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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 March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number: 0-17363
LIFEWAY FOODS, INC.
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(Exact name of small business issuer as specified in it charter)
Illinois 36-3442829
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6431 WEST OAKTON, MORTON GROVE, ILLINOIS 60053
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(Address of principal executive offices)
(847) 967-1010
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 15, 2005, the issuer had
8,412,388 shares of common stock, no par value, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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INDEX
PART I - FINANCIAL INFORMATION................................................3
ITEM 1. FINANCIAL STATEMENTS..............................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........17
ITEM 3. CONTROLS AND PROCEDURES..........................................19
PART II - OTHER INFORMATION..................................................19
ITEM 5. OTHER INFORMATION.................................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................19
SIGNATURE....................................................................21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
(UNAUDITED) YEAR ENDED
THREE MONTHS ENDED MARCH 31, DECEMBER 31,
---------------------------- ------------
2005 2004 2004
------------ ------------ ------------
ASSETS
------
Current assets
Cash and cash equivalents $ 5,434,032 $ 4,632,830 $ 5,773,285
Marketable securities 6,895,472 6,615,579 6,741,987
Accounts receivable, net of allowance for doubtful
accounts of $15,000 at March 31, 2005 and 2004
and December 31, 2004 2,522,971 2,006,629 2,024,036
Other receivables 105,759 160,968 72,137
Inventories 996,245 795,370 905,697
Prepaid expenses and other current assets -- 5,485 7,260
Deferred income taxes 89,535 27,288 --
Refundable income taxes 103,451 343,023 258,617
------------ ------------ ------------
TOTAL CURRENT ASSETS 16,147,465 14,587,172 15,783,019
PROPERTY AND EQUIPMENT, NET 3,432,149 3,617,411 3,420,138
Intangible assets
Goodwill 75,800 -- 75,800
Other intangible assets, net of amortization of $43,185
and $26,990 at March 31, 2005 and December 31, 2004 392,815 -- 409,010
------------ ------------ ------------
TOTAL INTANGIBLE ASSETS 468,615 -- 484,810
TOTAL ASSETS $ 20,048,229 $ 18,204,583 $ 19,687,967
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current maturities of notes payable $ 8,934 $ 24,248 $ 8,784
Accounts payable 789,247 739,253 641,651
Accrued expenses 125,017 100,634 195,541
Deferred income taxes - current portion -- -- 36,214
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 923,198 864,135 882,190
NOTES PAYABLE 460,940 468,768 463,541
DEFERRED INCOME TAXES 406,468 448,590 424,039
STOCKHOLDERS' EQUITY
Common stock 6,509,267 6,509,267 6,509,267
Paid-in-capital 72,089 -- 64,314
Stock subscription receivable -- (15,000) --
Treasury stock, at cost (870,831) (679,956) (649,039)
Retained earnings 12,599,866 10,587,615 11,874,475
Accumulated other comprehensive income (loss), net of taxes (52,768) 21,164 119,180
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 18,257,623 16,423,090 17,918,197
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,048,229 $ 18,204,583 $ 19,687,967
============ ============ ============
See accompanying notes to financial statements
3
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
AND THE YEAR ENDED DECEMBER 31, 2004
(UNAUDITED) YEAR ENDED
THREE MONTHS ENDED MARCH 31, DECEMBER 31,
---------------------------- ------------
2005 2004 2004
------------ ------------ ------------
Sales $ 4,656,860 $ 3,935,079 $ 16,319,210
Cost of goods sold 2,577,956 2,099,198 9,034,971
------------ ------------ ------------
GROSS PROFIT 2,078,904 1,835,881 7,284,239
Operating expenses 1,155,180 882,029 4,333,788
------------ ------------ ------------
INCOME FROM OPERATIONS 923,724 953,852 2,950,451
Other income (expense):
Interest and dividend income 65,276 41,124 185,575
Interest expense (7,442) (7,611) (31,441)
Gain (loss) on sale of marketable securities, net 198,140 268,367 354,128
Gain (loss) on marketable securities classified as trading 3,516 -- (16,487)
------------ ------------ ------------
Total other income (expense) 259,490 301,880 491,775
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,183,214 1,255,732 3,442,226
Provision for income taxes 457,823 490,533 1,390,167
------------ ------------ ------------
NET INCOME $ 725,391 $ 765,199 $ 2,052,059
============ ============ ============
BASIC AND DILUTED EARNINGS PER COMMON SHARE 0.09 0.09 0.24
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,432,653 8,436,888 8,439,159
============ ============ ============
COMPREHENSIVE INCOME
--------------------
NET INCOME $ 725,391 $ 765,199 $ 2,052,059
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on marketable securities
(net of taxes) (56,722) 21,422 170,107
Less reclassification adjustment for (gains) losses
