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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from: to
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Commission file number: 0-17363
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LIFEWAY FOODS, INC.
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(Name of small business issuer as specified in its charter)
Illinois 36-3442829
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7625 North Austin Avenue, Skokie, Illinois 60077
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(Address of principal executive offices) (Zip Code)
Issuers telephone number: (847) 967-1010
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Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
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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 for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
State issuers revenues for its most recent fiscal year. $5,295,405
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State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within the past 60 days. $4,150,919 as of March 20, 1997, based on the
average closing bid and asked prices as quoted on NASDAQ.
State the number of shares outstanding of each of the issuers classes
of common equity, as of the latest practicable date. 3,785,377 shares of
Common Stock as of March 20, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): . Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
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 similar to but distinct from
yogurt, in several flavors sold under the name "Lifeway's Kefir"; a plain
farmer's cheese sold under the name "Lifeway's Farmer's Cheese"; and a fruit
sugar-flavored product similar in consistency to cream cheese sold under the
name of "Sweet Kiss." In the third quarter of 1995, the Company commenced
marketing a vegetable-based seasoning under the name "Golden Zesta." The
Company currently distributes its products throughout the Chicago metropolitan
area through local food stores. In addition, the products are sold throughout
the United States and Ontario, Canada. 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 ending December 31, 1996 and 1995, export sales of the Company were
approximately $414,000 and $215,000, respectively. (See, further, Item 7, Note
1 to Consolidated Financial Statements.)
(a)(1) Subsidiary Corporations
Lifeway International, Inc.
In 1992, the Company formed Lifeway International, Inc. ("LII") 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, 46,400 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 lieu of this acquisition, LII
commenced exporting Kefir to Eastern Europe. In light of this change in the
business plan, the Company extended an exchange offer to the Minority
Shareholders. In 1994 and 1995, Minority Shareholders owning 36,800 shares were
paid $90,000 by the Company for their shares in LII. 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,
1996, all minority interests in LII have been exchanged or cashed out under the
terms of the exchange offer. (See, further, Item 7, Note 10 to Consolidated
Financial Statements, and Item 12, Certain Relationships and Related
Transactions.)
LFI Enterprises, Inc.
On September 30, 1992, the Company formed a wholly-owned subsidiary
corporation, LFI Enterprises, Inc. ("LFIE"), incorporated in the State of
Illinois. LFIE was formed for the purpose of operating a "Russian" theme
restaurant and supper club on the property acquired by the Company on October
9, 1992. The restaurant/supper club commenced its operations in late November
1992. In exchange for all of the issued and outstanding Common Stock of LFIE,
the Company transferred to LFIE $1,000 in cash. (See, further, Item 7, Notes 1
and 10 to Consolidated Financial Statements.)
(b) Business of Issuer
(b)(1) Products
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The Company's primary product is Kefir which, like the better-known
product of yogurt, is a fermented dairy product. Kefir has a slightly
effervescent quality, with a taste similar to yogurt and a consistency similar
to buttermilk. It is a distinct product from yogurt because it uses the unique
microorganisms of Kefir as the culture to ferment the milk. The Company's basic
Kefir is a drinkable product intended for use as a breakfast meal or a snack,
or as a base for lower-calorie dressings, dips, soups or sauces. The Kefir is
also used as the base of the Company's plain farmer's cheese, a cheese without
salt, sugar or animal rennet. In addition, Kefir is the primary ingredient of
the Company's "Sweet Kiss" product, a fruit sugar-flavored, cream cheese-like
spread which is intended to be used as a dessert spread or frosting.
Kefir contains a unique mixture of several live microorganisms and
body nutrients such as proteins, minerals and vitamins. Kefir is highly
digestible and, due to its acidity and enzymes, stimulates digestion of other
foods. Kefir is considered to be the most favorable milk product for people
suffering from genetically stipulated lactose intolerance. Studies indicate
that Kefir seems to stimulate protein digestion and appetite, decrease the
cholesterol content in blood, improve salivation and excretion of stomach and
pancreatic enzymes and peristalsis. As compared to yogurt, many Naturopathic
doctors consider Kefir to be the best remedy for digestive troubles because it
has a very low curd tension (the curd breaks up very easily into small
particles). The curd of yogurt, on the other hand, holds together or breaks
into lumps. The small size of the Kefir curd facilitates digestion by
presenting a large surface for the digestive agents to work on.
Like Kefir made by other manufacturers, other commercial yogurt
varieties, and dairy products in general, the Company's Kefir is a good source
of calcium, protein, and Vitamin B-complex. In addition, because the
fermentation process produces a less sour tasting product than yogurt, less
sugar is required to make a desirable product, and the end product contains
fewer calories.
The Company currently sells its drinkable Kefir product in eleven
flavors-- plain-regular, plain-low-fat, raspberry, blueberry, strawberry,
cherry, peach, banana-strawberry, capuccino, chocolate and vanilla-- in
32-ounce containers featuring color-coded caps and labels describing
nutritional information. In March 1996, the Company began marketing its
fat-free, low cholesterol Kefir in six flavors. The Kefir product is currently
marketed under the name "Lifeway's Kefir," and is sold from the dairy section.
Lifeway's Kefir has a shelf life of approximately 60 days. All flavors contain
fructose, fruit juice, Kefir culture, and pasteurized, low-fat milk and natural
flavorings.
The Company sells Lifeway Kefir, Sweet Kiss spread, and Lifeway
Farmer's Cheese to various retail establishments including supermarkets,
grocery stores, gourmet shops, delicatessens and convenience stores. In late
1995, the Company began marketing a vegetable-based seasoning under the name
"Golden Zesta" which, because of its low sodium content, may also be used as a
salt substitute, and two kinds of fat-free Farmer's Cheese, regular and swiss
style.
The Company intends to continue to develop new products, such as salad
dressing and a frozen dessert product based on Kefir and Farmer's Cheese,
although there is no assurance that such products can be developed successfully
or marketed profitably.
(b)(2) Distribution
The Company has verbal distribution arrangements with various
distributors throughout the United States. These verbal distribution
arrangements, in the opinion of the Company, allow management the necessary
latitude to expand into new areas and markets and establish new relationships
with distributors on an ongoing basis. The Company has not offered any
exclusive territories to any distributors.
