<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 June 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 of (IRS Employer Identification No.)
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 JULY 23, 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
<TABLE>
PART I - FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS. PAGE
----
Lifeway Foods, Inc. and Subsidiaries
June 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 6
SIGNATURES 8
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
[FOLLOWING PAGE IS F-1]
3
<PAGE> 4
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
TABLE OF CONTENTS
Certified Public Accountants Report on Financial Statements F-2
Consolidated Balance Sheets -
June 30, 1996 and June 30, 1995 F-3 - F-4
Consolidated Statements of Income -
for the years ended June 30, 1996 and 1995 F-5
Consolidated Statements of Changes in Stockholders' Equity -
for the years ended June 30, 1996 and 1995 F-6
Consolidated Statement of Cash Flows -
for the years ended June 30, 1996 and 1995 F-7 - F-8
Notes to Consolidated Financial Statements -
June 30, 1996 and 1995 F-9 - F16
<PAGE> 5
ROBERT L. DELORME
CERTIFIED PUBLIC ACCOUNTANT
1010 JORIE BOULEVARD/SUITE 300
OAK BROOK, ILLINOIS 60521
(708) 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
June 30, 1996 and 1995 and the related statements of income, changes in
stockholders' equity and cash flows for the six 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
July 16, 1996
F-2
<PAGE> 6
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
--------------------------- ------------
ASSETS 1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalent $ 542,661 $ 624,565 $ 702,107
Investments 342,000 167,565 329,411
Accounts receivable, net of allowance
for doubtful accounts of $24,000 at
June 30, 1995 and $48,000 at
June 30, 1996 and December 31, 1995 628,380 477,877 604,621
Other receivables 25,000 28,600 26,200
Inventories 365,429 217,000 288,100
Prepaid expenses and other assets 407,929 27,639 21,206
Deferred income taxes 34,480 0 34,480
------------ ------------ ------------
TOTAL CURRENT ASSET 2,345,879 1,543,246 2,006,125
PROPERTY AND EQUIPMENT
Land 369,500 369,500 369,500
Buildings, machinery and equipment 2,191,697 2,143,357 2,175,637
------------ ------------ ------------
Total property and equipment 2,561,197 2,512,857 2,545,137
Less: accumulated depreciation 963,231 773,926 868,769
------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET 1,597,966 1,738,931 1,676,368
OTHER ASSETS
Intangible assets 330,343 330,343 330,343
Less; accumulated amortization 238,381 197,558 221,595
------------ ------------ ------------
TOTAL OTHER ASSETS 91,962 132,785 108,748
------------ ------------ ------------
TOTAL ASSETS $ 4,035,807 $ 3,414,962 $ 3,791,241
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 7
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
JUNE 30, DECEMBER 31,
--------------------------- ------------
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of notes payable $ 43,588 $ 39,349 $ 41,651
Accounts Payable 214,979 204,769 245,224
Accrued expenses 217,251 116,717 263,603
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 475,818 360,835 550,478
LONG-TERM LIABILITIES
Notes payable 639,209 684,723 660,007
DEFERRED INCOME TAXES 45,395 47,259 45,395
MINORITY INTEREST 0 172 0
STOCKHOLDERS' EQUITY
Common Stock 1,355,935 1,369,254 1,374,754
Retained Earnings 1,519,450 952,719 1,160,607
TOTAL STOCKHOLDERS' EQUITY 2,875,385 2,321,973 2,535,361
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,035,807 $ 3,414,962 $ 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 SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED
---------------------------- DECEMBER 31,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
SALES $ 2,611,528 $ 2,089,859 $ 4,497,560
COST OF GOODS SOLD 1,154,720 976,456 2,244,628
------------ ------------ ------------
GROSS PROFIT 1,456,808 1,113,403 2,252,932
OPERATING EXPENSES 873,381 721,543 1,560,967
------------ ------------ ------------
INCOME FROM OPERATIONS 583,427 391,860 691,965
OTHER INCOME (EXPENSE)
Interest income 23,245 16,162 41,326
Interest expense (21,680) (44,038) (67,164)
Gain on sale of assets 689 16,011 16,001
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 2,254 (11,865) (9,827)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 585,681 379,995 682,138
PROVISION FOR INCOME TAXES 226,838 147,158 241,413
------------ ------------ ------------
NET INCOME $ 358,843 $ 232,837 $ 440,725
============ ============ ============
Earnings per share $ .10 $ .06 $ .12
============ ============ ============
SHARES OUTSTANDING 3,774,977 3,782,977 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 six months ended
June 30, 1996 0 0 358,843
------------ ------------ ------------
BALANCES AT JUNE 30, 1996 3,774,977 $ 1,355,935 $ 1,519,450
============ ============ ============
</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 SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED
---------------------------- DECEMBER 31,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 358,843 $ 232,837 $ 440,725
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 111,248 111,686 230,565
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 0 (36,344)
Gain on sale of asset (689) (16,011) (16,011)
(Increase) decrease in operating assets:
Accounts receivable (23,759) 48,834 (101,910)
Other receivable 1,200 2,300 4,700
Inventories (77,329) (108,691) (179,791)
Prepaid expenses and other assets (386,723) (1,872) 4,561
Increase (decrease) in operating liabilities:
Accounts payable (30,245) (102,408) (57,125)
Accrued expenses (46,352) (56,920) 89,964
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (93,806) 151,755 445,334
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (112,000) 0 (167,315)
Sale of investments 100,100 101,745 107,214
Purchase of property and equipment (16,060) (15,813) (48,194)
Proceeds from sales of assets 0 0 51,323
------------ ------------ ------------
NET CASH PROVIDED BY (USED) IN
