<PAGE> 1
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, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
---------------- ------------------
Commission file number: 0-17363
LIFEWAY FOODS, INC.
- ------------------------------------------------------------------------------
(Exact name of small business issuer as specified in it charter)
ILLINOIS 36-3442829
- ------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
7625 NORTH AUSTIN AVENUE, SKOKIE, ILLINOIS 60077
- ------------------------------------------------------------------------------
(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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be filed
by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] 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 11, 1996, THE
ISSUER HAD 3,774,977 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Lifeway Foods, Inc. and Subsidiaries
September 30, 1996 and 1995
Certified Public Accountants Report on
Unaudited Financial Statements F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Income F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS 4
PART II - OTHER INFORMATION 5
SIGNATURES 7
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
[FOLLOWING PAGE IS F-1]
3
<PAGE> 4
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
TABLE OF CONTENTS
<TABLE>
<S> <C>
Certified Public Accountants Report on Financial Statements F-2
Consolidated Balance Sheets -
September 30, 1996 and 1995 F-3 - F-4
Consolidated Statements of Income -
for the years ended September 30, 1996 and 1995 F-5
Consolidated Statements of Changes in Stockholders' Equity -
for the years ended September 30, 1996 and 1995 F-6
Consolidated Statement of Cash Flows -
for the years ended September 30, 1996 and 1995 F-7 - F-8
Notes to Consolidated Financial Statements -
September 30, 1996 and 1995 F-9 - F16
</TABLE>
<PAGE> 5
ROBERT L. DeLORME
CERTIFIED PUBLIC ACCOUNTANT
1010 JORIE BOULEVARD/SUITE 300
OAK BROOK, ILLINOIS 60521
(630) 571-1800
CERTIFIED PUBLIC ACCOUNTANTS REPORT
ON FINANCIAL STATEMENTS
To the Shareholders and Directors
Lifeway Foods, Inc.
Skokie, Illinois
The accompanying balance sheets of Lifeway Foods, Inc. and Subsidiaries as of
September 30, 1996 and 1995 and the related statements of income, changes in
stockholders' equity and cash flows for the nine months then ended were not
audited by me and, accordingly, I do not express an opinion or any other form
of assurance on them.
The accompanying financial statement of Lifeway Foods, Inc. and subsidiaries
as of December 31, 1995 and for the year then ended were audited by other
auditors. They expressed an unqualified opinion on them in their report dated
February 9, 1996. They have not performed any audit procedures since that
date.
/s/ ROBERT L. DeLORME
Robert L. DeLorme, C.P.A.
Oak Brook, Illinois
October 23, 1996
F-2
<PAGE> 6
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
------------------------- DECEMBER 31,
ASSETS 1996 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalent $ 788,458 $ 801,696 $ 702,107
Investments 342,000 170,563 329,411
Accounts receivable, net of allowance
for doubtful accounts of $24,000 at
September 30, 1995 and $48,000 at
September 30, 1996 and December 31, 1995 698,975 631,122 604,621
Other receivables 25,000 31,100 26,200
Inventories 462,376 293,900 288,100
Prepaid expenses and other assets 410,655 24,663 21,206
Deferred income taxes 34,480 0 34,480
---------- ---------- ----------
TOTAL CURRENT ASSET 2,761,944 1,953,044 2,006,125
PROPERTY AND EQUIPMENT
Land 369,500 369,500 369,500
Buildings, machinery and equipment 2,219,618 2,148,463 2,175,637
---------- ---------- ----------
Total property and equipment 2,589,118 2,517,963 2,545,137
Less: accumulated depreciation 1,010,462 819,967 868,769
---------- ---------- ----------
PROPERTY AND EQUIPMENT, NET 1,578,656 1,697,996 1,676,368
OTHER ASSETS
Intangible assets 330,343 330,343 330,343
Less; accumulated amortization 253,425 206,250 221,595
---------- ---------- ----------
TOTAL OTHER ASSETS 76,918 124,093 108,748
---------- ---------- ----------
TOTAL ASSETS $4,417,518 $3,775,133 $3,791,241
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 7
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
------------------------- DECEMBER 31,
1996 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of notes payable $ 44,703 $ 43,656 $ 41,651
Accounts Payable 341,839 245,748 245,224
Accrued expenses 325,064 229,348 263,603
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 711,606 518,752 550,478
