UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 5(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ______________
Commission file number: 0-17363
LIFEWAY FOODS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in it charter)
Illinois 36-3442829
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7625 North Austin Avenue, Skokie, Illinois 60077
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(847) 967-1010
----------------------------------------
(issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 4, 1998, the issuer
had 3,785,677 shares of common stock, no par value, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements. F-1
Lifeway Foods, Inc. and Subsidiaries
September 30, 1998 and 1997
Consolidated Balance Sheets
December 31, 1997 and
September 30, 1998 and 1997 F-2 - F-3
Consolidated Statements of Income
for the year ended December 31, 1997 and
for the three months ended September 30,
1998 and 1997 (unaudited) for the nine
months ended September 30, 1998 and
1997 (unaudited) F-4
Consolidated Statements of Changes in
Stockholders' Equity for the year ended
December 31, 1997 and for the nine months
ended September 30, 1998 and 1997 (unaudited) F-5
Consolidated Statements of Cash Flows
for the year ended December 31, 1997 and
for the nine months ended September 30, 1998
and 1997 (unaudited) F-6 - F-7
Notes to Consolidated Financial Statements
(unaudited) F-8 - F-15
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 3
PART II - OTHER INFORMATION 4
SIGNATURES 5
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
F-1
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1998 1997 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalent $ 695,799 $ 503,366 $ 550,670
Investments 236,686 224,224 227,622
Accounts receivable, net of allowance
for doubtful accounts of $48,000 at
September 30, 1998 and 1997 and
December 31, 1997 868,145 768,996 818,245
Other receivables 16,200 15,200 15,200
Inventories 721,000 671,999 614,022
Prepaid expenses and other assets 44,229 7,714 7,714
Deferred income taxes 17,936 41,418 59,354
--------------- --------------- ----------------
Total current asset 2,599,995 2,232,917 2,292,827
Property and Equipment
Land 658,400 658,400 658,400
Buildings, machinery and equipment 4,873,748 4,320,082 4,540,891
--------------- --------------- ----------------
Total property and equipment 5,532,148 4,978,482 5,199,291
Less: accumulated depreciation 1,547,093 1,202,790 1,283,486
--------------- --------------- ----------------
Property and equipment, net 3,985,055 3,775,693 3,915,805
Other Assets
Intangible assets 330,343 330,343 330,343
Less: accumulated amortization 316,881 295,868 306,477
--------------- --------------- ----------------
Total other assets 13,462 34,475 23,866
--------------- --------------- ----------------
Total Assets $ 6,598,512 $ 6,043,084 $ 6,232,498
=============== =============== ================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
September 30, December 31,
1998 1997 1997
------------ ------------ --------------
<S> <C> <C> <C>
Current Liabilities
Current maturities of notes payable $ 266,964 $ 106,903 $ 681,561
Accounts Payable 356,183 358,186 394,390
Accrued expenses 293,896 367,190 429,197
------------ ------------ --------------
Total current liabilities 917,043 832,279 1,505,148
Long-Term Liabilities
Notes payable 1,128,087 1,399,520 791,920
Deferred Income Taxes 37,822 36,362 79,240
Stockholders' Equity
Common Stock 1,426,916 1,387,354 1,396,316
Retained Earnings 3,107,462 2,406,387 2,478,692
Treasury Stock (18,818) (18,818) (18,818)
------------ ------------- --------------
Total stockholders' equity 4,515,560 3,774,923 3,856,190
------------ ------------ -------------
Total Liabilities and Stockholders' Equity $ 6,598,512 $ 6,043,084 $ 6,232,498
============ ============ =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) For the
For the three months ended For the nine months ended year ended
September 30, September 30, December 31,
--------------------------- ---------------------------- ------------
1998 1997 1998 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $ 1,747,870 $ 1,504,353 $ 5,072,862 $ 4,392,201 $ 5,960,878
Cost of goods sold 914,117 834,422 2,313,480 2,406,970 3,434,605
------------ ------------ ------------ ------------ ------------
Gross Profit 833,753 669,931 2,759,382 1,985,231 2,526,273
Operating Expenses 510,435 418,809 1,679,994 1,121,072 1,486,338
------------ ------------ ------------ ------------ -------------
Income from operations 323,318 251,122 1,079,388 864,159 1,039,935
Other income (expense)
Interest income 8,904 11,526 28,412 37,395 47,344
Interest expense ( 32,842) ( 24,221) ( 81,502) (90,550) (124,218)
