<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 March 31, 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 it charter)
Illinois 36-3442829
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (IRS Employer
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 May 1, 1997, the
issuer had 3,774,977 shares of common stock, no par value, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Lifeway Foods, Inc. and Subsidiaries
March 31, 1997 and 1996
Certified Public Accountants Report on
Unaudited Financial Statements F-2
Consolidated Balance Sheets
March 31, 1997 and 1996 F-3 - F-4
Consolidated Statements of Income
for the three months ended March 31, 1997 and 1996 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1996 F-7 - F-8
Notes to Consolidated Financial Statements
March 31, 1997 and 1996 F-9 - F-16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS 4
PART II - OTHER INFORMATION 5
SIGNATURES 7
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
[Following page is F-1]
3
<PAGE> 4
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
TABLE OF CONTENTS
Certified Public Accountants Report on Financial Statements F-2
Consolidated Balance Sheets -
March 31, 1997 and 1996 F-3 - F-4
Consolidated Statements of Income -
for the three months ended March 31, 1997 and 1996 F-5
Consolidated Statements of Changes in Stockholders' Equity -
for the three months ended March 31, 1997 and 1996 F-6
Consolidated Statement of Cash Flows -
for the three months ended March 31, 1997 and 1996 F-7 - F-8
Notes to Consolidated Financial Statements -
March 31, 1997 and 1996 F-9 - F16
F-1
<PAGE> 5
ROBERT L. DELORME
CERTIFIED PUBLIC ACCOUNTANT
1010 JORIE BOULEVARD/SUITE 300
OAK BROOK, ILLINOIS 60521
(630) 571-1800
CERTIFIED PUBLIC ACCOUNTANTS REPORT
ON FINANCIAL STATEMENTS
To the Shareholders and Directors
Lifeway Foods, Inc.
Skokie, Illinois
The accompanying balance sheets of Lifeway Foods, Inc. and Subsidiaries as of
March 31, 1997 and 1996 and the related statements of income, changes in
stockholders' equity and cash flows for the three months then ended were not
audited by me and, accordingly, I do not express an opinion or any other form
of assurance on them.
The accompanying financial statement of Lifeway Foods, Inc. and subsidiaries as
of December 31, 1996 and for the year then ended were audited by other
auditors. They expressed an unqualified opinion on them in their report dated
February 14, 1997. They have not performed any audit procedures since that
date.
Robert L. DeLorme, C.P.A.
Oak Brook, Illinois
April 30, 1997
F-2
<PAGE> 6
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
----------------------- DECEMBER 31,
ASSETS 1997 1996 1996
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalent $1,006,636 $ 828,217 $ 996,101
Investments 216,865 330,000 213,671
Accounts receivable, net of allowance
for doubtful accounts of $48,000 at
March 31, 1997 and 1996 and
December 31, 1996 787,719 598,780 620,408
Other receivables 16,000 26,200 23,600
Inventories 423,280 268,100 413,324
Prepaid expenses and other assets 61,570 62,107 7,714
Deferred income taxes 41,418 34,480 41,418
---------- ---------- ----------
Total current asset 2,553,488 2,147,884 2,316,236
Property and Equipment
Land 658,400 369,500 658,400
Buildings, machinery and equipment 3,289,302 2,192,433 3,288,231
---------- ---------- ----------
Total property and equipment 3,947,702 2,561,933 3,946,631
Less: accumulated depreciation 1,113,954 916,000 1,069,536
---------- ---------- ----------
Property and equipment, net 2,833,748 1,645,933 2,877,095
Other Assets
Intangible assets 330,343 330,343 330,343
Less; accumulated amortization 274,647 229,988 264,036
---------- ---------- ----------
Total other assets 55,696 100,355 66,307
---------- ---------- ----------
Total Assets $5,442,932 $3,894,172 $5,259,638
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 7
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
-------------------------- DECEMBER 31,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of notes payable $ 106,869 $ 43,115 $ 105,928
Accounts Payable 237,522 279,168 242,079
Accrued expenses 272,237 175,919 272,054
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 616,628 498,202 620,061
LONG-TERM LIABILITIES
Notes payable 1,446,701 648,626 1,468,904
DEFERRED INCOME TAXES 36,362 45.395 36,362
STOCKHOLDERS' EQUITY
Common Stock 1,374,754 1,362,938 1,374,754
Retained Earnings 1,987,305 1,339,011 1,778,375
Treasury Stock (18,818) 0 (18,818)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,343,241 2,701,949 3,134,311
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,442,932 $ 3,894,172 $ 5,259,638
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE> 8
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED
-------------------------- DECEMBER 31,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
SALES $ 1,413,864 $ 1,258,639 $ 5,295,405
COST OF GOODS SOLD 660,881 512,233 2,976,307