LONG-TERM LIABILITIES
Notes payable 625,413 670,760 660,007
DEFERRED INCOME TAXES 45,395 55.004 45,395
MINORITY INTEREST 0 0 0
STOCKHOLDERS' EQUITY
Common Stock 1,355,935 1,374,254 1,374,754
Retained Earnings 1,679,169 1,156,363 1,160,607
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 3,035,104 2,530,617 2,535,361
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,417,518 $3,775,133 $3,791,241
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE> 8
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
---------------------------- DECEMBER 31,
1996 1995 1995
----------- ----------- ------------------
<S> <C> <C> <C>
SALES $ 3,985,736 $ 3,240,955 $ 4,497,560
COST OF GOODS SOLD 1,808,360 1,445,326 2,244,628
----------- ----------- -----------
GROSS PROFIT 2,177,376 1,795,629 2,252,932
OPERATING EXPENSES 1,327,775 1,076,170 1,560,967
----------- ----------- -----------
INCOME FROM OPERATIONS 849,601 719,459 691,965
OTHER INCOME (EXPENSE)
Interest income 32,124 31,950 41,326
Interest expense (36,017) (56,902) (67,164)
Gain on sale of assets 689 16,011 16,001
----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (3,204) (8,941) (9,827)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 846,397 710,518 682,138
PROVISION FOR INCOME TAXES 327,835 274,037 241,413
----------- ----------- -----------
NET INCOME $ 518,562 $ 436,481 $ 440,725
=========== =========== ===========
EARNINGS PER SHARE $ .14 $ .12 $ .12
=========== =========== ===========
SHARES OUTSTANDING 3,774,977 3,787,377 3,785,377
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE> 9
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES AUTHORIZED
-----------------------------
SHARES ISSUED RETAINED
AND OUTSTANDING AMOUNT EARNINGS
--------------- ----------- -----------
<S> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994 3,729,777 $ 1,302,754 $ 719,882
Shares exchanged in no-cash
transaction 55,600 72,000 0
Net income for the year ended
December 31, 1995 0 0 440,725
----------- ----------- -----------
BALANCES AT DECEMBER 31, 1995 3,785,377 1,374,754 1,160,607
Purchase of stock (10,400) (18,819) 0
Net income for the nine months ended
September 30, 1996 0 0 518,562
----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1996 3,774,977 $ 1,355,935 $ 1,679,169
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE> 10
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31
1996 1995 1995
---------- --------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 518,562 $ 436,481 $ 440,725
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 173,523 166,418 230,565
Issuance of common stock in exchange
for services rendered and interest expense 0 42,000 42,000
Increase in allowance for doubtful accounts 0 0 24,000
Deferred income taxes 0 7,745 (36,344)
Gain on sale of asset (689) (16,011) (16,011)
(Increase) decrease in operating assets:
Accounts receivable (94,354) (104,411) (101,910)
Other receivable 1,200 (200) 4,700
Inventories (174,276) (185,591) (179,791)
Prepaid expenses and other assets (389,449) 1,104 4,561
Increase (decrease) in operating liabilities:
Accounts payable 96,615 (56,601) (57,125)
Accrued expenses 61,461 55,711 89,964
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 192,593 346,645 445,334
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (112,000) 0 (167,315)
Sale of investments 100,100 98,747 107,214
Purchase of property and equipment (43,981) (20,919) (48,194)
Proceeds from sales of assets 0 51,220 51,323
--------- --------- ---------
NET CASH PROVIDED BY (USED) IN
INVESTING ACTIVITIES (55,881) 129,048 (56,972)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (31,542) (78,995) (91,753)
Purchase of treasury stock (18,819) 0 0
Payments to minority shareholders 0 (90,500) (90,000)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (50,361) (169,495) (181,753)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 86,351 306,198 206,609
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 702,107 495,498 495,498
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 788,458 $ 801,696 $ 702,107
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE> 11
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31
1996 1995 1995
----------- --------- -------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 36,017 $ 56,902 $ 67,164
======== ======== ========
Cash paid for income taxes $164,900 $193,152 $190,760
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES:
Issuance of common stock in exchange for:
Consulting fees $ 0 $ 27,500 $ 27,500
Minority shareholders - interest expense 0 14,500 14,500
-------- -------- --------
Sub-total 0 42,000 42,000
Minority shareholders - stock 0 30,000 30,000
-------- -------- --------
Total common stock issued $ 0 $ 72,000 $ 72,000
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-8
<PAGE> 12
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995 AND DECEMBER 31, 1995
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 produces Kefir, a drinkable product which is
similar to but distinct from yogurt in several flavors sold under the
name "Lifeway's Kefir"; a line of drinkable yogurt; a plain farmer's
cheese sold under the name "Lifeway's Farmer's Cheese"; and a fruit
sugar-flavored product similar in consistency to cream cheese sold under
the name of "Sweet Kiss." The Company currently distributes its products
throughout the Chicago metropolitan area through local food stores. In
addition, the products are sold in the states of California, Colorado,
Connecticut, Florida, Illinois, Indiana, Iowa, Michigan, Minnesota, New
Hampshire, New York, Ohio, Texas and Wisconsin. The Company has also
expanded the distribution of its products internationally by exporting
to Eastern Europe through its wholly-owned subsidiary Lifeway
International, Inc.
On September 30, 1992, the Company formed a wholly-owned subsidiary
corporation, LFI Enterprises, Inc., (LFIE) incorporated in the state of
Illinois. LFI Enterprises, Inc. was formed for the purpose of operating
a "Russian" theme restaurant and supper club on the property acquired by
the Company on October 9, 1992. The restaurant/supper club commenced its
operations in late November 1992.
Approximately 88.2% of Consolidated revenues and 156.8% of consolidated
net income for the year ended December 31, 1995 were derived from the
manufacturing of liquid yogurt and cheese 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 and majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated,
including $120,000 of rent paid by LFIE to the Company in 1995 for use
of the restaurant which is owned by the Company.
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 94., "Consolidation of all Majority-owed Subsidiaries", which
requires the consolidation of all majority-owned subsidiaries unless
control is temporary or does not rest with the majority owners.
F-9
<PAGE> 13
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995 AND DECEMBER 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 Equivalents
All highly liquid investments purchased with a maturity of three months
or less are considered to be cash equivalents.
Investments
Effective December 31, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No 115 " Accounting for
certain Debt and Equity Securities" (SFAS 115). In accordance with this
Statement, securities are classified as held-to-maturity,
available-for-sale or trading.
The Company's investments include certificates of deposit with maturity
dates greater than three months and US Treasury Bonds which are all
short term and held-to-maturity. Securities classified as
held-to-maturity are stated at cost adjusted for amortization of
premiums and accretion of discounts. At December 31, 1995, cost
approximated market value. The Company does not currently have any
trading or available-for-sale securities.
Inventory
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 cost. 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:
<TABLE>
<CAPTION>
Category Years
-------- -----
<S> <C>
Buildings and improvements 31
Machinery and equipment 5-12
Office equipment 5-7
</TABLE>
F-10
<PAGE> 14
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995 AND DECEMBER 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Intangible Assets
Intangible Assets are stated at cost. Organization costs are amortized
over five years using the straight-line method. Other intangible assets
are amortized over the estimated useful lives of the assets using the
straight- line method as follows:
<TABLE>
<S> <C>
Covenant not to compete 10 years
Trademark license 2.5 years
U.P.C. Codes 7 years
Customer lists 5 years
</TABLE>
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 noncurrent, 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 noncurrent 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,
capitalization of indirect costs for tax purposes, use of allowance
method for book purposes verses the direct method for tax purposes as to
bad debts and amortization of customer list.
