable consist of the following:
(Unaudited)
September 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 $474,659 $483,474 $481,281
Notes payable to finance
companies, payable in monthly
installments of $1,851,
including interest at 0%, due
November 2004. Collateralized
by vehicles 2,853 25,071 19,517
-------- -------- --------
10
Total notes payable 477,512 508,545 500,798
Less current maturities 11,716 30,521 28,289
-------- -------- --------
$465,796 $478,024 $472,509
Total long-term portion
======== ======== ========
Maturities of notes payables are as follows:
As of September 30,
2005 $ 11,716
2006 465,796
-----------
Total $ 477,512
===========
Note 7 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
(Unaudited) For the
For the Nine Months Ended Year Ended
September 30, December 31,
------------------------- ----------
2004 2003 2003
---------- ---------- ----------
Current:
Federal $ 841,895 $1,139,107 $1,075,623
State 193,231 262,618 269,841
---------- ---------- ----------
Total current 1,035,126 1,401,725 1,345,464
Deferred 45,779 31,466 9,084
---------- ---------- ----------
Provision for income taxes $1,080,905 $1,433,191 $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 Nine Months Ended Year Ended
September 30, December 31,
------------------------------ ------------
2004 2003 2003
------------ ------------ ------------
Federal income tax expense $ 880,399 $ 1,300,292 $ 1,216,006
computed at the statutory rate
State taxes, expense 203,912 183,571 171,671
Permanent book/tax differences (3,406) (50,672) (33,129)
------------ ------------ ------------
Provision for income taxes $ 1,080,905 $ 1,433,191 $ 1,354,548
============ ============ ============
11
Amounts for deferred tax assets and liabilities are as follows:
(Unaudited) For the
For the Nine Months Ended Year Ended
September 30, December 31,
-------------------------- ----------
2004 2003 2003
---------- ---------- ----------
Non-current deferred tax liabilities arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $ (426,895) $ (398,788) $ (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 40,665 415,014 --
Book/tax, capital loss carryforward -- -- 104,683
Book/tax, inventory 50,272 45,194 36,425
Less: valuation allowance -- (220,000) --
---------- ---------- ----------
Total deferred tax assets 90,937 240,208 27,038
---------- ---------- ----------
Net deferred tax liability $ (335,958) $ (158,580) $ (444,915)
========== ========== ==========
Note 8 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows:
(Unaudited) For the Year
For the Nine Months Ended Ended
September 30, December 31,
------------------------- ----------
2004 2003 2003
---------- ---------- ----------
Interest $ 23,103 $ 23,164 $ 41,205
Income taxes $ 798,147 $1,152,000 $2,055,000
Note 9 - STOCK OPTION PLANS
The Company has a registration statement filed with the Securities and
Exchange Commission in connection with a Consulting Service
Compensation Plan covering up to 300,000 of the Company's common stock
shares. Pursuant to 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 468,600 shares
available for issuance under the Plan at December 31, 2003 and at
September 30, 2004 and 2003.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, September 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
has been and will continue to 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 has
vested in the third quarter of 2004 and a stock award expense of
$41,860 has been recognized in connection therewith .
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.
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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 values of the Company's financial instruments are as
follows at September 30, 2004:
Carrying Fair
Amount Value
---------- ----------
Cash and cash equivalents $5,348,135 $5,348,135
Marketable securities $6,727,867 $6,727,867
Notes payable $ 477,512 $ 454,773
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 - 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 of the 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 manufactures and distributes certain cream
cheese products under the brand name "Ilya's Farms" in the Philadelphia,
Pennsylvania metropolitan area. The results of LFIE's operations have been
included in the consolidated financial statements since that 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
============================================== =============
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PART II - OTHER INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
COMPARISON OF QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2004 TO
QUARTER AND NINE MONTHS ENDED SEPTEMBER 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 $301,506 (approximately 8%) to $4,138,606 during
the three month period ended September 30, 2004, from $3,837,100 during the same
three month period in 2003. In the nine months ended September 30, 2004, sales
increased $1,154,268 over the same nine month period in 2003. This increase was
primarily attributable to continued growth in sales of Lifeway's products to
existing customers. Sav-A-Lot, the 13th largest grocery chain in the United
States which operates more than 1000 Sav-A-Lot and Supervalu food stores
nationwide, ceased all product orders from Lifeway during the second calendar
quarter of 2004. During the third quarter of 2003, sales by Lifeway to Sav-A-Lot
accounted for approximately $210,000 (about 5.5%) of the total sales revenue of
$3,837,100 for the three month period ended September 30, 2003. At present, it
is unknown to Lifeway's management whether Sav-A-Lot will make any further
product orders.
Cost of goods sold as a percentage of sales was 54% for the three
months ended September 30, 2004, compared to 50% for the same three month period
in 2003. Cost of goods sold increased by $331,751 to $2,239,553 during the three
month period ending September 30, 2004 (approximately 17%) from $1,907,802
during the same three month period in 2003. In the nine months ended September
30, 2004, cost of goods sold increased $1,136,862 (approximately 21%) over the
same nine month period in 2003. The price of milk, our largest cost of goods
component, rose approximately 70% during this same nine month period. The
largest component of the increase in the cost of goods sold during the first
nine months of 2004 was a milk price increase of approximately 110% during the
three months ended June 30, 2004. While the price of milk decreased slightly
during the three months ended September 30, 2004, it remained substantially
higher than during the same three month period in 2003 and continued to be the
largest component of the cost of goods for the third quarter of 2004.