included in net income (net of taxes) (115,226) (156,495) (207,164)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 553,443 $ 630,126 $ 2,015,002
============ ============ ============
See accompanying notes to financial statements
4
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005
AND THE YEAR ENDED DECEMBER 31, 2004
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES
AUTHORIZED # OF SHARES
--------------------------- OF
# OF SHARES # OF SHARES TREASURY COMMON PAID IN
ISSUED OUTSTANDING STOCK STOCK CAPITAL
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2003 $ 8,636,888 $ 8,436,888 $ 200,000 $ 6,509,267 $ --
Issuance of treasury stock -- 4,550 (4,550) -- 64,314
Other comprehensive income:
Unrealized losses on
securities, net of taxes
and reclassification
adjustment -- -- -- -- --
Payment on subscription
receivable -- -- -- -- --
Net income for the year ended
December 31, 2004 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2004 $ 8,636,888 $ 8,441,438 $ 195,450 $ 6,509,267 $ 64,314
Issuance of treasury stock -- 550 (550) -- 7,775
Redemption of stock -- (29,600) 29,600 -- --
Other comprehensive income:
Unrealized losses on
securities, net of taxes
and reclassification
adjustment -- -- -- -- --
Net income for the three
months ended March 31, 2005 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCES AT MARCH 31, 2005
(UNAUDITED) 8,636,888 8,412,388 224,500 $ 6,509,267 $ 72,089
============ ============ ============ ============ ============
ACCUMULATED
OTHER
STOCK COMPREHENSIVE
SUBSCRIPTION TREASURY RETAINED INCOME (LOSS),
RECEIVABLE STOCK EARNINGS NET OF TAX TOTAL
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2003 $ (15,000) $ (679,956) $ 9,822,416 $ 156,237 $ 15,792,964
Issuance of treasury stock -- 30,917 -- -- 95,231
Other comprehensive income:
Unrealized losses on
securities, net of taxes
and reclassification
adjustment -- -- -- (37,057) (37,057)
Payment on subscription
receivable 15,000 -- -- -- 15,000
Net income for the year ended
December 31, 2004 -- -- 2,052,059 -- 2,052,059
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2004 $ -- $ (649,039) $ 11,874,475 $ 119,180 $ 17,918,197
Issuance of treasury stock -- 3,737 -- -- 11,512
Redemption of stock -- (225,529) -- -- (225,529)
Other comprehensive income:
Unrealized losses on
securities, net of taxes
and reclassification
adjustment -- -- -- (171,948) (171,948)
Net income for the three
months ended March 31, 2005 -- -- 725,391 -- 725,391
------------ ------------ ------------ ------------ ------------
BALANCES AT MARCH 31, 2005
(UNAUDITED) $ -- $ (870,831) $ 12,599,866 $ (52,768) $ 18,257,623
============ ============ ============ ============ ============
See accompanying notes to financial statements
5
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
AND THE YEAR ENDED DECEMBER 31, 2004
(UNAUDITED) YEAR ENDED
THREE MONTHS ENDED MARCH 31, DECEMBER 31,
---------------------------- ------------
2005 2004 2004
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
NET INCOME $ 725,391 $ 765,199 $ 2,052,059
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 140,742 155,905 669,994
Gain on sale of marketable securities, net (198,140) (268,367) (354,128)
(Gain)/Loss on marketable securities classified as trading (3,516) -- 16,487
Deferred income taxes (22,343) 75,127 45,560
Treasury stock issued for services 11,512 -- 95,231
(Increase) decrease in operating assets:
Accounts receivable (498,935) (206,488) (223,895)
Other receivables (33,622) 4,799 93,630
Inventories (90,548) 16,202 (94,125)
Refundable income taxes 155,166 (36,852) 47,554
Prepaid expenses and other current assets 7,260 (4,694) (6,469)
Increase (decrease) in operating liabilities:
Accounts payable 147,596 (56,069) (153,670)
Accrued expenses (70,524) (82,966) 11,941
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 270,039 361,796 2,200,169
CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
Purchase of marketable securities (1,910,623) (3,141,028) (6,265,671)
Sales of marketable securities 1,665,869 2,862,610 6,096,652
Purchases of property and equipment (136,558) (40,585) (330,411)
Acquisition of Ilya's Farms, Inc.
net of assets acquired -- -- (511,800)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (381,312) (319,003) (1,011,230)
CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------
Proceeds from stock subscription receivable -- -- 15,000
Purchases of treasury stock (225,529) -- --
Repayment of notes payable (2,451) (7,782) (28,473)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (227,980) (7,782) (13,473)
------------ ------------ ------------
Net increase/(decrease) in cash and cash equivalents (339,253) 35,011 1,175,466
Cash and cash equivalents at the beginning of the period 5,773,285 4,597,819 4,597,819
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 5,434,032 $ 4,632,830 $ 5,773,285
============ ============ ============
See accompanying notes to financial statements
6
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
NOTE 1 - NATURE OF BUSINESS
Lifeway Foods, Inc. (The "Company") commenced operations in February 1986 and
incorporated under the laws of the state of Illinois on May 19, 1986. The
Company's principal business activity is the production of dairy products.