Earning Per Common Share
Earnings per common share were computed by dividing net income by
weighted average number of shares of common stock outstanding during the
year. For the year ended December 31, 1995, fully diluted and primary
earnings per share were the same as there were no potentially dilutive
common stock equivalents outstanding. See Note 11 for fully diluted
earnings per share for the year ended December 31, 1994.
NOTE 3 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31
1996 1995 1995
----------- --------- ------------------
<S> <C> <C> <C>
Finished goods $348,197 $192,900 $199,600
Production supplies 53,761 45,000 42,500
Raw materials 60,418 56,000 46,000
-------- -------- --------
$462,376 $293,900 $288,100
======== ======== ========
</TABLE>
F-11
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995 AND DECEMBER 31, 1995
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31
1996 1995 1995
---------- ---------- ------------------
<S> <C> <C> <C>
Building and improvements $ 796,752 $ 796,752 $ 796,752
Machinery and equipment 1,259,101 1,209,558 1,218,213
Vehicles 110,117 89,906 109,877
Office equipment 53,648 52,247 50,795
---------- ---------- ----------
$2,219,618 $2,148,463 $2,175,637
========== ========== ==========
</TABLE>
Depreciation charged to income for the nine months ended September 30,
1996 and 1995 was $141,693 and $138,123 respectively, and $186,925 for
the year ended December 31, 1995.
NOTE 5 - NOTES PAYABLE
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31
1996 1995 1995
---------- ---------- ------------------
<S> <C> <C> <C>
Mortgage note payable, 1st National Bank of Morton Grove, payable in
monthly installments of $2,548, including interest at 7.5%, with a
balloon payment of $184,900 due November 1998. Collateralized by
real estate. $216,566 $229,884 $227,464
Mortgage note payable, American National Bank and Trust Company of
Chicago, payable in monthly installments of $4,498 including interest
at 6.75%, with a balloon payment of $394,000 due August
1998. Collaterlized by real estate 445,665 471,791 462,638
Note payable, Glenview State Bank, payable in monthly installments of
$460, including interest at 6.25%, due March, 1998. Collateralized
by automobile 7,885 12,741 11,556
-------- -------- --------
Total 670,116 714,416 701,658
Less current maturities 44,703 43,656 41,651
-------- -------- --------
Total $625,413 $670,760 $660,007
======== ======== ========
</TABLE>
Maturities of notes payable for the years ended December 31,are as
follows:
<TABLE>
<S> <C>
1996 $ 41,651
1997 44,621
1998 615,386
--------
$701,658
</TABLE>
F-12
<PAGE> 16
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995 AND DECEMBER 31, 1995
NOTE 6 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31
1996 1995 1995
---------- ---------- ------------------
<S> <C> <C> <C>
Current
Federal $ 267,136 $ 216,918 $ 225,897
State 60,699 49,374 51,860
--------- --------- ---------
Total current 327,835 266,292 277,757
Deferred 0 7,745 (36,344)
--------- --------- ---------
Provision for income taxes $ 327,835 $ 274,037 $ 241,413
========= ========= =========
</TABLE>
A reconciliation of the provision for income taxes and the income tax
computed at the statutory rate is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31
1996 1995 1995
---------- ---------- ------------------
<S> <C> <C> <C>
Federal income tax expense
computed at the statutory rate $ 267,136 $ 216,918 $ 215,228
State taxes, expense 60,699 49,374 49,796
Book/tax, accumulated depreciation adjusted 0 0 (4,886)
Book/tax, inventory adjustment 0 0 (16,319)
Permanent book/tax difference 0 7,745 (2,406)
--------- --------- ---------
Provision for income taxes $ 327,835 $ 274,037 $ 241,413
========= ========= =========
</TABLE>
Amounts for deferred tax assets and liabilities as of December 31, 1995
are as follows:
<TABLE>
<S> <C>
Long-term deferred tax liabilities arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $ 48,873
Book/tax, accumulated amortization (3,478)
--------
Total deferred tax liabilities 45,395
Short-term deferred tax assets arising from:
Book/tax, allowance for doubtful accounts $(22,176)
Book/tax, inventory (12,304)
--------
Total deferred tax assets (34,480)
Net deferred tax liability $ 10,915
========
</TABLE>
F-13
<PAGE> 17
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995 AND DECEMBER 31, 1995
NOTE 7 - CUSTOMER AND CREDIT CONCENTRATIONS
Concentrations of credit with regard to trade accounts receivable and
sales are limited due to the fact the Company's customers are spread
across different geographic areas. The customers are concentrated in the
retail food industry. Two customers accounted for 5% and 3% of 1995
sales and 18% and 22% of trade accounts receivable as of December 31,
1995.