These distributors are provided Lifeway products at wholesale prices
for distribution to their retail accounts. The Company believes that the price
at which its products are sold to its distributors is competitive with the
prices generally paid by distributors for similar products in the markets
served. In all areas served, distributors currently deliver the products
directly to the refrigerated cases of dairy sections of the retail stores. Each
carries the full complement of Lifeway's products on its trucks, and checks the
retail stores for space allocated to Lifeway's products, determines inventory
requirements, and places Lifeway products directly into the case. The Company
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prefers such method of distribution in order to serve the needs of each retail
store, and to ensure consistency and quality of product handling, quality
control, flavor selection and retail display. Under the distribution
arrangements, each distributor must meet certain prescribed product handling,
service and administrative requirements including, among others, frequency of
delivery, replacement of damaged, old or substandard packages, and delivery of
products directly to the refrigerated case.
With its four Company-owned trucks, the Company distributes its
products directly in over 750 stores in the State of Illinois, including major
retail chains such as Jewel Food Stores (more than 200 stores), Dominick's
Finer Foods (more than 100 stores), Omni Super Stores, Treasure Island Food
Marts, Whole Foods, Cub Foods and Butera Food Stores.
Additionally, the Company distributes its products internationally by
exporting to Eastern Europe. (See, further, Item 7, Note 1 to Consolidated
Financial Statements.)
(b)(3) Marketing
The Company continues to promote the verifiable nutritional
characteristics, purity of product, and good taste of its Kefir and Kefir-based
products. The Company primarily advertises its products through local radio
stations, which is directed to both users and non-users of cultured milk
products of all kinds. In addition, through newspapers and magazines, the
Company provides educational information on its products and appeals to the
common perception that the products may be of particular benefit for a wide
range of ills, including intestinal disorders, and continues to educate the
public on the possible health benefits which could be derived from the use of
Kefir and Kefir-based products. Although no scientific studies have proven the
certainty of such claims, the Company believes that the potential for healthful
benefits as suggested by such studies can serve as the basis for an advertising
strategy.
In addition to local radio stations, newspapers and magazines, the
Company receives further exposure of its products through catalog advertising
and promotion, inside store demonstrations throughout the U.S, and
participation in various trade shows. In 1996, the Company's products were
represented at ten trade shows including the Fancy Foods Show in Philadelphia,
the Metro Foods Products Expo in Baltimore, the North East Coop Food Show in
Boston, the North Farm Coop Show in Madison, the Cheese and Dairy Show in
Milwaukee, and the World Food Expo in Moscow. The cost of participating in the
shows is split between the distributor and the Company.
The Company plans to continue its advertising campaign during the next
12-months. The Company expended approximately $193,000 and $202,000 on
advertising and product promotion in 1996 and 1995, respectively, and it
expects to expend approximately $100,000 in 1997.
(b)(4) Competition
The Company's Kefir-based products are subject to competition from
major producers of yogurt and other dairy products. These producers, such as
Dannon and Dean Foods Company, as well as other national and regional
producers, are well-established and have significantly greater managerial and
technical expertise and financial resources than the Company.
While the business of manufacturing Kefir, yogurt and related products
carry a relatively low cost of entry, financial success in the industry is
dependent upon implementing costly national marketing and other factors. In
addition, Lifeway's products also compete, in general, with all other food
products and, in particular, with other dairy products and dessert items.
(b)(5) Suppliers
The Company purchases its raw materials, such as milk, sugar and
fruit, from unaffiliated suppliers, and is not limited or contractually bound
to any one. Prior to making any purchase, the Company determines which
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supplier can offer the lowest price for the highest quality of product. The raw
and packaging materials purchased by the Company are considered commodity items
and are widely available on the open market. The Company owns and operates the
means of production of all of its products.
(b)(6) Major Customers
The Company distributes its products to more than 400 accounts
throughout the U.S. Concentrations of credit with regard to trade accounts
receivable and sales are limited due to the fact that the Company's customers
are spread across different geographic areas. The customers are concentrated in
the retail food industry. In 1996, two customers accounted for 11.7% and 10.6%
of sales and 16.4% and 19.9% of trade accounts receivable as of December 31,
1996, respectively. For 1995, these two customers accounted for 5% and 3% of
sales. (See, further, Item 1(b)(2) Distribution, and Item 7, Note 8 to
Consolidated Financial Statements.)
(b)(7) Patents, Trademarks, Licenses, Franchises, Concessions, Royalty
Agreements, Labor Contracts
On December 12, 1989, and June 12, 1990, the U.S. Patent and Trademark
Office granted the Company exclusive trademarks for the names "Lifeway's" and
"Healthy Eating," respectively. In addition, on January 10, 1992, the Company
was granted a trademark for the name "Lifeway's" for its use in Canada since
September 9, 1988 on wares.
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 U.P.C. codes from a third party. (See, further,
Item 1(a)(2), Acquisition of Business Line, and Item 7, Note 8 to Consolidated
Financial Statements.)
On June 30, 1992, the Company was granted trademarks for grain based,
non-alcoholic beverages, although it has no claim to the exclusive right to use
the names "KVAS," "KBAC" or "KWASS," apart from the mark as shown on the
Principal Register. Although the Company has developed the product under this
trademark, it is not currently marketing it.
In first quarter 1996, the Company made application to the U.S. Patent
and Trademark Office for the trademark "Golden Zesta," for its newly marketed
vegetable-based seasoning. The Company received trademark approval in December
1996.
In addition, the Company maintains various state licenses and permits
required to operate its businesses, including a restaurant and liquor license,
renewed annually, held by the Company's wholly-owned subsidiary, LFI
Enterprises, Inc. for the operation of its "Russian" theme restaurant and
supper club.
At the date of this Report, neither the Company nor its subsidiaries
have entered into any franchise agreement, concession, royalty agreement or
labor contract.
(b)(8) Regulation
The Company is subject to regulation by federal, state and local
governmental authorities regarding the distribution and sale of food products.
Although the Company believes that it currently has all material government
permits, licenses, qualifications and approvals for its operations, there can
be no assurance that the Company will be able to maintain its existing licenses
and permits or to obtain any future licenses, permits, qualifications or
approvals which may be required for the operation of the Company's business.
(b)(9) Research and Development
The Company continues its program of new product development, centered
around the nutritional and "low calorie" features of its proprietary Kefir
formulas. In 1995, the Company developed and began marketing "Golden Zesta," a
vegetable-based seasoning, which can also be used as a salt substitute. Also,
in late 1995, the Company introduced a fat-free, low cholesterol line of Kefir
and two kinds of fat-free, low cholesterol Farmer's Cheese. (See,
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further, Item 1(a), Business Development, and Item 1(b)(1), Products.) The
Company's research and development efforts have resulted in the successful
introduction to market of a "drinkable yogurt." These products, which have been
produced on a commercial basis, in the opinion of management, have gained
substantial market acceptance. Management anticipates that its product sales
will contribute significantly to the Company's growth as significant market
penetration is achieved. The Company's research and development program has
identified certain other products capable of development for sale complimentary
to its current product line. It is anticipated that a substantial portion of
projected increases in sales for the Company will come from new product sales.
