<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, 1997
[ ] 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 its charter)
ILLINOIS 36-3442829
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 1, 1997, THE
ISSUER HAD 3,777,077 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, 1997 and 1996
Consolidated Balance Sheets
December 31, 1996 and
September 30, 1997 and 1996 (unaudited) F-2 - F-3
Consolidated Statements of Income
for the year ended December 31, 1996 and
for the three and nine months ended September 30, 1997 and 1996
(unaudited) F-4
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 1996 and
for the nine months ended September 30, 1997 (unaudited) F-5
Consolidated Statements of Cash Flows
for the year ended December 31, 1996 and
for the nine months ended September 30, 1997 and 1996 (unaudited) F-6 - F-7
Notes to Consolidated Financial Statements (unaudited) F-8 - F-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS 4
PART II - OTHER INFORMATION 5
SIGNATURES 6
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
3
<PAGE> 4
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
SEPT. 30,
----------------------- DECEMBER 31,
ASSETS 1997 1996 1996
---------- ---------- ------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalent $ 503,366 $ 788,458 $ 996,101
Investments 224,224 342,000 213,671
Accounts receivable, net of allowance
for doubtful accounts of $48,000 at
Sept. 30, 1997 and 1996 and
December 31, 1996 768,996 698,975 620,408
Other receivables 15,200 25,000 23,600
Inventories 671,999 462,376 413,324
Prepaid expenses and other assets 7,714 410,655 7,714
Deferred income taxes 41,418 34,480 41,418
---------- ---------- ----------
TOTAL CURRENT ASSET 2,232,917 2,761,944 2,316,236
PROPERTY AND EQUIPMENT
Land 658,400 369,500 658,400
Buildings, machinery and equipment 4,320,082 2,219,618 3,288,231
---------- ---------- ----------
Total property and equipment 4,978,482 2,589,118 3,946,631
Less: accumulated depreciation 1,202,790 1,010,462 1,069,536
---------- ---------- ----------
Property and equipment, net 3,775,693 1,578,656 2,877,095
OTHER ASSETS
Intangible assets 330,343 330,343 330,343
Less; accumulated amortization 295,868 253,425 264,036
---------- ---------- ----------
TOTAL OTHER ASSETS 34,475 76,918 66,307
---------- ---------- ----------
TOTAL ASSETS $6,043,084 $4,417,518 $5,259,638
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE> 5
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
SEPT. 30, DECEMBER 31,
-------------------------- ------------
1997 1996 1996 .
----------- ----------- -----------
CURRENT LIABILITIES
<S> <C> <C> <C>
Current maturities of notes payable $ 106,903 $ 44,703 $ 105,928
Accounts Payable 358,186 341,839 242,079
Accrued expenses 367,190 325,064 272,054
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 832,279 711,606 620,061
LONG-TERM LIABILITIES
Notes payable 1,399,520 625,413 1,468,904
DEFERRED INCOME TAXES 36,362 45.395 36,362
STOCKHOLDERS' EQUITY
Common Stock 1,387,354 1,355,935 1,374,754
Retained Earnings 2,406,387 1,679,169 1,778,375
Treasury Stock (18,818) 0 (18,818)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,774,923 3,035,104 3,134,311
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,043,084 $ 4,417,518 $ 5,259,638
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 6
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED FOR THE
SEPT. 30, SEPT. 30, YEAR ENDED
-------------------------- -------------------------- DECEMBER 31,
1997 1996 1997 1996 1996
----------- ----------- -------------------------- ------------
<S> <C> <C> <C> <C> <C>
SALES $ 1,504,353 $ 1,374,208 $ 4,392,201 $ 3,985,736 $ 5,295,405
COST OF GOODS SOLD 834,422 770,910 2,406,970 2,148,700 2,976,307
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 669,931 603,298 1,985,231 1,837,036 2,319,098
OPERATING EXPENSES 418,809 337,124 1,121,072 987,435 1,383,049
----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 251,122 266,174 864,159 849,601 936,049
OTHER INCOME (EXPENSE)
Interest income 11,526 8,879 37,395 32,124 52,140
Interest expense (24,221) (14,337) (90,550) (36,017) (62,168)
Other Income 15,750 0 214,058 689 59,087
----------- ----------- ----------- ----------- -----------
TOTAL OTHER INCOME
(EXPENSE) 3,055 (5,458) 160,903 (3,204) 49,059
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 254,177 260,716 1,025,062 846,397 985,108
PROVISION FOR INCOME TAXES 98,465 100,997 397,050 327,835 367,340
----------- ----------- ----------- ----------- -----------
NET INCOME $ 155,712 $ 159,719 $ 628,012 $ 518,562 $ 617,768
=========== =========== =========== =========== ===========
EARNINGS PER SHARE $ .04 $ .04 $ .17 $ .14 $ .16
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,785,377 3,774,977 3,785,377 3,774,977 3,777,385
=========== =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE> 7
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES AUTHORIZED
<TABLE>
<CAPTION>