NOTE 8 - ACQUISITION OF BUSINESS LINE
On December 27, 1990, the Company purchased the Tuscan brand-name liquid
yogurt customer list along with a limited license of the trademark and
use of the Tuscan liquid yogurt UPC codes from a third party. In
addition, the third party signed a Covenant Not to Compete which states
that, for a period of ten (10) years from the date of the agreement,
they shall not sell, produce, market or broker liquid yogurt products in
the United States.
The final purchase price of the assets was determined to be $286,000,
which was allocated accordingly:
<TABLE>
<S> <C>
Covenant Not to Compete $ 50,000
Customer List 6,000
Trademark 30,000
UPC Codes 200,000
--------
$286,000
========
</TABLE>
Total amortization charged against income for the years ended December
31, 1995 and 1994 was $43,640 and $47,241, respectively.
NOTE 9 - FORMATION OF SUBSIDIARIES
In 1992, the Company formed Lifeway International, Inc.("LLI") as a
majority-owned subsidiary. In exchange for 98% of the issued and
outstanding common stock, 2,320,000 shares, the Company transferred
$108,000 in cash. The remaining 2% of the issued and outstanding common
stock, 46,000 shares, was transferred to other shareholders ("Minority
Shareholders") under a qualifying Rule 144 restricted stock issue in
exchange for $145,000 in cash. In 1993, LII executed an Investment
Agreement with the Svyatoshino Milk Plant Ukrainian Joint-Stock Company
(Kiev, Ukraine) in which LII was to acquire a majority-ownership
interest in Svyatoshino.
Due to the political situation in the Ukraine, acquisition of the
controlling interest is not anticipated in the near future. In lieu of
this acquisition, LII has commenced exporting Kefir to Eastern Europe.
In light of this change in business plan, the Company extended an
exchange offer to the Minority Shareholders. See Note 11 for additional
information. For the years ending December 31, 1995, LII had export
sales totaling $141,708.
On September 30, 1992, the Company formed LFI Enterprises, Inc. (LFIE)
as a wholly-owned subsidiary. In exchange for all of the issued and
outstanding common stock of LFIE, the Company transferred to LFIE $1,000
in cash.
F-14
<PAGE> 18
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995 AND DECEMBER 31, 1995
NOTE 10 - BUSINESS SEGMENT INFORMATION
The Company's significant business segments include the sale of dairy
products and the operations of a restaurant. "Corporate and other"
includes revenues and expenses of the company's export subsidiary,
general corporate expenses, interest expense, and interest income. The
Company's operations, by business segment for 1995 are as follows:
<TABLE>
<CAPTION>
Dairy Corporate
1995 Products Restaurant & Other Consolidated
---- -------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Sales $3,965,707 $ 390,145 $ 141,708 $4,497,560
Net Income $ 691,055 $ 18,729 $ (269,059) $ 440,725
Identifiable Assets $3,033,742 $ 654,413 $ 103,086 $3,791,241
Depreciation and
Amortization $ 209,567 $ 12,129 $ 8,869 $ 230,565
Capital Additions $ 45,494 $ 2,700 $ 0 $ 48,194
</TABLE>
NOTE 11 - EXCHANGE OFFER TO MINORITY SHAREHOLDERS
During 1994, the Company determined that it would not be able to
implement its original business plan for LII at this time (see Note 9).