Specifically, the Company produces Kefir, a drinkable product which is similar
to but distinct from yogurt, in several flavors sold under the name "Lifeway's
Kefir;" a plain farmer's cheese sold under the name "Lifeway's Farmer's Cheese;"
a fruit sugar-flavored product similar in consistency to cream cheese sold under
the name of "Sweet Kiss;" and a dairy beverage, similar to Kefir, with increased
protein and calcium, sold under the name "Basics Plus." The Company also
produces several soy-based products under the name "Soy Treat" and a
vegetable-based seasoning under the name "Golden Zesta." The Company currently
distributes its products throughout the Chicago Metropolitan area through local
food stores. In addition, the products are sold throughout the United States and
Ontario, Canada by distributors. The Company also distributes some of its
products to Eastern Europe. During the year ended December 31, 2004 and for the
three months ended March 31, 2005 and 2004, export sales of the Company were
approximately $37,050, $0 and $221,000, respectively.
On July 23, 2004, LFIE acquired certain assets and inventory of Ilya's Farms,
Inc., a Pennsylvania corporation, for a total purchase price of $575,600. The
asset acquisition included approximately $63,800 of tangible assets (including
certain manufacturing equipment, a delivery truck and inventory) as well as
intangible assets such as the brand name "Ilya's Farms" and the recipes and
manufacturing processes previously used by Ilya's Farms, Inc. At present, LFIE
manufactures and distributes certain cream cheese products under the brand names
"Ilya's Farms" and under Lifeway Foods in the Philadelphia, Pennsylvania
metropolitan area.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, LFI Enterprises, Inc. All
significant intercompany accounts and transactions have been
eliminated.
Use of estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition
-------------------
Sales represent sales of Company produced dairy products that are
recorded at the time of shipment. In addition, shipping costs invoiced
to the customers are included in net sales and the related cost in cost
of sales.
7
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Cash and cash equivalents
-------------------------
All highly liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents.
The Company maintains cash deposits at several institutions located in
the greater Chicago, Illinois and Philadelphia, Pennsylvania
metropolitan areas. Deposits at each institution are insured up to
$100,000 by the Federal Deposit Insurance Corporation or the Securities
Investor Protector Corporation.
Bank balances of amounts reported by financial institutions are
categorized as follows:
(UNAUDITED)
MARCH 31, DECEMBER 31,
----------------------- -----------
2005 2004 2004
---------- ---------- -----------
Amounts insured $ 500,000 $ 400,000 $ 472,341
Uninsured and uncollateralized amounts 5,303,533 4,337,104 5,456,188
---------- ---------- -----------
Total bank balances $5,803,533 $4,737,104 $ 5,928,529
========== ========== ===========
Marketable securities
---------------------
Marketable securities are classified as available-for-sale or trading
and are stated at fair value or quoted prices. Gains and losses related
to marketable securities sold are determined by the specific
identification method.
Accounts receivable
-------------------
Credit terms are extended to customers in the normal course of
business. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral.
Accounts receivable are recorded at invoice amounts, and reduced to
their estimated net realizable value by recognition of an allowance for
doubtful accounts. The Company's estimate of the allowance for doubtful
accounts is based upon historical experience, its evaluation of the
current status of specific receivables, and unusual circumstances, if
any. Accounts are considered past due if payment is not made on a
timely basis in accordance with the Company's credit terms. Accounts
considered uncollectible are charged against the allowance.
Inventories
-----------
Inventories are stated at lower of cost or market, cost being
determined by the first-in, first-out method.
Property and equipment
----------------------
Property and equipment are stated at depreciated cost or fair value
where depreciated cost is not recoverable. Depreciation is computed
using the straight-line method. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is recognized in
income for the period. The cost of maintenance and repairs is charged
to income as incurred; significant renewals and betterments are
capitalized.
Property and equipment are being depreciated over the following useful
lives:
CATEGORY YEARS
-------------------------- ---------
Buildings and improvements 31 and 39
Machinery and equipment 5 - 12
Office equipment 5 - 7
Vehicles 5
8
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Intangible assets
-----------------
The Company accounts for intangible assets at historical cost.
Intangible assets acquired in a business combination are recorded under
the purchase method of accounting at their estimated fair values at the
date of acquisition. Goodwill represents the excess purchase price over
the fair value of the net tangible and other intangible assets
acquired. Goodwill is not amortized. The Company amortizes other
intangible assets over their estimated useful lives, as disclosed in
the table below.
Goodwill is reviewed for impairment at least annually. The Company will
perform its annual impairment test on July 23 (or the first business
day immediately following that date). Since the Company only has one
reporting unit, the test is based on a fair value approach applied for
the entire company.
The Company will review intangible assets and their related useful
lives at least once a year to determine if any adverse conditions exist
that would indicate the carrying value of these assets may not be
recoverable. This review is called an impairment assessment. The
Company will conduct more frequent impairment assessments if certain
conditions exist, including: a change in the competitive landscape, any
internal decisions to pursue new or different strategies, a loss of a
significant customer, or a significant change in the market place
including changes in the prices paid for the Company's products or
changes in the size of the market for the Company's products.