Other Income 0 15,750 0 214,058 214,058
------------ ------------ ------------ ------------ -------------
Total other income
(expense) (23,938) 3,055 ( 53,090) 160,903 137,184
------------ ------------ ------------ ------------ -------------
Income before income taxes 299,380 254,177 1,026,298 1,025,062 1,177,119
Provision for income taxes 115,976 98,465 397,528 397,050 476,802
------------ ------------ ------------ ------------ -------------
Net Income $ 183,404 $ 155,712 $ 628,770 $ 628,012 $ 700,317
============ ============ ============ ============ =============
Earnings per share $ .05 $ .04 $ .17 $ .17 $ .19
============ ============ ============ ============ =============
Weighted average shares
outstanding 3,790,274 3,789,277 3,790,274 3,789,277 3,776,102
============ ============ ============ ============ =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
</TABLE>
<TABLE>
<CAPTION>
Common Stock, No par Value
10,000,000 Shares Authorized
----------------------------
# of
Shares of
# of Shares Treasury Common Treasury Retained
Issued Stock Stock Stock Earnings
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1995 3,785,377 0 $ 1,374,754 $ 0 $ 1,160,607
Repurchase of
treasury stock 0 10,400 0 18,818 0
Net income for the year
ended December 31, 1996 0 0 0 0 617,768
----------- ----------- ----------- ----------- -----------
Balances at
December 31, 1996 3,785,377 10,400 1,374,754 18,818 1,778,375
Shares exchanged in
non-cash transaction 3,900 0 21,562 0 0
Net income for the year
ended December 31, 1997 0 0 0 0 700,317
----------- ----------- ----------- ----------- -----------
Balances at
December 31, 1997 3,789,277 10,400 1,396,316 18,818 2,478,692
Shares exchanged in
non-cash transaction 6,800 0 30,600 0 0
Net income for the nine months
ended September 30, 1998 0 0 0 0 628,770
----------- ----------- ----------- ----------- -----------
Balances at
September 30, 1998 3,796,077 10,400 $ 1,426,916 $ 18,818 $ 3,107,462
=========== ========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended For the year ended
September 30, December 31
-----------------------------
1998 1997 1997
------------ ------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 628,770 $ 628,012 $ 700,317
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 274,011 165,086 276,491
Issuance of common stock in exchange
for services 0 0 21,562
Deferred income taxes 0 0 24,942
(Increase) decrease in operating assets:
Accounts receivable (49,900) (148,588) (197,837)
Other receivable (1,000) 8,400 8,400
Inventories (106,978) (258,675) (200,698)
Prepaid expenses and other assets (36,515) 0 0
Increase (decrease) in operating liabilities:
Accounts payable (38,207) 116,107 152,311
Accrued expenses (135,301) 95,136 157,143
------------ ------------ -------------
Net cash provided (used) by operating activities 534,880 605,478 942,631
Cash flows from investing activities:
Purchase of investments (9,064) (10,553) (13,951)
Purchase of property and equipment (332,857) (1,031,851) (1,272,760)
------------ ------------ -------------
Net cash provided by (used in)
investing activities (341,921) (1,042,404) (1,286,711)
Cash flows from financing activities:
Proceeds from issuance of common stock 30,600 12,600 0
Repayments of notes payable (78,430) (68,409) (101,351)
------------- ------------ -------------
Net cash used in financing activities (47,830) (55,809) (101,351)
------------- ------------ -------------
Net increase (decrease) in cash and
cash equivalents 145,129 (492,735) (445,431)
Cash and cash equivalents at
beginning of period 550,670 996,101 996,101
------------- ------------ -------------
Cash and cash equivalents at end of period $ 695,799 $ 503,3667 $ 550,670
============= ============ =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended
-----------------------------
September 30, For the year ended
----------------------------- December 31
1998 1997 1997
------------ ------------ ------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 81,502 $ 90,550 $ 124,218
============ ============ ============
Cash paid for income taxes $ 502,000 $ 286,560 $ 267,996
============ ============ ============
Supplemental schedule of non-cash financial activities:
Issuance of common stock in exchange
for consulting fees $ 30,600 $ 12,600 $ 21,562
============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 AND DECEMBER 31, 1997
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 also
distributes some of its products internationally by exporting to Eastern
Europe. For the years ended December 31, 1997 and 1996 export sales of the
Company were approximately $381,000 and $414,000, respectively.