As a result, the Company conducted an exchange offer to the Minority
Shareholders of LII, whereby each Minority Shareholder could
alternatively exchange their shares for:
1) restricted common shares in the Company (including shares for
interest on their investment) or,
2) receive a return of their original investment in cash plus interest
on their investment paid in restricted common shares in the Company.
During 1994, Minority Shareholders owning 8,000 shares in LII elected to
cash out and were paid $25,000. During 1995, Minority Shareholders
owning 28,800 shares in LII elected to cash out and were paid $90,000.
In addition, these Minority Shareholders were entitled to 9,200
restricted common shares in the Company as payment of interest on their
investment in LII. During 1995, Minority Shareholders owning 9,600
shares in LII elected to exchange their shares and were issued 26,400
restricted common shares of the Company, including 2,400 shares as
payment of interest on their investment in LII. The total issue of
35,600 restricted common shares in the Company resulted in a .9%
dilution of the current Company shareholder's interests. As of December
31, 1995, all minority interests in LII have been exchanged or cashed
out under the terms of the exchange offer. Had the shares been issued in
1994, earnings per share for the year ended December 31, 1994 would have
decreased $.0005.
NOTE 12 - COMMON STOCK ISSUE
During 1995, the Company received consulting services valued at $27,500.
In lieu of cash, the Company issued 20,000 shares of common stock as
payment for these services, which resulted in a .5% dilution of the
current Company shareholder's interest.
F-15
<PAGE> 19
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995 AND DECEMBER 31, 1995
NOTE 13 - CONCENTRATION OF RISK
The Company maintains cash deposits at several banks located in the
greater Chicago, Illinois metropolitan area. Deposits at each bank are
insured by the Federal Deposit Insurance Corporation up to $100,000.
Bank balances of amounts reported by financial institutions which are
categorized as follows at December 31, 1995:
<TABLE>
<S> <C>
Amounts insured by FDIC $ 231,589
Uninsured and uncollateralized amounts 788,158
----------
Total bank balance $1,019,747
==========
</TABLE>
NOTE 14 - INVESTMENTS
The amortized cost and fair value of investments at December 31, 1995
were:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Certificates of Deposit $230,000 $230,000
U.S. Treasury Bond 99,411 99,411
-------- --------
Total Investment $329,411 $329,411
======== ========
</TABLE>
NOTE 15 - REAL ESTATE PURCHASE AGREEMENT
On May 3, 1996, the Company entered into a Real Estate Sales Contract
(the "Contract") to purchase a 110,000 square foot parcel of real
property, zoned commercial, including a 46,000 square foot one-story
building, located at 6431 Oakton Avenue, Morton Grove, Illinois for
$1,325,000. The purchase enables the Company to further expand its
production facilities and capacity. Under the terms, upon execution of
the Contract, (1) the Company would be allowed a period of 45 days to
inspect the property (the "inspection period"); and (2) the Company
would place initial earnest monies totalling $10,000 in escrow. On June
20, 1996, the Company placed additional earnest monies of $290,000 in
the interest bearing escrow account at Chicago Title and Trust Company.
As of September 30, 1996, earnest monies totalling $300,000 are held in
escrow at Chicago Title and Trust Company, the direction to control is
held by the Seller. On October 15, 1996, the Company closed on the
purchase of the Real Estate.