# OF
SHARES OF
# OF SHARES ISSUED TREASURY COMMON TREASURY RETAINED
AND OUTSTANDING STOCK STOCK STOCK EARNINGS
------------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1995 3,785,377 0 $1,374,754 $ 0 $1,160,607
Repurchase of
treasury stock 0 10,400 0 18,818 0
Net income for the year
ended December 31, 1996 0 0 0 0 617,768
---------- ---------- ---------- ---------- ----------
BALANCES AT
DECEMBER 31, 1996 3,785,377 10,400 1,374,754 18,818 1,778,375
Shares exchanged in
non-cash transaction 2,100 0 12,600 0 0
---------- ---------- ---------- ---------- ----------
Net income for the nine months
ended Sept. 30, 1997 0 0 0 0 628,012
---------- ---------- ---------- ---------- ----------
BALANCES AT
SEPTEMBER 30, 1997 3,787,477 10,400 $1,387,354 $ 18,818 $2,406,387
========== ========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE> 8
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPT. 30, FOR THE YEAR ENDED
-------------------------- DECEMBER 31
1997 1996 1996
----------- ----------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 628,012 $ 518,562 $ 617,768
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 165,086 173,523 243,208
Deferred income taxes 0 0 (15,971)
Gain on sale of asset 0 (689) 0
(Increase) decrease in operating assets:
Accounts receivable (148,588) (94,354) (15,787)
Other receivable 8,400 1,200 2,600
Inventories (258,675) (174,276) (125,224)
Prepaid expenses and other assets 0 (389,449) 13,492
Increase (decrease) in operating liabilities:
Accounts payable 116,107 96,615 (3,145)
Accrued expenses 95,136 61,461 8,451
----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 605,478 192,593 725,392
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (10,553) (112,000) (13,671)
Sale of investments 0 100,100 129,411
Purchase of property and equipment (1,031,851) (43,981) (1,401,494)
Proceeds from sales of assets 0 0 0
----------- ----------- -----------
NET CASH PROVIDED BY (USED) IN
INVESTING ACTIVITIES (1,042,404) (55,881) (1,285,754)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 12,600 0 0
Proceeds from notes payable 0 0 919,645
Repayments of notes payable (68,409) (31,542) (46,471)
Purchase of Treasury Stock 0 (18,819) (18,818)
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (55,809) (50,361) 854,356
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (492,735) 86,351 293,994
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 996,101 702,107 702,107
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 503,366 $ 788,458 $ 996,101
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE> 9
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPT. 30, DECEMBER 31
------------------------- ------------------
1997 1996 1996
-------- ---------- ------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<S> <C> <C> <C>
Cash paid for interest $ 90,550 $ 36,017 $ 62,168
======== ======== ========
Cash paid for income taxes $286,560 $164,900 $486,900
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE> 10
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996 AND DECEMBER 31, 1996
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 throughout the United States and Ontario, Canada. The
Company has also expanded the distribution of some of its products
internationally by exporting to Eastern Europe through its wholly-owned
subsidiary Lifeway International, Inc. For the years ended December 31,
1996 and 1995 export sales of the Company were approximately $414,000 and
$215,000, respectively.
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.
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 1996 and 1995 for use of
the restaurant which is owned by the Company.
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.
F-8
<PAGE> 11
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996 AND DECEMBER 31, 1996
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Investments
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, 1996, 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:
Category Years
-------- -----
Buildings and improvements 31
Machinery and equipment 5-12
Office equipment 5-7
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:
Covenant not to compete 10 years
Trademark license 2.5 years
U.P.C. Codes 7 years
Customer lists 5 years
F-9
<PAGE> 12
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996 AND DECEMBER 31, 1996
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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.
Change in Accounting Principle
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128) and No. 129, "Disclosure of Information About Capital
Structure" (SFAS 129). The Company's required adoption date is January 1,
1997. SFAS 128 changes the calculation for earnings per share. SFAS 129
restates existing disclosures related to the Company's capital structure.
The Company anticipates the adoption of SFAS 128 and SFAS 129 will not
have a material impact on its financial statements.