In 1992, the Company formed Lifeway International, Inc. ("LII") as a
majority-owned subsidiary to facilitate the distribution of its products to
Eastern Europe. The Company is considering merging the operations of LII
into the operations of the Company in 1998 to simplify the exporting of its
products.
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 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.
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.
<PAGE>
Cash Equivalents
----------------
All highly liquid investments purchased with a maturity of three months or
less are considered to be cash equivalents.
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.
F-8
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 AND DECEMBER 31, 1997
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Bank balances of amounts reported by financial institutions are categorized
as follows at December 31, 1997:
Amounts insured by FDIC $ 227,910
Uninsured and uncollateralized amounts 507,524
------------
Total bank balances $ 735,434
============
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, 1997, 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 lower of cost or realized value.
Depreciation is computed using the straight line method. When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss
is recognized in income for the period. The cost of maintenance and repairs
is charged to income as incurred; significant renewals and betterments are
capitalized.
Property and equipment are being depreciated over the following useful
lives:
Category Years
-------- -----
Buildings and improvements 31 and 39
Machinery and equipment 5-12
Office equipment 5-7
Vehicles 5
<PAGE>
Intangible Assets
-----------------
Intangible Assets are stated at cost and are amortized over estimated
useful lives of the assets using the straight-line method as follows:
Covenant not to compete 10 years
U.P.C. Codes 7 years
Organization costs 5 years
F-9
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 AND DECEMBER 31, 1997
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes
------------
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax purposes
in different periods. Deferred taxes are classified as current or
noncurrent, depending on the classification of the assets and liabilities
to which they relate. Deferred taxes arising from temporary differences
that are not related to an asset or liability are classified as current or
noncurrent depending on the periods in which the temporary differences are
expected to reverse.
The principal sources of temporary differences are different depreciation
methods for financial statement and tax purposes, capitalization of
indirect costs for tax purposes; use of allowance method for book purposes
verses the direct method for tax purposes as to bad debts.
Earning Per Common Share
------------------------
Earnings per common share were computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding during the year. For the year ended December 31, 1997 and 1996,
diluted and basic earnings per share were the same, as the effect of
dilutive securities options outstanding was not significant.
Change in Accounting Principle
------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) and No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The Company required adoption
date is January 1, 1998. SFAS 130 establishes standards for the reporting
and display of comprehensive income. SFAS 131establishes reporting
requirements for information about operating segments. The Company
anticipates adoption of SFAS 130 and SFAS 131 will not have a material
impact on its financial statements.
<PAGE>
Note 3 - INVENTORIES
Inventories consisted of the following:
(Unaudited)
For the nine months ended For the year ended
September 30, December 31
1998 1997 1997
----------- ----------- ------------------
Finished goods $ 330,000 $ 415,542 $ 314,993
Production supplies 206,000 147,045 138,527
Raw materials 185,000 113,865 160,502
----------- ----------- ------------
$ 721,000 $ 671,999 $ 614,022
=========== =========== ============
F-10
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 AND DECEMBER 31, 1997
Note 4 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consisted of the following: (Unaudited)
For the nine months ended
September 30, For the year ended
------------------------------- December 31
1998 1997 1997
------------- -------------- ------------------
<S> <C> <C> <C>
Land $ 658,400 $ 658,400 $ 658,400
Buildings and improvement 1,649,370 1,649,370 1,567,574
Machinery and equipment 3,022,256 2,503,863 2,779,201
Vehicles 119,770 109,877 113,885
Office equipment 82,352 56,972 80,231
------------- ------------- -------------
$ 5,532,148 $ 4,978,482 $ 5,199,291
============= ============= =============
</TABLE>
Depreciation charged to income for the three and nine months ended
September 30, 1998 and 1997 was $ 87,869, $44,417 , $263,607 and $133,253
respectively, and $234,050 for the year ended December 31, 1997.
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 $214,058 and
$59,000 of rent during 1997 and 1996, respectively, included in other
income.