----------- ----------- -----------
GROSS PROFIT 752,983 746,406 2,319,098
OPERATING EXPENSES 463,705 458,937 1,383,049
----------- ----------- -----------
INCOME FROM OPERATIONS 289,278 287,469 936,049
OTHER INCOME (EXPENSE)
Interest income 12,413 9,874 52,140
Interest expense (36,694) (12,602) (62,168)
Other Income 74,343 689 59,087
----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 50,062 (2,039) 49,059
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 339,340 285,430 985,108
PROVISION FOR INCOME TAXES 130,410 107,026 367,340
----------- ----------- -----------
NET INCOME $ 208,930 $ 178,404 $ 617,768
=========== =========== ===========
EARNINGS PER SHARE $ .06 $ .05 $ .16
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,777,385 3,778,977 3,777,385
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE> 9
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES AUTHORIZED
----------------------------
# 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 18,819 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 18,819 1,778,375
Net income for the three months
ended March 31, 1997 0 0 0 0 208,930
---------- ---------- ---------- ---------- ----------
BALANCES AT
MARCH 31, 1997 3,785,377 10,400 1,374,754 $ 18,819 $1,987,305
========== ========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE> 10
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED
-------------------------- DECEMBER 31
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 208,930 $ 178,404 $ 617,768
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 55,029 55,624 243,208
Deferred income taxes 0 0 (15,971)
Gain on sale of asset 0 (689) 0
(Increase) decrease in operating assets:
Accounts receivable (167,311) 5,841 (15,787)
Other receivable 7,600 0 2,600
Inventories (9,956) 20,000 (125,224)
Prepaid expenses and other assets (53,856) (40,901) 13,492
Increase (decrease) in operating liabilities:
Accounts payable (4,557) 33,944 (3,145)
Accrued expenses 183 (87,684) 8,451
----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 36,062 346,645 725,392
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (3,194) (100,000) (13,671)
Sale of investments 0 100,100 129,411
Purchase of property and equipment (1,071) (16,796) (1,401,494)
Proceeds from sales of assets 0 0 0
----------- ----------- -----------
NET CASH PROVIDED BY (USED) IN
INVESTING ACTIVITIES (4,265) (16,696) (1,285,754)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 0 919,645
Repayments of notes payable (21,262) (9,917) (46,471)
Purchase of Treasury Stock 0 (11,816) (18,818)
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (21,262) (21,733) 854,356
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 10,535 126,110 293,994
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 996,101 702,107 702,107
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,006,636 $ 828,217 $ 996,101
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE> 11
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31
--------------------------
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 36,694 $ 12,602 $ 62,168
============ ============ ============
Cash paid for income taxes $ 90,000 $ 90,900 $ 486,900
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-8
<PAGE> 12
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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-9
<PAGE> 13
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996 AND DECEMBER 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Investments
Effective December 31, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No 115 " Accounting for
certain Debt and Equity Securities" (SFAS 115). In accordance with this
Statement, securities are classified as held-to-maturity,
available-for-sale or trading.
The Company's investments include certificates of deposit with maturity
dates greater than three months and US Treasury Bonds which are all short
term and held-to-maturity. Securities classified as held-to-maturity are
stated at cost adjusted for amortization of premiums and accretion of
discounts. At December 31, 1995, cost approximated market value. The
Company does not currently have any trading or available-for-sale
securities.
Inventory
Inventories are stated at lower of cost or market, cost being determined
by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight line method. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized in income for the
period. The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized.
Property and equipment are being depreciated over the following useful
lives:
<TABLE>
<CAPTION>
Category Years
-------- -----
<S> <C>
Buildings and improvements 31
Machinery and equipment 5-12
Office equipment 5-7
</TABLE>
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>
<CAPTION>
<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> 14
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 and
amortization of customer list.