The Company conducts primarily all of its research internally, but at
times will employ the services of an outside testing facility. In the fiscal
years 1996 and 1995, the Company estimates it expended approximately $10,000
and $7,500, respectively, for research and new product development, which costs
were not borne directly by its customers.
(b)(10) Employees
The Company and its subsidiary, LFI Enterprises, Inc., currently
employ approximately 35 full-time persons and 3 or 4 part-time employees on an
"as needed" basis. Approximately 28 of those employees are engaged in the
manufacturing process of the Company's Kefir and Kefir-based products and 7 are
employed in the restaurant operation. None of the Company's employees are
covered by collective bargaining agreements. The President of the Company,
Michael Smolyansky, is engaged by the Company under an employment agreement.
Under the terms of such agreement, as amended, Mr. Smolyansky is employed as
President for a period of 5 years, commencing April 1992. The agreement
provides for a base salary, payable in equal monthly installments, which may be
increased, subject to approval of the Board of Directors, on a yearly basis in
proportion to the Company's profitability. Additionally, under the agreement,
Mr. Smolyansky is entitled to receive cash bonuses at the discretion of the
Board of the Directors, subject to the Company being profitable. (See, further,
Item 10. Executive Compensation.)
ITEM 2. DESCRIPTION OF PROPERTY.
On May 16, 1988, the Company purchased a 26,000 square foot parcel of
real property, including an 8,500 square foot one-story building, located at
7625 N. Austin Street, Skokie, Illinois. The purpose of the purchase was to
enable the Company to significantly expand its production facilities and
capacity pursuant to its business plan and growing demand for its product. The
Company brought the facility to full capacity and completed its remodeling in
1994. In addition to the increase in capacity, because of substantially
improved storage facilities at the new plant, the Company has been able to
incur substantial savings in the purchase of milk and other raw materials, by
virtue of its increased capacity to store bulk purchases. The loan to the
Company from 1st National Bank of Morton Grove, collateralized by the real
estate, is payable in monthy installments of $2,548, including interest at
7.5%, with a balloon payment of $184,900 due November, 1998. At December 31,
1996, the loan had a balance of $213,490. (See, further, Item 7, Note 5 to
Consolidated Financial Statements.)
On October 9, 1992, the Company purchased certain real estate located
at 7800 N. Caldwell, Niles, Illinois. The former restaurant property was
acquired from WRKR, Inc., a third-party having no material relationship with
the Company or any of its affiliates. This property consists of approximately
75,000 square feet of commercially zoned property, and a 7,750 square foot
building. The loan to the Company from American National Bank and Trust Company
of Chicago, collateralized by the real estate, has a balloon maturity in August
1998 and carries an interest rate of 6.75% per annum. The Company's monthly
payments, calculated on a 15-year amortization schedule, are $4,498. At
December 31, 1996, the loan had a balance of $439,761. (See, further, Item 7,
Note 5 to Consolidated Financial Statements.) The Company refurbished the
property in late 1992 and put it into productive use as a supper club facility,
known as "Moscow Nites," catering to the Chicago area's Russian and East
European ethnic communities. The premises are operated by the Company's
wholly-owned subsidiary, LFI Enterprises, Inc., an Illinois corporation.
On October 16, 1996, the Company purchased 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,
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Illinois. The purchase enables the Company to further expand its production
facilities and capacity. The loan to the Company from American National Bank
and Trust Company of Chicago, collateralized by the real estate, has a balloon
maturity in November 2001. The mortgage note is payable in monthly installments
of principal of $5,109 plus interest at 8.05%. At December 31, 1996, the loan
had a balance of $914,536. (See, further, Item 7, Note 5 to Consolidated
Financial Statements.)
For financial statement and tax purposes, the Company depreciates its
real property buildings on a straight line basis over 31 to 39 years. (See,
further, Item 7, Note 2 to Consolidated Financial Statements.)
The Company believes it has adequate insurance coverage for all its
properties.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company, its Subsidiaries, nor its properties are a party
to or a subject of any pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 1996, to a vote of security holders through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The Company's Common Stock, no par value, the only class of common
equity of the Company, is traded on the National Association of Securities
Dealer's Automated Quotation System ("NASDAQ") under the symbol "LWAY." Trading
commenced on March 29, 1988.
The range of high and low bid quotations for the Company's Common
Stock for the quarterly periods within the two most recent fiscal years, is set
forth in the following table:
<TABLE>
<CAPTION>
Low Bid High Bid
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<S> <C> <C> <C> <C>
1st Qtr. 1995 $1.125 $2.00
2nd Qtr. 1995 $1.75 $4.25
3rd Qtr. 1995 $2.00 $3.50
4th Qtr. 1995 $1.4375 $2.50
1st Qtr. 1996 $1.375 $1.9375
2nd Qtr. 1996 $1.625 $3.8125
3rd Qtr. 1996 $2.75 $3.6875
4th Qtr. 1996 $3.4375 $3.875
</TABLE>
(b) Holders
As of March 20, 1997, there were approximately 347 holders of record
of the Company's Common Stock, as reflected on the Company's stock register and
in brokerage accounts.
(c) Dividends
The Company has paid no cash dividends on its Common Stock and
management does not anticipate that such dividends will be paid in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(a) Management's Discussion and Analysis of Financial Condition and
Results of Operations
(a)(1) Results of Operations
Net income increased by $177,043, up to $617,768 in 1996 from $440,725
in 1995. The components of this increase are detailed as follows:
Sales and cost of goods sold increased by $797,845 and $391,442,
respectively, up to $5,295,405 and $2,976,307 in 1996 from $4,497,560 and
$2,584,865 in 1995, respectively. The increase is primarily attributable to
increased sales of Kefir, Farmer's Cheese and the introduction of Golden Zesta
during 1995. Costs of sales and gross margins of the Company increased
proportionately with sales in 1996. In 1996, it was determined that certain
expenses that have been classified as operating expenses would be more
appropriately classified in the class of goods sold. Accordingly, the 1995
balances have been reclassified to reflect this change. (See, further, Item 7,
Note 2 - Reclassification of Financial Statement Presentation - to Consolidated
Financial Statements.)