INVESTING ACTIVITIES (27,960) 85,932 (56,972)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (18,861) (18,120) (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 (37,680) (108,620) (181,753)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (159,446) 129,067 206,609
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 702,107 495,498 495,498
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 542,661 $ 624,565 $ 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 SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED
---------------------------- DECEMBER 31,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 21,680 $ 44,038 $ 67,164
============ ============ ============
Cash paid for income taxes $ 164,900 $ 185,000 $ 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
JUNE 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
JUNE 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>
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
JUNE 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 SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED
---------------------------- DECEMBER 31,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Finished goods $ 226,229 $ 118,000 $ 199,600
Production supplies 69,000 45,000 42,500
Raw materials 70,200 54,000 46,000
------------ ------------ ------------
$ 365,429 $ 217,000 $ 288,100
============ ============ ============
</TABLE>
F-11
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 SIX MONTHS ENDED
JUNE 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 1,233,899 1,208,091 1,218,213
Vehicles 109,877 89,906 109,877
Office equipment 51,169 48,195 50,795
------------ ------------ ------------
$ 2,191,697 $ 2,143,357 $ 2,175,637
============ ============ ============
</TABLE>
Depreciation charged to income for the six months ended June 30, 1996 and
1995 was $94,462 and $92,082 respectively, and $186,925 for the year ended
December 31, 1995.
NOTE 5 - NOTES PAYABLE
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 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 $ 221,324 $ 234,079 $ 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 452,345 476,085 462,638
Note payable, Glenview State Bank, payable in monthly
installments of $460, including interest at 6.25%,
due March, 1998. Collateralized by automobile 9,128 13,908 11,556
------------ ------------ ------------
Total 682,797 724,072 701,658
Less current maturities 43,588 39,349 41,651
------------ ------------ ------------
Total $ 639,209 $ 684,723 $ 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
JUNE 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 SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED
--------------------------- DECEMBER 31,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal $ 184,858 $ 119,946 $ 225,897
State 41,980 27,212 51,860
------------ ------------ ------------
Total current 226,838 147,158 277,757
Deferred 0 0 (36,344)
------------ ------------ ------------
Provision for income taxes $ 226,838 $ 147,158 $ 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 SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED
--------------------------- DECEMBER 31,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax expense
computed at the statutory rate $ 184,858 $ 119,946 $ 215,228
State taxes, expense 41,980 27,212 49,796
Book/tax, accumulated depreciation adjusted 0 0 (4,886)
Book/tax, inventory adjustment 0 0 (16,319)
Permanent book/tax difference 0 0 (2,406)
------------ ------------ ------------
Provision for income taxes $ 226,838 $ 147,158 $ 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
JUNE 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
JUNE 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
JUNE 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 totaling $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 June 30, 1996, earnest
monies totaling $300,000 are held in escrow at Chicago Title and Trust
Company, the direction to control is held by the Seller. The Company shall
be entitled to the interest accruing thereunder unless they are in default
of the Contract, in which case the Seller shall be entitled to the
interest. The Contract is expressly contingent upon entering into a
mutually acceptable agreement with the current tenant of the building to
terminate its lease. If the Seller is unable to enter into a termination
agreement with the Tenant prior to the negotiation period set forth in the
Contract, the Company shall have either (a) the option to extend the
negotiation period or (b) the right to terminate the Contract. In the
event of termination, the Contract shall be null and void with all earnest
monies plus interest earned thereon to be refunded to the Company together
with the sum of $1,000 for cost reimbursements.
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 $126,006, up to $358,843 for the six month period
ending June 30, 1996, from $232,837 during the same six month period in 1995.
The components of this increase are detailed as follows:
Sales and cost of goods sold increased by $521,669 and $178,264,
respectively, up to $2,611,528 and $1,154,720 during the six month period
ending June 30, 1996 from $2,089,859 and $976,456 during the same six 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 $151,838, up to $873,381 during the six
month period ending June 30, 1996 from $721,543 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 $102,100, up to $365,429
during the three-month period ending June 30, 1996, as compared to $217,000
during the three-month period ending June 30, 1995. The increase is primarily
due to an increase in production and sales.
Interest income increased slightly, up to $23,245 during the six month
period ending June 30, 1996 from $16,162 during the same six month period in
1995. The increase is due to an increase in funds available for investments.
Provision for income taxes increased by $79,680, up to $226,838 during the
six month period ending June 30, 1996 from $147,158 during the same six month
period in 1995. The increase is proportionate to the net income increase.