Earning Per Common Share
Earnings per common share were computed by dividing net income by
weighted average number of shares of common stock outstanding during the
year. For the year ended December 31, 1995, fully diluted and primary
earnings per share were the same as there were no potentially dilutive
common stock equivalents outstanding. See Note 11 for fully diluted
earnings per share for the year ended December 31, 1994.
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 THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31
--------------------------
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Finished goods $ 285,291 $ 174,600 $ 300,287
Production supplies 84,088 47,500 33,957
Raw materials 53,901 46,000 79,080
------------ ------------ ------------
$ 423,280 $ 268,100 $ 413,324
============ ============ ============
</TABLE>
F-11
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996 AND DECEMBER 31, 1996
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31, 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 1,448,274 1,234,635 1,448,752
Vehicles 109,877 109,877 109,877
Leasehold improvements 81,781 51,169 80,232
------------ ------------ ------------
$ 3,947,702 $ 2,561,933 $ 3,946,631
============ ============ ============
</TABLE>
Depreciation charged to income for the three months ended March 31, 1997
and 1996 was $44,418 and $47,231 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, included in other income.
NOTE 5 - NOTES PAYABLE
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31, FOR THE YEARNDED
----------------------------- 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 $ 209,820 $ 224,368 $ 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. Collaterlized by real estate 433,663 457,021 439,761
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 904,318 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 5,769 10,352 7,045
----------- ----------- -----------
Total 1,553,570 691,741 1,574,832
</TABLE>
F-12
LIFEWAY FOODS, INC. AND SUBSIDIARIES
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996 AND DECEMBER 31, 1996
NOTE 5 - NOTES PAYABLE - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED
--------------------------- DECEMBER 31
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Less current maturities 106,869 43,115 105,928
------------ ------------ ------------
Total $ 1,446,701 $ 648,626 $ 1,468,904
============ ============ ============
</TABLE>
Maturities of notes payable are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
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 THREE MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED
--------------------------- DECEMBER 31
1997 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
Current
Federal $ 106,118 $ 86,603 $ 312,270
State 24,292 20,423 71,041
------------ ------------ ------------
Total current 130,410 107,026 383,311
Deferred 0 0 (15,971)
------------ ------------ ------------
Provision for income taxes $ 130,410 $ 107,026 $ 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 THREE MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED
--------------------------- DECEMBER 31
1997 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
Federal income tax expense
computed at the statutory rate $ 106,118 $ 86,603 $ 334,937
State taxes, expense 24,292 20,423 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 $ 130,410 $ 107,026 $ 367,340
============ ============ ============
</TABLE>
F-13
LIFEWAY FOODS, INC. AND SUBSIDIARIES
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 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.("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-14
LIFEWAY FOODS, INC. AND SUBSIDIARIES
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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-15
LIFEWAY FOODS, INC. AND SUBSIDIARIES
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996 AND DECEMBER 31, 1996
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 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
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 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 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-16
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(1) Material Changes in Results of Operations
Net income increased by $30,526, up to $208,930 for the three month
period ending March 31, 1997, from $178,404 during the same three month period
in 1996. The material components of this increase are detailed as follows:
Sales and cost of goods sold increased by $155,225 and $148,648,
respectively, up to $1,413,864 and $660,881, respectively, during the three
month period ending March 31, 1997, from $1,258,639 and $512,233, respectively,
during the same three month period in 1996. The increase is primarily
attributable to increased sales of Kefir, Farmer's Cheese and Golden Zesta. 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 $24,092, up to $36,694 during the three
month period ending March 31, 1997, from $12,602 during the same three 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 $73,654, up to $74,343 during the three
month period ending March 31, 1997, from $689 during the same three month
period in 1996. The increase is attributable to the receipt of rent revenues
from the current tenant occupying the real property that was acquired by the
Company in 1996. The Company anticipates that the current tenant will vacate
the property during the second quarter of 1997, after which time no future rent
revenues are expected to be received and the Company anticipates occupying the
property for its own use.
Provision for income taxes increased by $23,384, up to $130,410 during
the three month period ending March 31, 1997, from $107,026 during the same
three month period in 1996. The increase is proportionate to the net income
increase.
(2) Material Changes in Financial Condition
As of the three month period ending March 31, 1997, as compared to the
three month period ending March 31, 1996, the Company had working capital in
the amount of $1,936,860 as compared to $1,649,682, respectively, an increase
of $287,178; and cash on hand in the amounts of $1,006,636 as compared to
$828,217, respectively, an increase of $178,419. Cash flow from operations was
generated by the primary business activity of the Company. During the
remainder of 1997, the Company anticipates purchasing additional equipment for
its proposed new production facility, and to gradually employ additional
persons on an as-needed basis for its operation.