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Operating expenses increased by $162,319, up to $1,383,049 in 1996
from $1,220,730 in 1995. The increase is primarily attributable to salaries,
repair and maintenance, professional fees and transportation expenses.
Interest income increased by $10,814, up to $52,140 in 1996 from
$41,326 in 1995. The increase is due to an increase in funds available for
investments.
Provision for income taxes increased by $125,927, up to $367,340
in 1996 from $241,413 in 1995. The increase is proportionate to the net
income increase.
(a)(2) Liquidity and Capital Resources
As of December 31, 1996 and December 31, 1995, respectively, the
Company had working capital in the amount of $1,696,175 and $1,455,647, and
cash and cash equivalents in the amounts of $996,101 and $702,107. 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 next 12-month period. During
1997, the Company expects to purchase additional equipment for its new
production facility, and to gradually employ additional persons on an as-needed
bases for its operation.
LFI Enterprises, Inc., the Company's supper club facility, had sales
of $432,066 in 1996 and $390,145 in 1995, and net income of $65,080 in 1996 and
a loss of $59,954 in 1995. (See, further, Item 7, Note 11 to Consolidated
Financial Statements.)
Net cash provided by operating activities increased by $280,058, up to
$725,392 in 1996 from $445,334 in 1995. The increase is primarily due to the
Company's significant increase in sales and net income, as well as increased
collections of accounts receivable in 1996.
Net cash used in investing activities increased by $1,228,782, up to
$1,285,754 in 1996 from $56,972 in 1995. The increase is primarily attributable
to the purchase of property and equipment during 1996.
Net cash provided by financing activities in 1996 was $854,356 as
compared to net cash used in financing activities in 1995 of $181,753. The
positive cash flows back to the Company is primarily attributable to proceeds
received from notes payable in 1996.
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. During 1996, the Company repurchased a total of
10,400 of its Common Shares at a cost of $18,818. (See, further, Item 7, Note 7
to Consolidated Financial Statements.)
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 the purchase of
additional equipment for its new production facility, and the increase in
salaries and payroll taxes as the Company gradually employs additional persons
on an as-needed bases for its operation. There have been no material
fluctuations in the standard seasonal variations of the Company's business.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements that constitute Item 7 of this
report and a table of contents thereto commence on page F-1 through F-16, which
pages follow this page.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTANT AND
FINANCIAL DISCLOSURE
On February 28, 1995, the Company accepted the resignation of Robert
L. DeLorme, C.P.A., as its certifying accountant, and engaged the firm of
Gleeson, Sklar, Sawyers & Cumpata, L.L.P., Certified Public Accountants, with
offices at 2400 Big Timber Road, Suite 200, Elgin, Illinois 60123, to serve as
the Company's independent certifying public accountants.
There have been no disagreements with the Company's accountants on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure.
The Company incorporates by reference its Current Report on Form 8-K
dated February 28, 1995, which sets forth the information required by Item 304
of Regulation S-B.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
(a) Directors and Executive Officers. The directors and executive
officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position Director Since
- ------------------ -- ------------------------------------------- --------------
<S> <C> <C> <C>
Michael Smolyansky 49 CEO, CFO, President, Treasurer and Director 1986
Pol Sikar 48 Director 1986
Rick D. Salm 46 Director 1986
Renzo Bernardi 59 Director 1994
Valeriy Nikolenko 51 Vice President-Production and Secretary --
</TABLE>
MICHAEL SMOLYANSKY has been Chief Executive Officer, Chief Financial
Officer, President, Treasurer and a director of the Company since its inception
in February 1986. From 1976 to 1985, he was Project Engineer and Department
Manager of E.J. Littell Machine Co., of Chicago, Illinois, where he had primary
responsibility for design of material handling equipment. Mr. Smolyansky is a
graduate of the Kiev Institute of Technology (M.S., Mechanical Engineering,
1971). Mr. Smolyansky devotes full time to the business of the Company. Mr.
Smolyansky holds no other directorships in any other company reporting under
either Section 12(b), 12(g) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
POL SIKAR has been a director of the Company since its inception in
February 1986. He is a graduate with a Master's degree from the Odessa State
Institute of Civil Engineering in Russia. For more than 10 years he has been
President and major stockholder of Still-Montrose Glass & Mirror Co., a company
providing glass and mirror products to the wholesale and retail trade in the
greater Chicago area. Mr. Sikar devotes as much time as necessary to the
business of the Company. Mr. Sikar holds no other directorships in any other
company reporting under either Section 12(b), 12(g) or 15(d) of the Exchange
Act.
RICK D. SALM, a director of the Company since its inception in February
1986, is first Vice-President of the First Commercial Bank of Chicago,
Illinois. Mr. Salm joined First Commercial in 1982 and is currently in charge
of commercial lending activities. Mr. Salm holds a Bachelor's degree from St.
Norbert College, from which he graduated in 1974. Mr. Salm devotes as much time
as necessary to the business of the Company. Mr. Salm holds no other
directorships in any other company reporting under either Section 12(b), 12(g)
or 15(d) of the Exchange Act.
RENZO BERNARDI has been a director of the Company since 1994 and has
been a director of the Company's subsidiary, Lifeway International, Inc. Mr.
Bernardi is the president and founder of Renzo & Sons, Inc. - Dairy and Food
Service Company which has been in business since 1969 (formerly, Renzo-Milk
Distribution Systems). He has over 29 years of experience in the dairy
distribution industry. Over the years, Mr. Bernardi has developed and
implemented several innovative programs which have proven to reduce the costs
of distribution and have resulted in the steady and continuous growth of the
company which he now shares with his two sons. Mr. Bernardi is a graduate of
Instituto Teonico E Commerciale of Macomer, Sardinia. Mr. Bernardi will devote
as much time as necessary to the business of the Company. Mr. Bernardi holds no
other directorships in any other company reporting under either Section 12(b),
12(g) or 15(d) of the Exchange Act.
VALERIY NIKOLENKO has been Secretary of the Company since 1993 and
Vice President-Production since January 1996. From 1992 to 1993, he was
employed as an electronic technician in the United States. From 1982 to 1992,
Mr. Nikolenko was a Department Manager for a government controlled design
bureau in Kiev. He is a graduate of the Kiev Institute of Civil Aviation (M.S.,
Electronic Engineering, 1969). Mr. Nikolenko devotes full time to the business
of the Company. Mr. Nikolenko holds no other directorships in any other company
reporting under either Section 12(b), 12(g) or 15(d) of the Exchange Act.