If the estimate of an intangible asset's remaining useful life is
changed, the remaining carrying amount of the intangible asset is
amortized prospectively over the revised remaining useful life.
Intangible assets are being amortized over the following useful lives:
CATEGORY YEARS
-------------------------- ---------
Recipes 4
Customer lists and other
customer related intangibles 8
Lease agreement 7
Income taxes
------------
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax
purposes in different periods. Deferred taxes are classified as current
or non-current, depending on the classification of the assets and
liabilities to which they relate. Deferred taxes arising from temporary
differences that are not related to an asset or liability are
classified as current or non-current depending on the periods in which
the temporary differences are expected to reverse.
The principal sources of temporary differences are different
depreciation and amortization methods for financial statement and tax
purposes, unrealized gains or losses related to marketable securities,
capitalization of indirect costs for tax purposes, and the recognition
of an allowance for doubtful accounts for financial statement purposes.
Treasury stock
--------------
Treasury stock is recorded using the cost method.
9
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Advertising costs
-----------------
The Company expenses advertising costs as incurred. During the years ended
December 31, 2004 and for the three months ended March 31, 2005 and 2004,
approximately $909,179, $272,191 and $214,581, of such costs respectively,
were expensed.
Earning per common share
------------------------
Earnings per common share were computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding during the period. For all periods presented, diluted and basic
earnings per share were the same, as the effect of dilutive securities
options outstanding was not significant.
NOTE 3 - ACQUISITION OF ILYA'S FARMS, INC.
On July 23, 2004, LFI Enterprises, Inc., an Illinois corporation and wholly
owned subsidiary of Lifeway ("LFIE"), acquired certain assets of Ilya's
Farms, Inc., a Pennsylvania corporation. The aggregate purchase price was
$575,600, paid by LFIE in cash from its current assets.
As a result of the acquisition LFIE now manufactures and distributes
certain cream cheese products under the brand name "Ilya's Farms" in the
Philadelphia, Pennsylvania metropolitan area. The results of operations of
the acquired business have been included in the consolidated financial
statements since the acquisition date.
The following table summarizes the values of the assets and inventory
acquired at the date of acquisition, July 23, 2004.
ASSETS AND INVENTORY ACQUIRED VALUE
------------------------------ ---------
Machinery and equipment $ 38,200
Inventory 25,600
Intangible assets 511,800
---------
Total aggregate purchase price $ 575,600
=========
Intangible assets, and the related accumulated amortization, consist of the
following as of March 31, 2005:
ACCUMULATED
COST AMORTIZATION
--------- ------------
Recipes $ 43,600 $ 7,267
Customer lists and other customer
related intangibles 305,200 27,613
Lease acquisition 87,200 8,305
Goodwill 75,800 --
--------- ------------
$ 511,800 $ 43,185
========= ============
10
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
NOTE 3 - ACQUISITION OF ILYA'S FARMS, INC. - CONTINUED
Amortization expense is expected to be as follows for the 12 months ending
March 31:
2006 $ 64,777
2007 64,777
2008 64,777
2009 60,235
2010 50,244
Thereafter 88,005
----------
$ 392,815
==========
Amortization expense during the three months ended March 31, 2005 and year
ended December 31, 2004 was $16,195 and $26,990. Goodwill amortization, for
tax purposes, totaled $8,530 and $2,527 for the three months ended March
31, 2005 and year ended December 31, 2004.
NOTE 4 - MARKETABLE SECURITIES
The cost and fair value of marketable securities classified as available
for sale and trading are as follows:
LOSS ON
MARKETABLE
SECURITIES
UNREALIZED UNREALIZED CLASSIFIED FAIR
MARCH 31, 2005 (UNAUDITED) COST GAINS LOSSES AS TRADING VALUE
-------------------------- ------------ ------------ ------------ ------------ ------------
Equities and Mutual Funds $ 3,824,477 $ 152,989 $ (184,109) -- $ 3,793,357
Preferred Securities 65,000 200 (2,262) -- 62,938
Certificates of Deposit 150,000 -- (7,530) -- 142,470
Corporate Bonds 2,333,986 50 (49,948) -- 2,284,088
Municipal bonds, maturing
within five years 24,875 715 -- -- 25,590
Government agency obligations,
maturing after five years 600,000 -- -- (12,971) 587,029
------------ ------------ ------------ ------------ ------------
Total $ 6,998,338 $ 153,954 $ 243,849 (12,971) $ 6,895,472
============ ============ ============ ============ ============
11
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
NOTE 4 - MARKETABLE SECURITIES - CONTINUED
LOSS ON
MARKETABLE
SECURITIES
UNREALIZED UNREALIZED CLASSIFIED FAIR
MARCH 31, 2004 (UNAUDITED) COST GAINS LOSSES AS TRADING VALUE