Note 5 - NOTES PAYABLE
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended
September 30, For the year ended
---------------------------- December 31
1998 1997 1997
------------- ------------ ------------------
<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. $ 184,932 $ 200,983 $ 197,106
<PAGE>
Mortgage note payable, American National Bank
and Trust Company of Chicago, payable in monthly
installments of $3,161 including interest at 7.25%,
with a balloon payment of $343,154 due August
2003. Collaterlized by real estate. 397,763 423,511 416,220
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. 812,356 878,773 858,339
Note payable, Glenview State Bank, payable in
monthly installments of $460, including interest
at 6.25%, due March, 1998. Collateralized by
automobile. 0 3,156 1,816
----------- ------------ -----------
Total $ 1,395,051 $ 1,506,423 $ 1,473,481
</TABLE>
F-11
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 AND DECEMBER 31, 1997
Note 5 - NOTES PAYABLE - Continued
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended For the year ended
September 30, For the year ended
------------------------------- December 31
1998 1997 1997
----------- ------------ ------------------
<S> <C> <C> <C>
Less current maturities 266,964 106,903 681,561
----------- ------------ ------------
Total $ 1,128,087 $ 1,399,520 $ 791,920
=========== ============ ============
Maturities of notes payable are as follows:
Year Ending December 31,
1998 $ 681,561
1999 61,308
2000 61,308
2001 669,304
------------
Total $ 1,473,481
</TABLE>
Note 6 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended
September 30, For the year ended
------------------------------ December 31
1998 1997 1997
------------- ------------- ------------------
<S> <C> <C> <C>
Current
Federal $ 323,912 $ 323,522 $ 369,507
State 73,616 73,528 82,353
------------- ------------- -------------
Total current 397,528 397,050 451,860
Deferred 0 0 24,942
------------- ------------- -------------
Provision for income taxes $ 397,528 $ 397,050 $ 476,802
============= ============= =============
<PAGE>
A reconciliation of the provision for income taxes and the income tax
computed at the statutory rate is as follows:
(Unaudited)
For the nine months ended
September 30, For the year ended
------------------------------ December 31
1998 1997 1997
------------- ------------- ------------------
Federal income tax expense
computed at the statutory rate $ 323,912 $ 323,522 $ 399,596
State taxes, expense 73,616 73,528 58,764
Permanent book/tax difference 0 0 18,442
------------- ------------- -----------
Provision for income taxes $ 397,528 $ 397,050 $ 476,802
============= ============= ===========
</TABLE>
F-12
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 AND DECEMBER 31, 1997
Note 6 - PROVISION FOR INCOME TAXES - Continued
Amounts for deferred tax assets and liabilities as of December 31, 1997 are as
follows:
Non-current deferred tax liabilities arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $ 82,012
Book/tax, accumulated amortization ( 2,772)
------------
Total deferred tax liabilities 79,240
Current deferred tax assets arising from:
Book/tax, allowance for doubtful accounts $ 22,176
Book/tax, inventory 37,178
------------
Total deferred tax assets 59,354
Net deferred tax liability $ 19,886
============
Note 7 - 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 9.8%
and 9.6% of 1997 sales and 12.7% and 22.2% of trade accounts receivable as
of December 31, 1997, respectively.
Note 9 - INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1997:
Covenant Not to Compete $ 50,000
UPC Codes 200,000
Organization Costs 44,343
---------
294,343
Accumulated amortization 270,477
---------
$ 23,866
=========
Total amortization charged against income for the three and nine months
ended September 30, 1998 and 1997 was $3,469, $10,611, $10,404 and $31,832
respectively, and $42,441 for the year ended December 31, 1997.
F-13
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 AND DECEMBER 31, 1997
Note 9 - 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 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Dairy Corporate
1997 Products Restaurant & Other Consolidated
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 5,612,930 $ 347,948 $ 0 $ 5,960,878
Net Income $ 750,564 $ (38,400) $ (11,847) $ 700,317
Identifiable Assets $ 6,056,942 $ 119,261 $ 56,295 $ 6,232,498
Depreciation and
Amortization $ 257,073 $ 10,548 $ 8,870 $ 276,491
Capital Additions $ 1,272,760 $ 0 $ 0 $ 1,272,760
1996
---------
Sale $ 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 $ 0 $ 0 $ 1,401,494
</TABLE>
Note 10 - STOCK OPTION PLANS
The Company has a registration statement filed 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.