Operating expenses increased approximately 33% during the three
month period ended September 30, 2004 compared to the same three month period in
2003. For the nine month period ended September 30, 2004, operating expenses
increased approximately 16% compared to the same nine 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 third 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) 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. Lifeway also experienced increased
professional expenses in connection with the acquisition by LFI Enterprises,
Inc. of substantially all of the assets of Ilya's Farms, Inc. on July 23, 2004.
Net income decreased approximately 28% during the three month period
ended September 30, 2004 as compared to the same three month period in 2003. In
the opinion of Lifeway's management, several factors contributed to the 28%
decrease in third quarter net income for 2004 as compared to 2003: (1) the lack
of further orders from Sav-A-Lot, which accounted for about 5.5% of sales
revenues for the same three month period last year; (2) increased professional
expenses in connection with the acquisition by LFI Enterprises, Inc. of
substantially all of the assets of Ilya's Farms, Inc. on July 23, 2004.; and (3)
the increase in the cost of goods sold associated with higher milk prices. In
the nine month period ended September 30, 2004, net income decreased
approximately 28% compared to the same nine month period in 2003. This decrease
is primarily attributable to the fact that during the first nine months of 2003
Lifeway had a one-time gain from the sale of property of $1,246,287 while during
the first nine months of 2004, as discussed above, LFI Enterprises, Inc. entered
into the Ilya's Farms, Inc. acquisition discussed above and Lifeway ceased to
receive orders from a substantial customer.
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.
14
Net cash used in investing activities increased by $1,220,885 for
the nine months ended September 30, 2004 as compared to the increase of $143,264
during the same period in 2003. The increase in the net investing activity cash
flow during the nine month period ended September 30, 2004 relative to the same
period in 2003 was attributable the purchase by LFI Enterprises, Inc. of
substantially all of the assets of Ilya's Farms, Inc. in exchange for $575,600
paid in cash. Of the total cash amount of $575,600 used by LFI Enterprises, Inc.
in connection with the Ilya's Farms, Inc. asset acquisition, $511,800 will be
recognized by Lifeway as intangible assets, while $63,800 is accounted for as
part of the "Purchases of Property and Equipment" line item on the Consolidated
Statement of Cash Flows for the Third Quarter of 2004. In the opinion of
Lifeway's management, the acquisition by LFI Enterprises, Inc. of substantially
all of the assets of Ilya's Farms, Inc. is a positive step to broaden Lifeway's
presence in the market for manufactured dairy products.
During the nine month period ended September 30, 2004, Lifeway also
experienced net negative investing cash flows in the amount of $484,386
($5,790,781 used for purchases less $5,306,395 used for sales) used for the
purchase and sale of marketable securities 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 three calendar quarters of 2004 also are reflected in a gain of $321,716
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 vested in the third quarter of 2004.
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 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 ("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
15
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 September 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.
During the calendar quarter ended September 30, 2004, there was no
change in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to affect, the Company's internal
control over financial reporting. 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 its internal
controls over financial reporting 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 Lifeway's internal control procedures.
ITEM 6. EXHIBITS.
Exhibits
Exhibit No. Description
3.4 Amended and Restated By-laws (incorporated by reference to
Exhibit No. 3.5 of Lifeway's Current Report on Form 8-K
dated and filed on December 10, 2002).
3.5 Articles of Incorporation, as amended and currently in
effect (incorporated by reference to Exhibit 3.5 of
Lifeway's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2000 and filed on August 8, 2000).
10.1 Lifeway Foods, Inc. Consulting and Services Compensation
Plan, dated June 5, 1995 (incorporated by reference to
Lifeway's Registration Statement on Form S-8, File No.
33-93306).
10.10 Stock Purchase Agreement with Danone Foods, Inc., dated
October 1, 1999 (incorporated by reference to Exhibit 10.10
of Lifeway'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 Lifeway's Current Report on Form 8-K dated October 1,
1999, and filed October 12, 1999).
10.12 Extension to Stockholders' Agreement with Danone Foods, Inc.
dated September 28, 2004 (incorporated by reference to
Exhibit 10.1 of Lifeway's Current Report on Form 8-K dated
October 1, 2004 and filed October 18, 2004).
10.13 Second Extension to Stockholders' Agreement with Danone
Foods, Inc. dated October 29, 2004 (incorporated by
reference to Exhibit 10.1 of Lifeway's Current Report on
Form 8-K dated October 29, 2004 and filed November 4, 2004).
10.14 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 Lifeway's Current Report on Form 8-K dated December 24,
1999 and filed January 11, 2000).
10.15 Support Agreement with The Dannon Company, Inc. dated
December 24, 1999 (incorporated by reference to Exhibit
10.13 of Lifeway's Current Report on Form 8-K dated December
24, 1999 and filed January 11, 2000).
16
10.16 First Amendment to Support Agreement with The Dannon
Company, Inc., dated February 11, 2003 (incorporated by
reference to Exhibit 10.14 of Lifeway's Quarterly Report for
the quarter ended March 31, 2003 on Form 10-QSB dated and
filed May 15, 2003).
10.17 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.
17
SIGNATURE
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: November 15, 2004 LIFEWAY FOODS, INC.
By: /s/ Julie Smolyansky
-----------------------------------
Julie Smolyansky
Chief Executive Officer, Chief
Financial and Accounting Officer,
President, Treasurer and Director
18