10
<PAGE> 12
(b) Significant Employees
The Company employs no person who is not an executive officer but who
is expected to make a significant contribution to the business of the Company
or its subsidiaries who would therefore be considered a "significant employee,"
as that term is defined in Item 401 of Regulation S-B.
(c) Family Relationships
No family relationships exist between any director or executive
officer. Directors are elected to serve until the next annual meeting of
stockholders or until their successors have been elected and qualified.
Executive officers are appointed to serve at the pleasure of the Board of
Directors. Mr. Smolyansky may be deemed a "parent" of the Company as that term
is defined in the rules and regulations promulgated under the Securities Act of
1933, as amended.
(d) Involvement In Certain Legal Proceedings
During the past five years, no director, person nominated to become a
director, executive officer, promoter or control person of the issuer has (1)
filed any bankruptcy petition for himself or for any business for which he is a
general partner or executive officer; (2) been convicted in a criminal
proceeding or been subject to a pending criminal proceeding; (3) been subject
to any order, judgment, or decree, not subsequently reversed, suspended or
vacated, or been permanently or temporarily enjoined, barred, suspended or
otherwise limited in his involvement in any type of business, securities or
banking activities; or (4) been found by a court of competent jurisdiction (in
a civil action), the SEC or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, for which the
judgment has not been reversed, suspended, or vacated.
(e) Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors, and greater than 10% shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. All such persons, known to the Company, have filed the required
Forms.
ITEM 10. EXECUTIVE COMPENSATION.
(a) General
The following information discloses all plan and non-plan compensation
awarded to, earned by, or paid to Mr. Michael Smolyansky, CEO, CFO, President,
Treasurer and Director of the Company, for all services rendered in all
capacities to the registrant and its subsidiaries. Mr. Smolyansky is the only
person meeting the reporting requirements of Item 402 of Regulation S-B. No
other executive officer of the Company's total annual salary and bonus exceeded
$100,000 for the fiscal year ended December 31, 1996.
(b) Summary Compensation Table
The following table sets forth all compensation, including bonuses,
stock option awards and other payments, paid or accrued by the Company during
each of the fiscal years ended December 31, 1996, 1995 and 1994, to or for the
Company's Chief Executive Officer and each of the other executive officers of
the Company whose total annual salary and bonus, if any, exceeded $100,000 for
the fiscal year ended 1996.
11
<PAGE> 13
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------
(a) (b) (c) (d) (e)
Name Year Other
and Ended Annual
Principal December Salary Bonus Compensation
Position 31 ($) ($) ($)
- -------------------------------- ------------ ---------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Michael Smolyansky 1996 120,000.00 3,000.00 -0-
CEO, CFO, President 1995 99,999.84 15,000.00 -0-
1994 81,333.00 15,000.00 -0-
</TABLE>
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------------------
Awards Payouts
----------------------------------- -----------------
(a) (f) (g) (h) (i)
Name Restricted All
and Stock Shares LTIP Other
Principal Award(s) Underlying Payouts Compen-sation
Position ($) Options ($) ($)
- ------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Michael Smolyansky -0- -0- -0- -0-
CEO, CFO, President -0- -0- -0- -0-
-0- -0- -0- -0-
</TABLE>
(c) Option/SAR Grants in Last Fiscal Year
This table has been omitted, as Mr. Smolyansky, the only person
meeting the reporting requirements of Item 402 of Regulation S-B, has not
received any individual grants of stock options during fiscal 1996 or stock
appreciation rights during 1996.
(d) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Option/SAR Values
This table has been omitted, as Mr. Smolyansky, the only person
meeting the reporting requirements of Item 402 of Regulation S-B, has not
exercised any stock options during fiscal 1996.
(e) Long-Term Incentive Plans ("LTIP") - Awards in Last Fiscal Year
This table has been omitted, as Mr. Smolyansky, the only person
meeting the reporting requirements of Item 402 of Regulation S-B, has not
received any awards pursuant to any LTIP during fiscal 1996.
(f) Compensation of Directors
During fiscal 1996, the Board of Directors participated in three
meetings. Each of the directors were compensated an aggregate $1,000 for their
participation in two of those meetings.
(g) Employment Contracts and Termination of Employment and
Change-in-Control Arrangements
(g)(1) Employment Contracts
On April 15, 1992, Michael Smolyansky executed a 5-year employment
contract with the Company which will expire on April 14, 1997. The agreement
provides for a base salary, payable in equal monthly installments, which may be
increased, subject to approval of the Board of Directors, on a yearly basis in
proportion to the
12
<PAGE> 14
Company's profitability. Additionally, under the agreement, Mr. Smolyansky is
entitled to receive cash bonuses at the discretion of the Board of the
Directors, subject to the Company being profitable.
The employment agreement obligates the Company to pay Mr. Smolyansky's
basic annual salary for the remaining term of the agreement from the date of
the employee's termination regardless of whether such termination is based upon
cause. Additionally, the employment agreement provides that (a) the Company
shall furnish a suitable automobile for the employee's use and (b) the
employee, for a period of two years after termination, agrees not to compete in
a business substantially similar to that of the Company.
(g)(2) Restricted Stock Plan
The Company has adopted a Restricted Stock Plan (the "Plan") which
provides for the granting of stock options to employees, including salaried
officers of the Company. The maximum aggregate amount of shares of the
Company's Common Stock that may be made subject to stock options granted under
the Plan is 300,000. Options may be granted under the Plan at exercise prices
that are not less than the fair market value of the Common Stock at the time of
the grant. The Plan is administered by the Company's Board of Directors. The
terms of payment for the shares of Common Stock once options granted are
exercised may vary, as determined by the Board of Directors. As of March 20,
1997, no options have been granted under this Plan.
(g)(3) Employee, Consultants and Service Providers Benefit Plan
On June 9, 1995, the Company filed a registration statement on Form
S-8 with the Securities and Exchange Commission in connection with an employee
benefit plan (the "Plan") covering 300,000 shares of its Common Stock. Pursuant
to the Plan, the Company may issue Common Stock and/or options to purchase
Common Stock to certain consultants, service providers and employees, including
officers and directors, of the Company. The purpose of the Plan is to promote
the best interests of the Company and its stockholders by providing a means of
non-cash remuneration to eligible participants who contribute to operating
progress and earning power of the Company. The Plan is administered by the
Company's Board of Directors or a committee consisting of three members which
has the discretion to determine from time to time the eligible participants to
receive an award; the number of shares of stock issuable directly or to be
granted pursuant to option; the price at which the option may be exercised or
the price per share in cash or cancellation of fees or other payment which the
Company is liable if a direct issue of stock and all other terms on which each
option shall be granted. As of March 20, 1997, a total of 20,000 shares were
issued under the Plan for public relations services.