Reclassification of Financial Statement Presentation
Certain reclassifications have been made to the 1995 financial statements
to confirm with the 1996 financial statement presentation. Such
reclassifications had no effect on net income as previously reported.
Note 3 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPT. 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31
1997 1996 1996
-------- ---------- -------------------
<S> <C> <C> <C>
Finished goods $415,542 $348,197 $300,287
Production supplies 147,045 53,761 33,957
Raw materials 113,412 60,418 79,080
-------- -------- --------
$671,999 $462,376 $413,324
======== ======== ========
</TABLE>
F-10
<PAGE> 13
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996 AND DECEMBER 31, 1996
Note 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPT. 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31
1997 1996 1996
---------- ------------ --------------------
<S> <C> <C> <C>
Land $ 658,400 $ 369,500 $ 658,752
Buildings and improvement 1,649,370 796,752 1,649,370
Machinery and equipment 2,028,911 1,259,101 1,448,752
Vehicles 109,877 110,117 109,877
Leasehold improvements 531,924 53,648 80,232
---------- ---------- ----------
$4,978,482 $2,589,118 $3,946,631
========== ========== ==========
</TABLE>
Depreciation charged to income for the three and nine months ended
September 30, 1997 and 1996 was $44,418, $47,231, $133,253 and $141,693
respectively, and $200,767 for the year ended December 31, 1996.
During 1996, the Company acquired land, building and machinery for
$1,350,000. A mortgage note payable was signed for approximately $920,000,
related to this acquisition (see Note 5). The Company continued to rent
the building to the former tenant and recognized approximately $59,000 of
rent during 1996 and $214,058 for the nine months ended September 30,
1997, included in other income.
Note 5 - NOTES PAYABLE
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPT. 30, FOR THE YEAR ENDED
------------------------ DECEMBER 31,
1997 1996 1996
----------- ---------- -------------------
<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 $ 200,983 $ 216,566 $ 213,490
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
Collateralized by real estate 423,511 445,665 439,761
Mortgage note payable, American National Bank and Trust Company of
Chicago, payable in monthly installments of principal of $5,109 plus
interest at 8.05%, with a balloon payment of $618, 214 due
November 2001. Collateralized by real estate 878,773 0 914,536
Note payable, Glenview State Bank, payable in monthly installments of
$460, including interest at 6.25%,
due March, 1998. Collateralized by automobile 3,156 7,885 7,045
---------- ---------- ----------
Total 1,506,423 670,116 1,574,832
</TABLE>
F-11
<PAGE> 14
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996 AND DECEMBER 31, 1996
Note 5 - NOTES PAYABLE - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPT. 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31,
1997 1996 1996
----------- ---------- -----------------
<S> <C> <C> <C>
Less current maturities 106,903 44,703 105,928
---------- ---------- ----------
Total $1,399,520 $ 625,413 $1,468,904
========== ========== ==========
</TABLE>
Maturities of notes payable are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
1997 $ 105,928
1998 676,984
1999 61,308
2000 61,308
2001 669,304
----------
Total $1,574,832
==========
</TABLE>
Note 6 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPT. 30, FOR THE YEAR ENDED
--------------------- DECEMBER 31
1997 1996 1996
--------- --------- ------------------
<S> <C> <C> <C>
Current
Federal $ 323,522 $ 267,136 $ 312,270
State 73,528 60,699 71,041
--------- --------- ---------
Total current 397,050 327,835 383,311
Deferred 0 0 (15,971)
--------- --------- ---------
Provision for income taxes $ 397,050 $ 327,835 $ 367,340
========= ========= =========
</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
SEPT. 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31
1997 1996 1996
------------------------- ------------------
<S> <C> <C> <C>
Federal income tax expense
computed at the statutory rate $ 323,522 $ 267,136 $ 334,937
State taxes, expense 73,528 60,699 49,255
Book/tax, accumulated depreciation adjusted 0 0 (8,221)
Book/tax, inventory adjustment 0 0 (5,857)
Permanent book/tax difference 0 0 (2,774)
--------- --------- ---------
Provision for income taxes $ 397,050 $ 327,835 $ 367,340
========= ========= =========
</TABLE>
F-12
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996 AND DECEMBER 31, 1996
Note 6 - PROVISION FOR INCOME TAXES - CONTINUED
Amounts for deferred tax assets and liabilities as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Long-term deferred tax liabilities arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $ 39,134
Book/tax, accumulated amortization ( 2,772)
-------------
Total deferred tax liabilities 36,362
Short-term deferred tax assets arising from:
Book/tax, allowance for doubtful accounts $ 22,176
Book/tax, inventory 19,242
------------
Total deferred tax assets 41,418
------------
Net deferred tax asset $ 5,056
============
</TABLE>
Note 7 - STOCKHOLDERS' EQUITY
During 1996, the Company repurchased 10,400 shares of common stock at a
cost of $18,818.