(2) Material Changes in Financial Condition
As of the six month period ending June 30, 1996 as compared to the six
month period ending June 30, 1995, the Company had working capital in the
amount of $1,870,061 as compared to $1,182,411, respectively; and cash on hand
in the amounts of $542,661 as compared to $624,565, 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."
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. The
Company anticipates a move in date of December 1996. The Company has obtained
preliminary approval of financing with the American National Bank in Chicago.
It is proposed that the loan in the approximate amount of $1,000,000, 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 has made
earnest money deposits totaling $300,000, and will not need to raise additional
funds to meet its cash requirements for, among others, building upgrades,
additional employees, equipment and inventory. Thereafter, 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
4
<PAGE> 21
expects to employ up to 40 more persons to operate this new production
facility, on an as-needed basis, over the next three years.
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 June 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.
5
<PAGE> 22
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
The Company held its Annual Meeting of Stockholders on June 15, 1996.
Proxies were solicited pursuant to Regulation 14A under the Exchange Act, and
the election of directors was uncontested. The matters voted upon and the
results thereof were as follows:
1. Election of Directors to serve until the next meeting and until their
successors are duly elected and qualified:
<TABLE>
<CAPTION>
For Withhold
--------- --------
<S> <C> <C>
Michael Smolyansky 3,560,157 500
Pol Sikar 3,560,657
Rick D. Salm 3,560,657
Renzo Berenardi 3,560,657
</TABLE>
2. Ratification of Gleeson, Sklar, Sawyers & Cumpata LLP as independent
auditors for the next fiscal year:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
3,553,957 2,300 4,400
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number and Brief Description
- ------------------------------------
<S> <C>
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)
</TABLE>
6
<PAGE> 23
<TABLE>
<S> <C>
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)
10.6 Noncompetition, Nondisclosure, and Inventions Agreement. (3)
10.7 Restricted Stock Plan. (3)
10.8 Definitive Purchase Agreement between Lifeway Foods, Inc. and Johanna
Farms, Inc., dated December 27, 1990. (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)
15.1 Letter on unaudited interim financial information. (5)
16.1 Letter of Robert L. DeLorme, C.P.A., dated March 3, 1995, stating its
concurrence with the disclosure contained in the Company's Current
Report on Form 8-K dated February 28, 1995. (3)
16.2 Letter of Gleeson, Sklar, Sawyers & Cumpata, L.L.P., Certified Public
Accountants and Management Consultants, dated March 3, 1995, stating
its concurrence with the disclosure contained in the Company's
Current Report on Form 8-K dated February 28, 1995. (3)
27 Financial Data Schedule for 2nd Quarter Report on form 10-QSB
</TABLE>
- --------------
(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 issuers quarterly report on form
10-QSB for the period ended March 31, 1996.
(5) Filed herewith at page F-2 of Item 1. Financial Statements.
(b) Reports on Form 8-K
None.
7
<PAGE> 24
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: July 23, 1996
8
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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)
10.6 Noncompetition, Nondisclosure, and Inventions Agreement. (3)
10.7 Restricted Stock Plan. (3)
10.8 Definitive Purchase Agreement between Lifeway Foods, Inc. and Johanna
Farms, Inc., dated December 27, 1990. (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)
15.1 Letter on unaudited interim financial information. (5)
16.1 Letter of Robert L. DeLorme, C.P.A., dated March 3, 1995, stating its
concurrence with the disclosure contained in the Company's Current
Report on Form 8-K dated February 28, 1995. (3)
16.2 Letter of Gleeson, Sklar, Sawyers & Cumpata, L.L.P., Certified Public
Accountants and Management Consultants, dated March 3, 1995, stating
its concurrence with the disclosure contained in the Company's
Current Report on Form 8-K dated February 28, 1995. (3)
27 Financial Data Schedule for 2nd Quarter Report on form 10-QSB
</TABLE>
- --------------
(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 issuers quarterly report on form
10-QSB for the period ended March 31, 1996.
(5) Filed herewith at page F-2 of Item 1. Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1995, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 542,661
<SECURITIES> 342,000
<RECEIVABLES> 701,380
<ALLOWANCES> 48,000
<INVENTORY> 365,429
<CURRENT-ASSETS> 2,345,879
<PP&E> 2,561,197
<DEPRECIATION> 963,231
<TOTAL-ASSETS> 4,035,807
<CURRENT-LIABILITIES> 475,818
<BONDS> 639,209
<COMMON> 1,355,935
0
0
<OTHER-SE> 1,519,450
<TOTAL-LIABILITY-AND-EQUITY> 4,035,807
<SALES> 2,611,528
<TOTAL-REVENUES> 2,635,462
<CGS> 1,154,720
<TOTAL-COSTS> 873,381
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,680
<INCOME-PRETAX> 585,681
<INCOME-TAX> 226,838
<INCOME-CONTINUING> 358,843
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 358,843
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