13
<PAGE> 15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to the
Company regarding the beneficial ownership of the Company's Common Stock, the
Company's only class of securities, as of March 20, 1997 (except as indicated
below) by (a) each stockholder known by the Company to be the beneficial owner
of more than five percent of the Company's Common Stock, (b) each of the
Company's directors, (c) each of the Company's executive officers named in the
Summary Compensation Table above and (d) all executive officers and directors
of the Company as a group. The shareholders listed below have sole voting and
investment power except as noted.
<TABLE>
<CAPTION>
Percent Owned
Name and Address of Amount and Nature of Beneficially and
Beneficial Owner Beneficial Ownership of Record
(1) (2)
----------------------------------- --------------------------- -------------------------
<S> <C> <C>
Michael Smolyansky (5) 2,582,300 (3) 68.2
7625 N. Austin Ave.
Skokie, IL 60077
Rick D. Salm (5) 1,900 *
6945 N. Clark St.
Chicago, IL 60626
Pol Sikar (5) 9,900 *
3907 Miller Drive
Glenview, IL 60025
Renzo Bernardi (5) 1,200 *
2919 N. Natoma
Chicago, IL 60634
Valeriy Nikolenko (5) 4,100 (4) *
8917 Lamon Ave.
Skokie, IL 60077
All officers and directors of 2,599,400 68.7
the Company as a group (five
persons)
</TABLE>
- -----------------------
* Represents less than one percent of the outstanding Common Stock.
(1) Unless otherwise indicated, all shares are directly owned
and investing power is held by the persons named.
(2) Based upon 3,785,377 shares issued and outstanding as of
March 20, 1997.
(3) Mr. Smolyansky directly owns 2,555,100 Common Shares of the
Company. 27,200 Common Shares are owned by his wife and
therefore deemed to be beneficially owned by Mr. Smolyansky.
(4) Mr. Nikolenko directly owns 3,000 Common Shares of the
Company. 1,100 Common Shares are owned by his wife and
therefore deemed to be beneficially owned by Mr. Nikolenko.
14
<PAGE> 16
(5) Director or officer. The majority of the Common Shares held
by officers, directors and principal shareholders listed
above are "restricted securities" and, as such, are subject
to limitations on resale. The shares may be sold pursuant to
Rule 144 under certain circumstances. The Board of Directors
has adopted a Restricted Stock Plan under which certain
employees may be granted up to 300,000 shares of the Common
Stock of the Company. In addition, the Company filed a
registration statement on Form S-8 with the Securities and
Exchange Commission in connection with an employee benefit
plan (the "Plan") covering 300,000 shares of its Common
Stock. Pursuant to the Plan, the Company may issue Common
Stock and/or options to purchase Common Stock to certain
employees, including officers and directors, of the Company.
(See, further, Item 10(g)(2), Restricted Stock Plan and
(g)(3), Employee, Consultant and Services Providers Benefit
Plan.)
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1994, the Company determined that it would not be able to
implement its business plan for its subsidiary, Lifeway International, Inc.
("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 (i) restricted Common Shares in Lifeway Foods, Inc.
("LFI"); or (ii) receive a return of their original investment in cash plus
interest on their investment paid in restricted Common Shares in LFI. (See,
further, Item 1(a)(1) and Item 7, Note 10 to Consolidated Financial
Statements.) On February 21, 1995, Mr. Michael Smolyansky, the Company's CEO,
CFO, President, Treasurer and director, and his wife elected to exchange their
shares of LII for the return of their original investment in cash aggregating
$10,000 plus interest paid in an aggregate 800 restricted Common Shares in LFI.
On March 25, 1995, Mr. Pol Sikar, a director of the Company, elected to
exchange his shares of LII for 4,400 restricted Common Shares in LFI. On
January 10, 1995, Mr. Renzo Bernardi, a director of the Company, elected to
exchange his shares of LII for the return of his $10,000 investment in cash
plus interest paid in 1,600 restricted Common Shares in LFI.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a)(1)(2) Financial Statements and Schedules
A list of the Financial Statements and Financial Statement Schedules
filed as part of this Report is set forth in Item 7, and appears at page F-1 of
this Report, which list is incorporated herein by reference.
(a)(3) Exhibits
Exhibit Number and Brief Description
3.1 Articles of Incorporation of Registrant, with Certificate,
and Amendments. (1)
3.2 Bylaws of Registrant. (1)
3.3 Corrected Amendment to the Bylaws of Registrant. (1)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan,
dated June 5, 1995. (2)
10.2 Employment Agreement between Registrant 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)
15
<PAGE> 17
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)
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)
21.1 List of Subsidiaries of the Registrant. (4)
27 Financial Data Schedule. (4)
------------------------
(1) Incorporated by reference to the Registrant's registration
statement on Form S-18 (Commission File No. 33-14329-C), and
Post-Effective Amendments thereto.
(2) Incorporated by reference to the Registrant's registration
statement on Form S-8 (Commission File No. 33-93306).
(3) Incorporated by reference to the Registrant's Current Reports
filed under cover of Form 8-K and amendments thereto.
(4) Filed herewith.
(b) Reports on Form 8-K
None.
16
<PAGE> 18
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunder duly authorized.
LIFEWAY FOODS, INC.
By /s/ Michael Smolyansky
--------------------------------------------
Michael Smolyansky, Chief Executive Officer,
Chief Financial and Accounting Officer,
President, Treasurer and Director
Date: March 27, 1997
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By /s/ Michael Smolyansky
--------------------------------------------
Michael Smolyansky, Chief Executive Officer,
Chief Financial and Accounting Officer,
President, Treasurer and Director
Date: March 27, 1997
By /s/ Pol Sikar
--------------------------------------------
Pol Sikar, Director
Date: March 27, 1997
By /s/ Rick D. Salm
--------------------------------------------
Rick D. Salm, Director
Date: March 27, 1997
17
<PAGE> 19
LIFEWAY FOODS, INC. AND SUBSIDIARIES
ANNUAL REPORT
DECEMBER 31, 1996 AND 1995
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . F2
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . F3 - F4
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . F5
Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . . . . . F6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . F7 - F8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . F9 - F16
</TABLE>
F-1
<PAGE> 20
(GLEESON, SKLAR, SAWYERS & CUMPATA LLP LETTERHEAD)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
LIFEWAY FOODS, INC.