Note 8 - CUSTOMER AND CREDIT CONCENTRATIONS
Concentrations of credit with regard to trade accounts receivable, which
are uncollateralized, 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
11.7% and 10.6% of 1996 sales and 16.4% and 19.9% of trade accounts
receivable as of December 31, 1996, respectively.
Note 9 - INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Covenant Not to Compete $ 50,000
Customer List 6,000
Trademark 30,000
UPC Codes 200,000
Organization Costs 44,343
----------
330,343
Accumulated amortization 274,647
----------
$ 55,696
==========
</TABLE>
Total amortization charged against income for the three and nine months
ended September 30, 1997 and 1996 was $10,611, $10,610, $31,832 and
$31,830 respectively, and $33,572 for the year ended December 31, 1996.
Note 10 - 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.
F-13
<PAGE> 16
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996 AND DECEMBER 31, 1996
Note 10 - FORMATION OF SUBSIDIARIES - CONTINUED
During 1994, the Company determined that it would not be able to implement
its original business plan for LII. 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 of 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 owing 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 interest. As of December 31, 1996, all minority interests in
LII have been exchanged or cashed out under the terms of the exchange
offer.
On September 30, 1992, the Company formed LFI Enterprises, Inc. ("LFEI")
as a wholly owned subsidiary. In exchange for all of the issued and
outstanding common stock of LFEI, the Company transferred to LFEI $1,000
in cash.
Note 11 - 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 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Dairy Corporate
1996 Products Restaurant & Other Consolidated
---------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Sales $ 4,863,339 $ 432,066 $ 0 $ 5,295,405
Net Income $ 558,134 $ 65,080 $ (5,446) $ 617,768
Identifiable Assets $ 5,054,029 $ 114,878 $ 90,731 $ 5,259,638
Depreciation and
Amortization $ 223,210 $ 11,129 $ 8,869 $ 243,208
Capital Additions $ 1,401,494 $ 2,700 $ 0 $ 1,401,494
1995
----------
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>
F-14
<PAGE> 17
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996 AND DECEMBER 31, 1996
Note 12 - STOCK OPTION PLANS
On June 9, 1995, the Company filed a registration statement with the
Securities and Exchange Commission in connection with a Consulting Service
Compensation Plan covering up to 300,000 of the Company's Common Stock
shares. Pursuant to the Plan, the Company may issue Common Stock or option
to purchase Common Stock to certain consultants, service providers and
employees of the Company.
As of December 31, 1996, no options have been issued under the plan. The
Company did issue 20,000 shares of Common Stock in 1995 for consulting
services valued at $27,500. This issue resulted in a .5% dilution of the
current Company shareholder's interests. The Company issued 2,100 shares
of Common Stock as of September 30, 1997 for consulting services valued at
$12,600. This issue resulted in a .05% dilution of the current Company
shareholder's interests.
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, 1996:
<TABLE>
<S> <C>
Amounts insured by FDIC $ 147,374
Uninsured and uncollateralized amounts 732,472
------------
Total bank balance $ 879,846
============
</TABLE>
Note 14 - INVESTMENTS
The amortized cost and fair value of investments at December 31, 1996
were:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 996,101 $ 996,101
Certificates of Deposit 213,671 213,671
Note payable to bank 7,045 7,045
Mortgages payable 1,567,787 1,548,436
---------- ----------
Total Investment $2,784,604 $2,765,253
========== ==========
</TABLE>
The carrying values of cash and cash equivalents, certificates of deposit
and the note payable to bank approximate fair values. The fair value of
the mortgage 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.
F-15
<PAGE> 18
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 $109,450, up to $628,012 for the nine month
period ending September 30, 1997, from $518,562 during the same nine month
period in 1996. The material components of this increase are detailed as
follows:
Sales and cost of goods sold increased by $406,465 and $258,270,
respectively, up to $4,392,201 and $2,406,970, respectively, during the nine
month period ending September 30, 1997, from $3,985,736 and $2,148,700,
respectively, during the same nine month period in 1996. The increases are
primarily attributable to increased sales of Kefir, Farmer's Cheese and Golden
Zesta and the introduction of non-fat Kefir and fat-free Cheese. As first
disclosed in the Company's annual report of Form 10-KSB for the year ended
December 31, 1996, the financial statements reflect a change in accounting for
certain expenses, whereby certain expenses that have previously been classified
as operating expenses are now classified under cost of goods sold.