F-16
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(1) Material Changes in Results of Operations
Net income increased by $82,081, up to $518,562 for the nine month
period ending September 30, 1996, from $436,481 during the same nine month
period in 1995. The components of this increase are detailed as follows:
Sales and cost of goods sold increased by $744,781 and $363,034,
respectively, up to $3,985,736 and $1,808,360 during the nine month period
ending September 30, 1996 from $3,240,955 and $1,445,326 during the same nine
month period in 1995, respectively. The increase is primarily attributable to
increased sales of Kefir, Farmer's Cheese and the introduction of Golden
Zesta. Costs of sales and gross margins of the Company increased
proportionately with sales.
Operating expenses increased by $251,605, up to $1,327,775 during the
nine month period ending September 30, 1996 from $1,076,170 during the same
six month period in 1995. The increase is primarily attributable to (i) an
increase in advertising expenses due to the Company's aggressive marketing
campaign commencing in 1995; and (ii) an increase in salaries and payroll
taxes incurred as additional employees were hired to support the Company's
growth in production.
The Company's balance in inventory increased by $168,476, up to
$462,376 during the nine-month period ending September 30, 1996, as compared
to $293,900 during the nine-month period ending September 30, 1995. The
increase is primarily due to an increase in production and sales.
Provision for income taxes increased by $53,798, up to $327,835
during the nine month period ending September 30, 1996 from $274,037 during
the same nine month period in 1995. The increase is proportionate to the net
income increase.
(2) Material Changes in Financial Condition
As of the nine month period ending September 30, 1996 as compared to
the nine month period ending September 30, 1995, the Company had working
capital in the amount of $2,050,338 as compared to $1,434,292, respectively;
and cash on hand in the amounts of $788,458 as compared to $801,696,
respectively. Cash flow from operations was generated by the primary business
activity of the Company. As a result of its strong working capital position,
the Company expects all cash requirements can be met internally for the
remaining fiscal year. The decrease in cash on hand is primarily attributable
to the $300,000 in earnest money that is being held in escrow pending closing
of the purchase of real property to enable the Company to further expand its
production facilities and capacity. The earnest money on deposit is
categorized on the balance sheet under the heading entitled "Prepaid Expenses
and Other Assets." Closing occurred subsequent to the end of the fiscal quarter,
as discussed below.
On April 24, 1996, the Company entered into a Real Estate Sales
Contract with a non-affiliated third party to purchase a 110,000 square foot
parcel of real property, zoned industrial, including a 46,000 square foot
one-story building, in Morton Grove, Illinois, for $1,325,000. The purchase
will enable the Company to further expand its production facilities and
capacity. Closing occurred on October 15, 1996, and the Company anticipates a
move in April 1997. The Company has obtained bridge financing with the
American National Bank in Chicago. It is proposed that a mortgage in the
approximate amount of $919,000, the specified terms of which have not yet been
determined, will be secured by the real estate and be payable in monthly
installments. The Company will not need to raise additional funds to meet its
cash requirements for, among others, building upgrades, additional employees,
equipment and inventory. The Company, on a gradual basis, will implement its
three-year plan to increase production resulting in increased sales. Once full
production capability is reached, the Company expects that its annual product
sales will increase significantly. The Company expects to employ up to 40 more
persons to operate this new production facility, on an as-needed basis, over
the next three years.
4
<PAGE> 21
On January 26, 1996, the Board of Directors of the Company voted to
repurchase up to 100,000 shares of the Company's Common Stock on the open
market. The decision reflects the Board's belief that the Company's Common
Stock is significantly undervalued. The resolution of the Board of Directors
gave the Company one year to repurchase the shares to be held as treasury
stock for general corporate purposes. As of September 30, 1996, the Company
has repurchased a total of 10,400 of its Common Shares.