Skokie, Illinois
We have audited the consolidated balance sheet of LIFEWAY FOODS, INC. AND
SUBSIDIARIES as of December 31, 1996 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the years ended
December 31, 1996 and 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated balance sheet of LIFEWAY
FOODS, INC. AND SUBSIDIARIES as of December 31, 1996, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995
in conformity with generally accepted accounting principles.
/s/ Gleeson, Sklar, Sawyers & Cumpata LLP
Gleeson, Sklar, Sawyers & Cumpata LLP
Elgin, Illinois
February 14, 1997
F-2
<PAGE> 21
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
- ------
CURRENT ASSETS
- --------------
Cash and cash equivalents $996,101
Investments 213,671
Accounts receivable, net of allowance 620,408
for doubtful accounts of $48,000
Other receivables 23,600
Inventories 413,324
Prepaid expenses and other assets 7,714
Deferred income taxes 41,418
----------
TOTAL CURRENT ASSETS 2,316,236
PROPERTY AND EQUIPMENT
- ----------------------
Land 658,400
Buildings, machinery and equipment 3,288,231
----------
Total property and equipment 3,946,631
Less: accumulated depreciation 1,069,536
----------
PROPERTY AND EQUIPMENT, NET 2,877,095
OTHER ASSETS
- ------------
INTANGIBLE ASSETS, NET OF ACCUMULATED 66,307
AMORTIZATION OF $264,036 ----------
TOTAL ASSETS $5,259,638
- ------------ ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 22
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
- -------------------
Current maturities of notes payable $105,928
Accounts payable 242,079
Accrued expenses 272,054
----------
TOTAL CURRENT LIABILITIES 620,061
LONG-TERM LIABILITIES 1,468,904
- ---------------------
DEFERRED INCOME TAXES 36,362
- ---------------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock 1,374,754
Retained earnings 1,778,375
Treasury stock, at cost (18,818)
----------
TOTAL STOCKHOLDERS' EQUITY 3,134,311
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,259,638
- ------------------------------------------ ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE> 23
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
SALES $5,295,405 $4,497,560
Cost of goods sold 2,976,307 2,584,865
---------- ----------
GROSS PROFIT 2,319,098 1,912,695
Operating expenses 1,383,049 1,220,730
---------- ----------
INCOME FROM OPERATIONS 936,049 691,965
Other income (expense)
Interest income 52,140 41,326
Interest expense (62,168) (67,164)
Gain on sale of asset --- 16,011
Other income 59,087 ---
---------- ----------
Total other income (expense) 49,059 (9,827)
---------- ----------
INCOME BEFORE INCOME TAXES 985,108 682,138
Provision for income taxes 367,340 241,413
---------- ----------
NET INCOME $617,768 $440,725
========== ==========
EARNINGS PER SHARE $0.16 $0.12
========== ==========
Weighted average shares outstanding $3,777,385 $3,785,377
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE> 24
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES AUTHORIZED
----------------------------------------
# OF
SHARES OF
# OF SHARES # OF SHARES TREASURY COMMON TREASURY RETAINED
ISSUED OUTSTANDING STOCK STOCK STOCK EARNINGS
----------- ----------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1994 3,729,777 3,729,777 --- $1,302,754 $ --- $ 719,882
Shares exchanged in non-
cash transaction 55,600 55,600 --- 72,000 --- ---
Net income for the year
ended December 31, 1995 --- --- --- --- --- 440,725
--------- --------- ------ ---------- ------- ----------
BALANCES AT
DECEMBER 31, 1995 3,785,377 3,785,377 --- 1,374,754 --- 1,160,607
Repurchase of
treasury stock --- --- 10,400 --- 18,818 ---
Net income for the year
ended December 31, 1996 --- --- --- --- --- 617,768
--------- --------- ------ ---------- ------- ----------
BALANCES AT
DECEMBER 31, 1996 3,785,377 3,785,377 10,400 $1,374,754 $18,818 $1,778,375
========= ========= ====== ========== ======= ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE> 25
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
NET INCOME $ 617,768 $440,725
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 243,208 230,565
Issuance of common stock in exchange --- 42,000
for services rendered and interest expense
Increase in allowance for doubtful accounts --- 24,000
Deferred income taxes (15,971) (36,344)
Gain on sale of asset --- (16,011)
(Increase) decrease in operating assets:
Accounts receivable (15,787) (101,910)
Other receivables 2,600 4,700
Inventories (125,224) (179,791)
Prepaid expenses and other assets 13,492 4,561
Increase (decrease) in operating liabilities:
Accounts payable (3,145) (57,125)
Accrued expenses 8,451 89,964
---------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 725,392 445,334
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Purchase of investments (13,671) (167,315)
Sale of investments 129,411 107,214
Purchase of property and equipment (1,401,494) (48,194)
Proceeds from sale of asset --- 51,323
---------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,285,754) (56,972)
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from notes payable 919,645 ---
Repayments of notes payable (46,471) (91,753)
Payments to minority shareholders --- (90,000)
Purchase of treasury stock (18,818) ---
---------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 854,356 (181,753)
---------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 293,994 206,609
Cash and cash equivalents at beginning of year 702,107 495,498
---------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 996,101 $702,107
========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE> 26
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- --------------------------------------------------
Cash paid for interest $ 62,168 $ 67,164
========== ========
Cash paid for income taxes $ 486,900 $190,760
========== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
- -------------------------------------------------------
Issuance of common stock in exchange for:
Consulting fees $ --- $27,500
Minority shareholders - interest expense --- 14,500
---------- --------
Subtotal --- 42,000
Minority shareholders - stock 30,000
---------- --------
Total common stock issued $ --- $ 72,000
========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-8
<PAGE> 27
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 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 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 ending 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. LFIE 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-9
<PAGE> 28
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996 AND 1995
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Investments
The Company's investments include certificates of deposit with maturity
dates greater than three months, 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.
Inventories
Inventories are stated at lower of cost or market, cost being determined by
the first-in, first-out method.
Property and Equipment
Property and equipment are stated at 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 and 39
Machinery and equipment 5-12
Office equipment 5-7
Vehicles 5
</TABLE>
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>
F-10
<PAGE> 29
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996 AND 1995
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 and the use of the allowance method for
book purposes versus the direct method for tax purposes for bad debts.