-------------------------- ------------ ------------ ------------ ------------ ------------
Equities/Mutual Funds $ 3,718,091 $ 95,725 $ (62,081) $ -- $ 3,751,735
Preferred Securities 75,505 3,925 -- -- 79,430
Certificates of Deposit 150,000 -- (2,790) -- 147,210
Corporate Bonds 775,010 2,524 (160) -- 777,374
Municipal bonds, maturing
within five years 907,244 4,544 (9) -- 911,779
Government agency Obligations,
maturing After five years 953,234 -- (5,183) -- 948,051
------------ ------------ ------------ ------------ ------------
Total $ 6,579,084 $ 106,718 $ (70,223) $ -- $ 6,615,579
============ ============ ============ ============ ============
LOSS ON
MARKETABLE
SECURITIES
UNREALIZED UNREALIZED CLASSIFIED FAIR
DECEMBER 31, 2004 COST GAINS LOSSES AS TRADING VALUE
----------------- ------------ ------------ ------------ ------------ ------------
Equities and Mutual Funds $ 3,414,459 $ 341,230 $ (120,991) $ -- $ 3,634,698
Preferred Securities 65,000 596 -- -- 65,596
Certificates of Deposit 150,000 -- (4,935) -- 145,065
Corporate Bonds 1,639,275 -- (14,862) -- 1,624,413
Municipal bonds, maturing
within five years 132,226 1,992 -- -- 134,218
Government agency obligations,
maturing after five years 1,154,484 -- -- (16,487) 1,137,997
------------ ------------ ------------ ------------ ------------
Total $ 6,555,444 $ 343,818 $ (140,788) $ (16,487) $ 6,741,987
============ ============ ============ ============ ============
Proceeds from the sale of marketable securities were $6,096,652, $1,665,869
and $2,862,610 during the year ended December 31, 2004 and for the three
months ended March 31, 2005 and 2004, respectively.
12
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
NOTE 4 - MARKETABLE SECURITIES - CONTINUED
Gross gains of $354,128, $198,140 and $268,367 were realized on these sales
during the year ended December 31, 2004 and for the three months ended
March 31, 2005 and 2004, respectively.
NOTE 5 - INVENTORIES
Inventories consist of the following:
(UNAUDITED)
MARCH 31, DECEMBER 31,
--------------------------- ------------
2005 2004 2004
------------ ------------ ------------
Finished goods $ 444,519 $ 349,431 $ 404,206
Production supplies 326,986 232,432 297,791
Raw materials 224,740 213,507 203,700
------------ ------------ ------------
Total inventories $ 996,245 $ 795,370 $ 905,697
============ ============ ============
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
(UNAUDITED)
MARCH 31, DECEMBER 31,
--------------------------- ------------
2005 2004 2004
------------ ------------ ------------
Land $ 470,900 $ 470,900 $ 470,900
Buildings and improvements 2,483,007 2,459,090 2,481,257
Machinery and equipment 5,476,656 5,176,788 5,394,932
Vehicles 459,815 359,383 408,898
Office equipment 80,930 78,763 78,763
------------ ------------ ------------
8,971,308 8,544,924 8,834,750
Less accumulated depreciation 5,539,159 4,927,513 5,414,612
------------ ------------ ------------
Total property and equipment $ 3,432,149 $ 3,617,411 $ 3,420,138
============ ============ ============
Depreciation expense during the year ended December 31, 2004 and for the
three months ended March 31, 2005 and 2004 was $643,004, $124,547 and
$155,905, respectively.
NOTE 7 - NOTES PAYABLE
Notes payable consist of the following:
(UNAUDITED)
MARCH 31, DECEMBER 31,
--------------------------- ------------
2005 2004 2004
------------ ------------ ------------
Mortgage note payable to a bank,
payable in monthly installments
of $3,273 including interest at
6.25%, with a balloon payment of
$454,275 due September 25, 2006
Collateralized by real estate $ 469,874 $ 479,054 $ 472,325
Notes payable to finance
companies; paid in full November
2004 -- 13,962 --
------------ ------------ ------------
Total notes payable 469,874 493,016 472,325
Less current maturities 8,934 24,248 8,784
------------ ------------ ------------
Total long-term portion $ 460,940 $ 468,768 $ 463,541
============ ============ ============
13
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
Maturities of notes payables are as follows:
As of March 31,
2005 $ 8,934
2006 460,940
------------
Total $ 469,874
============
NOTE 8 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
(UNAUDITED) FOR THE
FOR THE THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
--------------------------- ------------
2005 2004 2004
------------ ------------ ------------
Current:
Federal $ 384,812 $ 336,538 $ 1,084,557
State 95,354 78,868 260,050
------------ ------------ ------------
Total current 480,166 415,406 1,334,607
Deferred (22,343) 75,127 45,560
------------ ------------ ------------
Provision for income taxes $ 457,823 $ 490,533 $ 1,390,167
============ ============ ============
A reconciliation of the provision for income taxes and the income tax
computed at the statutory rate are as follows:
(UNAUDITED) FOR THE
FOR THE THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
--------------------------- ------------
2005 2004 2004
------------ ------------ ------------
Federal income tax expense
computed at the statutory rate $ 372,925 $ 395,782 $ 1,084,921
State taxes, expense 86,375 91,668 251,283