Interest expense increased by $54,533, up to $90,550 during the nine
month period ending September 30, 1997, from $36,017 during the same nine month
period in 1996. The increase is primarily attributable to interest paid on a
mortgage note payable on real property that was purchased in 1996.
Other income increased by $214,369, up to $215,058 during the nine
month period ending September 30, 1997, from $689 during the same nine month
period in 1996. The increase is attributable to the receipt of rent revenues
from a tenant who occupied the real property that was acquired by the Company
in 1996. The tenant vacate the property during the second quarter of 1997 so
no future rent revenues will be received, and the Company is now occupying the
property for its own use.
Provision for income taxes increased by $69,215, up to $397,050 during
the nine month period ending September 30, 1997, from $327,835 during the same
nine month period in 1996. The increase is proportionate to the net income
increase.
(2) Material Changes in Financial Condition
As of the nine month period ending September 30, 1997, as compared to
the nine month period ending September 30, 1996, the Company had working capital
in the amount of $1,400,638 as compared to $2,050,338, respectively, a decrease
of $649,700; and cash on hand in the amounts of $503,366 as compared to
$788,458, respectively, a decrease of $285,092. These decreases are primarily
due to 1) a large decrease in "prepaid expenses and other assets" for the
current year because this account had included in the prior period large
security deposits on property and equipment that have since been purchased; and
2) during the quarter ended September 30, 1997, the Company invested $526,891 in
property improvements and equipment for its new production facility, which
commenced operations in October 1997. Cash flow from operations was generated
by the primary business activity of the Company.
The Company's balance in inventory increased by $209,623, up to
$671,999 as of September 30, 1997, as compared to $462,376 as of September 30,
1996. The increase is primarily due to an increase in production and sales.
Net cash provided (used) by operating activities increased by
$412,885, up to $605,478 as of September 30, 1997, as compared to $192,593 as
of September 30, 1996. The increase is primarily due to 1) a significant
increase in net income due to increased sales; and 2) a significant decrease in
prepaid expenses and other assets due primarily to the Company's purchase of
property and equipment that had been under deposit in the prior period.
The Company is not aware of any circumstances or trends which would
have a negative impact upon future sales or earnings. There have been no
material fluctuations in the standard seasonal variations of the Company's
business. The accompanying financial statements include all adjustments which
in the opinion of management are necessary in order to make the financial
statements not misleading.
4
<PAGE> 19
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
A. In August of 1997, the Company's Board of Directors formed an
Audit Committee comprised of three directors, a majority of whom are outside
directors. The members of the initial Audit Committee are Michael Smolyansky,
Pol Sikar, and Rick Salm. Members are appointed annually by the full Board.
The functions of the Audit Committee are to review the Company's internal
controls, accounting policies, and financial reporting practices; to review the
financial statements, the arrangements for and scope of the independent audit,
as well as the results of the audit engagement; and to review the services and
fees of the independent auditors, their independence, and recommend to the
Board for its approval and for ratification by the stockholders the engagement
of the independent auditors to serve the following year in examining the
accounts of the Company.
B. After the quarter ended September 30, 1997, on October 21,
1997, the Company commenced production in its new 46,000 square foot plant
located in Morton Grove, Illinois, giving the Company the ability to increase
capacity approximately 15-fold.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Exhibit Number and Brief Description
<TABLE>
<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)
10.9 .. 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)
</TABLE>
- -------------------
footnotes:
(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 on 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.
5
<PAGE> 20
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 12, 1997
6
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER 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)
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)
10.9 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)
</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 issuer's Quarterly Report on Form
10-QSB for the period ended March 31, 1996.
(5) Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 503,366
<SECURITIES> 224,224
<RECEIVABLES> 832,196
<ALLOWANCES> 48,000
<INVENTORY> 671,999
<CURRENT-ASSETS> 2,232,917
<PP&E> 4,978,482
<DEPRECIATION> 1,202,790
<TOTAL-ASSETS> 6,043,084
<CURRENT-LIABILITIES> 832,279
<BONDS> 1,399,520
0
0
<COMMON> 1,387,354
<OTHER-SE> 2,387,569
<TOTAL-LIABILITY-AND-EQUITY> 6,043,084
<SALES> 4,392,201
<TOTAL-REVENUES> 4,643,654
<CGS> 2,406,970
<TOTAL-COSTS> 1,121,072
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90,550
<INCOME-PRETAX> 1,025,062
<INCOME-TAX> 397,050
<INCOME-CONTINUING> 628,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 628,012
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