Earnings Per Common Share
Earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
year. For the years ended December 31, 1996 and 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 conform 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 at December 31, 1996:
<TABLE>
<S> <C>
Raw materials $79,080
Production supplies 33,957
Finished goods 300,287
--------
$413,324
========
</TABLE>
F-11
<PAGE> 30
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996 AND 1995
Note 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Land $658,400
Buildings and improvements 1,649,370
Machinery and equipment 1,448,752
Vehicles 109,877
Office equipment 80,232
----------
$3,946,631
==========
</TABLE>
Depreciation charged to income was $200,767 and $186,925 in 1996 and 1995,
respectively.
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, included in other income.
Note 5 - NOTES PAYABLE
<TABLE>
<S> <C>
Mortgage note payable, 1st National Bank of Morton Grove, payable in monthly $213,490
installments of $2,548, including interest at 7.5%, with a balloon payment of $184,900
due November, 1998. Collateralized by real estate.
Mortgage note payable, American National Bank and Trust Company of Chicago, payable in 439,761
monthly installments of $4,498 including interest at 6.75%, with a balloon payment of
$394,300 due August, 1998. Collateralized by real estate.
Mortgage note payable, American National Bank and Trust Company of Chicago, payable in 914,536
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.
Note Payable, Glenview State Bank, payable in monthly installments of $460, including 7,045
interest at 6.25%, due March, 1998. Collateralized by an automobile.
----------
Total 1,574,832
Less current maturities 105,928
----------
Total $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>
F-12
<PAGE> 31
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996 AND 1995
Note 6 - PROVISION FOR INCOME TAXES
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current
Federal $312,270 $225,897
State 71,041 51,860
-------- --------
Total current 383,311 277,757
Deferred (15,971) (36,344)
-------- --------
Provision for income taxes $367,340 $241,413
======== ========
</TABLE>
A reconciliation of the provision for income taxes and the income tax
computed at the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Federal income tax expense $334,937 $215,228
computed at the statutory rate
State taxes, expense 49,255 49,796
Book/tax, accumulated depreciation adjustment (8,221) (4,886)
Book/tax, inventory adjustment (5,857) (16,319)
Permanent book/tax difference (2,774) (2,406)
-------- --------
Provision for income taxes $367,340 $241,413
======== ========
</TABLE>
Amounts for deferred tax assets and liabilities as of December 31, 1996
were 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.
F-13
<PAGE> 32
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996 AND 1995
Note 8 - CUSTOMERS AND CREDIT CONCENTRATIONS
Concentrations of credit with regard to trade accounts receivable, which
are uncollateralized, and sales are limited due to the fact that 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. For 1995, these
two customers accounted for 5.0% and 3.0% of sales and 18.2% and 22.1% of
trade accounts receivable, 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
U.P.C. Codes 200,000
Organization costs 44,343
--------
330,343
Accumulated amortization 264,036
--------
Total $ 66,307
========
</TABLE>
Total amortization charged against income for the years ended December 31,
1996 and 1995 was $33,572 and $43,640, respectively.
Note 10 - FORMATION OF SUBSIDIARIES
In 1992, the Company formed Lifeway International, Inc.("LII") 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, 46,400 shares, was transferred to other shareholders ("Minority
Shareholders") under a qualifying Rule 144 restricted stock issue in
exchange for $145,000 in cash.
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.
F-14
<PAGE> 33
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996 AND 1995
Note 10 - FORMATION OF SUBSIDIARIES - Continued
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, 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. 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.
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 $ $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 $223,210 $11,129 $8,869 $243,208
Amortization
Capital Additions $1,401,494 --- --- $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 $209,567 $12,129 $8,869 $230,565
Amortization
Capital Additions $45,494 $2,700 --- $48,194
</TABLE>
F-15
<PAGE> 34
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996 AND 1995
Note 12 - STOCK OPTION PLANS
The Company previously adopted a Restricted Stock Plan which provides for
the granting of stock options to Company employees. The maximum number of
Company Common Stock shares that may be subject to the Restrictive Stock
Option Plan is 300,000.
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
options 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 either of the
two plans. 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.
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 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 balances $879,846
========
</TABLE>
Note - 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, none of
which are held for trading purposes, are as follows at December 31, 1996:
<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 $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 the rates currently offered
for debt with similar maturities.
F-16
<PAGE> 35
EXHIBIT INDEX
Exhibit Number and Brief Description
3.1 Articles of Incorporation of Registrant, with Certificate, and
Amendments. (1)
3.2 Bylaws of Registrant. (1)
3.3 Corrected Amendment to the Bylaws of Registrant. (1)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated
June 5, 1995. (2)
10.2 Employment Agreement between Registrant 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)
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)
21.1 List of Subsidiaries of the Registrant. (4)
27 Financial Data Schedule. (4)
________________________
(1) Incorporated by reference to the Registrants registration statement on
Form S-18 (Commission File No. 33-14329-C), and Post-Effective
Amendments thereto.
(2) Incorporated by reference to the Registrants registration statement on
Form S-8 (Commission File No. 33-93306).
(3) Incorporated by reference to the Registrants Current Reports filed under
cover of Form 8-K and amendments thereto.
(4) Filed herewith.
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES OF THE REGISTRANT
1. Lifeway International, Inc., incorporated under the laws of the State of
Illinois, does business under the name of Lifeway International, Inc.
2. LFI Enterprises, Inc., incorporated under the laws of the State of Illinois,
does business under the name of LFI Enterprises, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 996,101
<SECURITIES> 213,671
<RECEIVABLES> 620,408
<ALLOWANCES> 48,000
<INVENTORY> 413,324
<CURRENT-ASSETS> 2,316,236
<PP&E> 3,946,631
<DEPRECIATION> 1,069,536
<TOTAL-ASSETS> 5,259,638
<CURRENT-LIABILITIES> 620,061
<BONDS> 1,468,904
0
0
<COMMON> 1,374,754
<OTHER-SE> 1,759,557
<TOTAL-LIABILITY-AND-EQUITY> 5,259,638
<SALES> 5,295,405
<TOTAL-REVENUES> 5,295,405
<CGS> 2,976,307
<TOTAL-COSTS> 2,976,307
<OTHER-EXPENSES> 1,383,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,168
<INCOME-PRETAX> 985,108
<INCOME-TAX> 367,340
<INCOME-CONTINUING> 617,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 617,768
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