Permanent book/tax differences (1,477) 3,083 53,963
------------ ------------ ------------
Provision for income taxes $ 457,823 $ 490,533 $ 1,390,167
============ ============ ============
14
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
Amounts for deferred tax assets and liabilities are as follows:
(UNAUDITED) FOR THE
FOR THE THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------------- ------------
2005 2004 2004
------------ ------------ ------------
Non-current deferred tax
liabilities arising from:
Temporary differences -
principally Book/tax,
accumulated depreciation $ (406,468) $ (448,590) $ (424,039)
Current deferred tax liability
arising from:
Book/tax, unrealized losses
(gains) on marketable securities 37,127 (15,072) (83,850)
Current deferred tax assets
arising from:
Book/tax, inventory 52,408 42,360 47,636
------------ ------------ ------------
Total current deferred tax assets
(liabilities) 89,535 27,288 (36,214)
------------ ------------ ------------
Net deferred tax asset (liability)$ (316,933) $ (421,302) $ (460,253)
============ ============ ============
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows:
(UNAUDITED) FOR THE YEAR
FOR THE THREE MONTHS ENDED
ENDED MARCH 31, DECEMBER 31,
--------------------------- ------------
2005 2004 2004
------------ ------------ ------------
Interest $ 7,442 $ 7,611 $ 31,441
Income taxes $ 325,372 $ 452,000 $ 1,298,348
NOTE 10 - STOCK OPTION PLANS
The Company has a registration statement filed with the Securities and
Exchange Commission in connection with a Consulting Service Compensation
Plan covering up to 600,000 of the Company's common stock shares. Pursuant
to such Plan, the Company may issue common stock or options to purchase
common stock to certain consultants, service providers, and employees of
the Company. There were 468,000 shares available for issuance under the
Plan at December 31, 2004 and at March 31, 2005 and 2004. The option price,
number of shares, grant date, and vesting terms are determined at the
discretion of the Company's Board of Directors.
As of December 31, 2004 and at March 31, 2005 and 2004, there were no stock
options outstanding or exercisable.
15
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
AND DECEMBER 31, 2004
NOTE 10 - STOCK OPTION PLANS - CONTINUED
On February 12, 2004, Lifeway's Board of Directors approved awards of an
aggregate amount of 5,100 shares to be awarded under its Employee and
Consulting Services and Compensation Plan to certain employees and
consultants for services rendered to the Company. The stock awards were
made on April 1, 2004 and have vesting periods that vary from six months to
one year, depending upon the individual grantee. The expense for the awards
is measured as of April 1, 2004 at $20.93 per share for 5,100 shares, or a
total stock award expense of $106,743. This expense is being recognized as
the stock awards vest beginning with the recognition of $41,860 for 2,000
shares vested on April 1, 2004. There were a total of 4,550 vested shares
resulting in a stock award expense of $95,231 for the year ended December
31, 2004, and an additional 550 shares vested during the quarter ended
March 31, 2005 for an additional expense of $11,512.
NOTE 11 - STOCK SPLIT
On February 12, 2004, the Board of Directors of the Company declared a
two-for-one stock split of the common stock of the Company payable on March
8, 2004 to all of the Company's shareholders of record as of February 27,
2004.
As a result of the stock split, shareholders received two shares of common
stock for every one share held on the record date. Upon completion of the
split, the total number of shares of common stock outstanding increased
from 4,218,444 to 8,436,888.
The earnings per share calculations as presented on the consolidated
statements of income and comprehensive income and the number of shares
issued and outstanding per statement of changes in stockholders' equity
have been adjusted to reflect split adjusted share amounts.
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments is as
follows at:
--------------------------- ---------------------------
(UNAUDITED)
MARCH 31, 2005 DECEMBER 31, 2004
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Cash and cash equivalents $ 5,434,032 $ 5,434,032 $ 5,773,285 $ 5,773,285
Marketable securities $ 6,895,472 $ 6,895,472 $ 6,741,987 $ 6,741,987
Notes payable $ 469,874 $ 466,069 $ 472,325 $ 469,696
The carrying values of cash and cash equivalents, and marketable securities
approximate fair values. The fair value of the notes payable is based on
the discounted value of contractual cash flows. The discount rate is
estimated using rates currently offered for debt with similar maturities.
NOTE 13 - PENDING LITIGATION
On December 4, 2004 a former employee requested a Motion for Summary
Judgment on the issue of Liability in a lawsuit filed against the Company
by the former employee. The motion was granted on February 10, 2005 and on
February 18, 2005 the case was referred to a Magistrate Judge for a
settlement conference.