The Company's balance in inventory increased by $155,180, up to
$423,280 as of March 31, 1997, as compared to $268,100 as of March 31, 1996.
The increase is primarily due to an increase in production and sales.
Net cash provided by operating activities decreased by $310,583, down
to $36,062 as of March 31, 1997, as compared to $346,645 as of March 31, 1996.
The decrease is primarily due to 1) a significant increase in accounts
receivable due primarily to increased sales; and 2) a significant decrease in
accrued expenses due primarily to the Company's payments of taxes that had
previously been accrued.
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.
4
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number and Brief Description
3.1 Articles of Incorporation of issuer, with Certificate, and
Amendments. (1)
3.2 Bylaws of issuer. (1)
3.3 Corrected Amendment to the Bylaws of issuer. (1)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan,
dated June 5, 1995. (2)
10.2 Employment Agreement between issuer and Michael Smolyansky.
(3)
10.4 Industrial Building Lease between Lifeway Foods, Inc. and
Michael Smolyansky, and Addendum to Building Lease. (3)
10.5 Stock Option Agreements. (3)
10.7 Restricted Stock Plan. (3)
10.9 Real Estate Sales Contract, dated April 24, 1996, to purchase
a 110,000 square foot parcel of real property, zoned
industrial, in Morton Grove, Illinois. (4)
27 Financial Data Schedule. (5)
- --------------------
5
<PAGE> 22
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
filed under cover of Form 8-K and amendments thereto.
(4) Incorporated by reference to the issuer's Quarterly Report on
Form 10-QSB for the period ended March 31, 1996.
(5) Filed herewith.
(b) Reports on Form 8-K
None.
6
<PAGE> 23
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LIFEWAY FOODS, INC.
By: /s/ MICHAEL SMOLYANSKY
-------------------------------------------
Michael Smolyansky, Chief Executive
Officer, Chief Financial and Accounting
Officer, President, Treasurer and
Director
Date: May 8, 1997
7
<PAGE> 24
EXHIBIT INDEX
3.1 Articles of Incorporation of issuer, with Certificate, and Amendments.
(1)
3.2 Bylaws of issuer. (1)
3.3 Corrected Amendment to the Bylaws of issuer. (1)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated
June 5, 1995. (2)
10.2 Employment Agreement between issuer and Michael Smolyansky. (3)
10.4 Industrial Building Lease between Lifeway Foods, Inc. and Michael
Smolyansky, and Addendum to Building Lease. (3)
10.5 Stock Option Agreements. (3)
10.7 Restricted Stock Plan. (3)
10.9 Real Estate Sales Contract, dated April 24, 1996, to purchase a
110,000 square foot parcel of real property, zoned industrial, in
Morton Grove, Illinois. (4)
27 Financial Data Schedule. (5)
-------------------
(1) Incorporated by reference to the issuer's registration statement on
Form S-18 (File No. 33-14329-C), and Post- Effective Amendments
thereto.
(2) Incorporated by reference to the issuer's registration statement on
Form S-8 (File No. 33-93306).
(3) Incorporated by reference to the issuer's Current Reports filed under
cover of Form 8-K and amendments thereto.
(4) Incorporated by reference to the issuer's Quarterly Report on Form
10-QSB for the period ended March 31, 1996.
(5) Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,006,636
<SECURITIES> 216,865
<RECEIVABLES> 851,719
<ALLOWANCES> 48,000
<INVENTORY> 423,280
<CURRENT-ASSETS> 2,553,488
<PP&E> 3,947,702
<DEPRECIATION> 1,113,954
<TOTAL-ASSETS> 5,442,932
<CURRENT-LIABILITIES> 616,628
<BONDS> 1,446,701
0
0
<COMMON> 1,374,754
<OTHER-SE> 1,968,487
<TOTAL-LIABILITY-AND-EQUITY> 5,442,932
<SALES> 1,413,864
<TOTAL-REVENUES> 1,500,620
<CGS> 660,881
<TOTAL-COSTS> 463,705
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,694
<INCOME-PRETAX> 339,340
<INCOME-TAX> 130,410
<INCOME-CONTINUING> 208,930
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 208,930
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