The Company is not aware of any circumstances or trends which would
have a negative impact upon future sales or earnings. The Company believes it
has sufficient funds available during the next fiscal year for any Common
Stock repurchases as discussed above. There have been no material fluctuations
in the standard seasonal variations of the Company's business.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number and Brief Description
3.1 Articles of Incorporation of issuer, with Certificate,
and Amendments. (1)
3.2 Bylaws of issuer. (1)
3.3 Corrected Amendment to the Bylaws of issuer. (1)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation
Plan, dated June 5, 1995. (2)
10.2 Employment Agreement between issuer and Michael
Smolyansky. (3)
10.4 Industrial Building Lease between Lifeway Foods, Inc.
and Michael Smolyansky, and Addendum to Building Lease. (3)
5
<PAGE> 22
10.5 Stock Option Agreements. (3)
10.7 Restricted Stock Plan. (3)
10.9 Real Estate Sales Contract, dated April 24, 1996, to
purchase a 110,000 square foot parcel of real property,
zoned industrial, in Morton Grove, Illinois. (4)
27 Financial Data Schedule. (5)
- ---------------
(1) Incorporated by reference to the issuer's registration statement
on Form S-18 (File No. 33-14329-C), and Post-Effective
Amendments thereto.
(2) Incorporated by reference to the issuer's registration
statement on Form S-8 (File No. 33-93306).
(3) Incorporated by reference to the issuer's Current Reports
filed under cover of Form 8-K and amendments thereto.
(4) Incorporated by reference to the issuer's Quarterly Report
on Form 10-QSB for the period ended March 31, 1996.
(5) Filed herewith.
(b) Reports on Form 8-K
None.
6
<PAGE> 23
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LIFEWAY FOODS, INC.
By: /s/ MICHAEL SMOLYANSKY
---------------------------------------------
Michael Smolyansky, Chief Executive Officer,
Chief Financial and Accounting Officer,
President, Treasurer and Director
Date: November 11, 1996
7
<PAGE> 24
EXHIBIT INDEX
3.1 Articles of Incorporation of issuer, with Certificate, and
Amendments. (1)
3.2 Bylaws of issuer. (1)
3.3 Corrected Amendment to the Bylaws of issuer. (1)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan,
dated June 5, 1995. (2)
10.2 Employment Agreement between issuer and Michael Smolyansky. (3)
10.4 Industrial Building Lease between Lifeway Foods, Inc. and
Michael Smolyansky, and Addendum to Building Lease. (3)
10.5 Stock Option Agreements. (3)
10.7 Restricted Stock Plan. (3)
10.9 Real Estate Sales Contract, dated April 24, 1996, to purchase a
110,000 square foot parcel of real property, zoned industrial, in
Morton Grove, Illinois. (4)
27 Financial Data Schedule. (5)
- --------------
(1) Incorporated by reference to the issuer's registration statement on
Form S-18 (File No. 33-14329-C), and Post-Effective Amendments
thereto.
(2) Incorporated by reference to the issuer's registration statement on
Form S-8 (File No. 33-93306).
(3) Incorporated by reference to the issuer's Current Reports filed under
cover of Form 8-K and amendments thereto.
(4) Incorporated by reference to the issuer's Quarterly Report on Form
10-QSB for the period ended March 31, 1996.
(5) Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 788,458
<SECURITIES> 342,000
<RECEIVABLES> 746,975
<ALLOWANCES> 48,000
<INVENTORY> 462,376
<CURRENT-ASSETS> 2,761,944
<PP&E> 2,589,118
<DEPRECIATION> 1,010,462
<TOTAL-ASSETS> 4,417,518
<CURRENT-LIABILITIES> 711,606
<BONDS> 625,413
<COMMON> 1,355,935
0
0
<OTHER-SE> 1,679,169
<TOTAL-LIABILITY-AND-EQUITY> 4,417,518
<SALES> 3,985,736
<TOTAL-REVENUES> 4,018,549
<CGS> 1,808,360
<TOTAL-COSTS> 1,327,775
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,017
<INCOME-PRETAX> 846,397
<INCOME-TAX> 327,835
<INCOME-CONTINUING> 518,562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 518,562
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