The lawsuit alleges non payment of overtime wages in violation of federal
employment laws, with an estimated amount between $7,500 and $15,000. The
suit was filed in the United States District Court for the Northern
District of Illinois on behalf of all employees who were classified as
non-exempt during 2001 through 2003. Outside counsel for the company has
advised that at this stage in the proceedings he cannot offer an opinion as
to the probable outcome.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
COMPARISON OF QUARTER ENDED MARCH 31, 2005 TO QUARTER ENDED MARCH 31, 2004
The following analysis should be read in conjunction with the unaudited
financial statements of the Company and related notes included elsewhere in this
quarterly report and the audited financial statements and Management's
Discussion and Analysis contained in our Form 10-KSB, for the fiscal year ended
December 31, 2004.
RESULTS OF OPERATIONS
Sales increased by $721,781 (approximately 18%) to $4,656,860 during the three
month period ended March 31, 2005 from $3,935,079 during the same three month
period in 2004. This increase is primarily attributable to increased sales and
awareness of Lifeway existing drinkable dairy product, including La Fruta, and
its flagship line, Kefir. Sav a Lot, which was one of Lifeway's largest
customers, and accounted for $362,000 in sales in the first quarter 2004, ceased
ordering in the second quarter of 2004, and therefore was absent from the first
quarter of 2005.
Lifeway's wholly-owned subsidiary, LFI Enterprises, Inc. ("LFIE") accounted for
$213,644 of total sales revenues during the first quarter 2005. Of the total
$213,644 revenues from LFIE, $97,275 was earned due to sales of Lifeway's Kefir
and Farmer Cheese products sent from our Morton Grove, Illinois facility to
Philadelphia, Pennsylvania for distribution in the tri-state area of
Pennsylvania, New Jersey and New York. The remaining $116,369 of LFIE revenues
for the first quarter 2005 were earned from sales of the Cream Cheese Gourmet
line of products acquired from Ilya's Farms, Inc. in the third quarter of 2004.
Cost of goods sold as a percentage of sales was approximately 55% during the
first quarter 2005, compared to about 53% during the same period in 2004. This
increase is directly related to the increased cost of milk during this period.
The average cost of milk, Lifeway's largest cost of goods sold component,
increased approximately 25% in the first quarter 2005 compared to the same
period in 2004. Even though the price of milk experienced such a dramatic
increase, Lifeway was able to maintain strong relative gross margins by more
efficiently using our other material components.
Operating expenses as a percentage of sales was approximately 25% during the
first quarter 2005, compared to about 22% during the same period in 2004. This
increase is primarily attributable to an overall increase in utility expenses
and rising insurance and professional fees associated with the Sarbanes-Oxley
Act of 2002 and other regulatory compliance requirements.
Provision for income taxes was $457,823 during the first quarter 2005 compared
with $490,533 during the same period in 2004. Income taxes are discussed in Note
8 of the Notes to Consolidated Financial Statements.
SOURCES AND USES OF CASH
Net cash used in financing activities was $227,980 during the quarter ended
March 31, 2005, which is an increase of $220,198 compared to the same period in
2004. This increase is primarily attributable to the purchase of treasury stock.
The Company purchased 29,600 shares of its treasury stock at a cost of $225,529
in the first quarter 2005.
During the quarter ended March 31, 2005, Lifeway's cash used in investing
activities totalled $381,312 due to a rebalancing of our portfolio in our
continued efforts to move away from higher-risk securities towards large cap
value, higher dividend yielding and tax-advantaged equities. Our efforts in this
regard during the first calendar quarter of 2005 also are reflected by a gain of
$198,140 on the sale of marketable securities evident on the Company's
consolidated income statement, which appears in this quarterly report. We
believe, given the current market conditions, this asset allocation strategy
offers a positive risk-reward ratio for our Company.
17
A significant portion of our assets are held in marketable securities. The
majority of our marketable securities are classified as available-for-sale on
our balance sheet, while the mortgage-backed securities are classified as
trading. All of these securities are stated thereon at market value as of the
end of the applicable period. Gains and losses on the portfolio are determined
by the specific identification method.
We anticipate being able to fund the Company's foreseeable liquidity
requirements internally. We continue to explore potential acquisition
opportunities in our industry in order to boost sales while leveraging our
distribution system to consolidate and lower costs.
OTHER DEVELOPMENTS
On February 12, 2004, Lifeway's Board of Directors approved awards of an
aggregate amount of 5,100 shares to be awarded under its Employee and Consulting
Services and Compensation Plan to certain employees and consultants for services
rendered to the Company. The stock awards were made on April 1, 2004 and have
vesting periods that vary from six months to one year, depending upon the
individual grantee. The expense for the awards is measured as of April 1, 2004
at $20.93 per share for 5,100 shares, or a total stock award expense of
$106,743. This expense will be recognized as the stock awards vest beginning
with the recognition of $41,860 for 2,000 shares vested on April 1, 2004. An
additional 2,000 shares of the total 5,100 vested in the third quarter of 2004.
550 shares vested in the fourth quarter of 2004. The remaining 550 shares vested
in the first quarter of 2005 and resulted in an expense of $11,512.
CRITICAL ACCOUNTING POLICIES
Lifeway's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The preparation of financial statements in
accordance with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
US GAAP provides the framework from which to make these estimates, assumptions
and disclosures. Lifeway chooses accounting policies within US GAAP that
management believes are appropriate to accurately and fairly report Lifeway's
operating results and financial position in a consistent manner. Management
regularly assesses these policies in light of current and forecasted economic
conditions and has discussed the development and selection of critical
accounting policies with its audit committee of the Board of Directors. For
further information concerning accounting policies, refer to Note 2 -- Summary
of Significant Accounting Policies in the notes to the consolidated financial
statements.
FORWARD LOOKING STATEMENTS
In this report, in reports subsequently filed by Lifeway with the SEC on Form
10-QSB and filed or furnished on Form 8-K, and in related comments by
management, our use of the words "believe," "expect," "anticipate," "estimate,"
"forecast," "objective," "plan," "goal," "project," "explore,"
"priorities/targets," and similar expressions is intended to identify
forward-looking statements. While these statements represent our current
judgment on what the future may hold, and we believe these judgments are
reasonable, actual results may differ materially due to numerous important
factors that are described in this report and other factors that may be
described in subsequent reports which Lifeway may file with the SEC on Form
10-QSB and filed or furnished on Form 8-K, including but not limited to:
o Changes in economic conditions, commodity prices;
o Shortages of and price increase for fuel, labor strikes or work
stoppages, market acceptance of the Company's new products;
o Significant changes in the competitive environment;
o Changes in laws, regulations, and tax rates; and
o Management's ability to achieve reductions in cost and employment
levels, to realize production efficiencies and to implement capital
expenditures, all at of the levels and times planned by management.
18
ITEM 3. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Accounting Officer conducted an
evaluation of the effectiveness of the Company's disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as
of March 31, 2005. The Company has historically operated on strictly monitored
cost constraints; with that perspective, the Chief Executive Officer and the
Chief Accounting Officer concluded that the disclosure controls and procedures
are effective in ensuring that all material information required to be filed in
this quarterly report has been made known to them. However, based upon the
Company's recent growth and improved cash position, as well as consultation with
its auditors, management intends to implement additional procedures to improve
internal controls over financial reporting in 2005. Specifically, an enhanced
accounting software package has been identified and continues to be evaluated
which will permit enhanced data recording and internal reporting as well as
additional on-site accounting staff and some changes to the Company's internal
control procedures over financial reporting.
As of the date of this quarterly report, there have been no known
significant changes in internal controls or in other factors that could
significantly affect these controls subject to the date of such evaluation.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On May 16, 2005, the Company announced its financial results for the fiscal
quarter ended March 31, 2005 and certain other information. A copy of the
Company's press release announcing these financial results and certain other
information is attached as Exhibit 99.1 hereto. The information contained in
Exhibit 99.1 hereto is being furnished, and should not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liabilities imposed by that Section. The information
contained in Exhibit 99.1 shall not be incorporated by reference into any
registration statement or other document or filing under the Securities Act of
1933, as amended, except as may be expressly set forth in a specific filing. The
press release filed as an exhibit to this report includes "safe harbor" language
pursuant to the Private Securities Litigation Reform Act of 1995, as amended,
indicating that certain statements about the Company's business and other
matters contained in the press release are "forward-looking." The press release
also cautions investors that "forward-looking" statements may be different from
actual operating results. Finally, the press release states that a more thorough
discussion of risks and uncertainties which may affect the Company's operating
results is included in the Company's reports on file with the Securities and
Exchange Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number Description
------ -----------
3.4 Amended and Restated By-laws (incorporated by reference to Exhibit No.
3.5 of Lifeway's Current Report on Form 8-dated and filed on December
10, 2002). (File No. 000-17363)
3.5 Articles of Incorporation, as amended and currently in effect
(incorporated by reference to Exhibit 3.5 of Lifeway's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 2000 and filed on
August 8, 2000). (File No. 000-17363)
19
11 Statement re: Computation of per share earnings (incorporated by
reference to Note 2 of the Consolidated Financil Statements).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky.
32.1 Section 1350 Certification of Julie Smolyansky.
32.2 Section 1350 Certification of Edward P. Smolyansky.
99.1 Press Release dated May 16, 2005- "Lifeway Foods, Inc. Reports First
Quarter Results: Sales up 18%"
(b) Reports on Form 8-K
Current Report on Form 8-K dated January 13, 2005 and filed January 14, 2005
(File No 000-17363)
20
SIGNATURE
In accordance with the requirements of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 16, 2005
LIFEWAY FOODS, INC.
By: /s/ Julie Smolyansky
-------------------------------------
Julie Smolyansky
Chief Executive Officer, President, and
Director
/s/ Edward P. Smolyansky
-------------------------------------
Chief Financial and Accounting Officer
and Treasurer
21
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky.
32.1 Section 1350 Certification of Julie Smolyansky.
32.2 Section 1350 Certification of Edward P. Smolyansky.
99.1 Press Release dated May 16, 2005- "Lifeway Foods Announces First
Quarter Results."
22