The option price, number of shares and grant date are determined at the
discretion of the Company's Board of Directors and are considered 100%
vested at the grant date. Options issued under the plan expire June 30,
2000.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weight-average
assumptions used for grants: dividend yield of 0%, expected volatility of
<PAGE>
54%, risk free interest rate of 6.2% and expected lives of three years. The
weighted-average fair value of options granted during 1997 was $1.48 per
share.
The Company has chosen to account for stock-based compensation in
accordance with APB Opinion 25. If compensation cost would have been
recognized in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," compensation cost would
have increased by approximately $81,000, net income would have been reduced
by approximately $48,000 in 1997, and earnings per share would have been
reduced by $0.01.
F-14
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 AND DECEMBER 31, 1997
Note 10 - STOCK OPTION PLANS - Continued
A summary of option transactions during the year ended December 31, 1997 is
shown below:
<TABLE>
<CAPTION>
Number Weighted-Average
of Exercise
Shares Price
-------- ----------------
<S> <C> <C>
Outstanding and exercisable at January 1, 1997 --- N/A
Granted 55,000 $5.00
Exercised --- $5.00
Forfeited --- ---
Expired --- ---
--------
Outstanding and exercisable at December 31, 1997 55,000 $5.00
========
Available for issuance at December 31, 1997 245,000
========
Additionally, during 1997, the Company issued 3,900 shares of common stock
in exchange for services valued at $21,562.
Note 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, none of
which are held for trading purposes, are as follows at December 31, 1997:
Carrying Fair
Amount Value
----------- ------------
Cash and cash equivalents $ 550,670 $ 550,670
Certificates of Deposit 227,622 227,622
Note payable to bank 1,816 1,816
Mortgages payable 1,471,665 1,446,985
----------- -----------
Total $ 2,251,773 $ 2,227,093
=========== ===========
The carrying values of cash and cash equivalents, certificates of deposit
and the note payable to bank approximate fair values. The fair value of the
mortgage payable is based on the discounted value of contractual cash
flows. The discount rate is estimated using rates currently offered for
debt with similar maturities.
F-15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(1) Material Changes in Results of Operations
Net income for the nine month period ending September 30, 1998 was
$628,770 an increase of $758 over the same nine month period in 1997. Although
sales increased for the current period, they were offset by increased operating
expenses and a decrease in other income. The material components of the charges
in net income are detailed as follows:
Sales increased by $680,661, up to $5,072,862 during the nine month
period ending September 30, 1998, from $4,392,201 during the same nine month
period in 1997. The increase in Sales can be attributed to increased sales
volume as well as product price increases implemented during the most recent
quarter. Cost of goods sold were $1,399,363 during the nine month period ending
September 30, 1998, a decrease of $93,490 from $1,322,933 during the same nine
month period in 1997. This decrease in cost of goods sold can be attributed
primarily to a change in product mix: the Company's new production facility has
allowed the Company to produce and sell more products having a greater profit
margin than in the past.
Operating expenses increased by $558,922, up to $1,679,994 for the nine
month period ending September 30, 1998, from $1,121,072 during the same nine
month period in 1997. This increase is primarily attributable to increased
expenses incurred in connection with the operation of the new production
facility.
Other income was $-0- for the nine month period ending September 30,
1998, compared to $214,058 for the same nine month period in 1997. The other
income in 1997 is attributable to the receipt of rent revenues from a tenant who
occupied the real property that was acquired by the Company in 1996. The Company
is now occupying the property for its own use.
(2) Liquidity and Capital Resources
As of the nine month period ending September 30, 1998, as compared to
the nine month period ending September 30, 1997, the Company had working capital
in the amount of $1,682,952 as compared to $1,400,638, respectively, an increase
of $282,314; and cash on hand in the amounts of $695,799 as compared to
$503,366, respectively, an increase of $192,433. These increases are primarily
attributable to decreased use of cash in the current year for the purchase of
additional equipment and a build-up of inventories for the new production
facility, as compared to the prior year. Additionally, there was a decrease in
long-term liabilities and a corresponding increase in current liabilities due to
the upcoming maturities of several mortgage notes payable, which will be due in
1998. The Company intends to refinance all of these mortgages during 1998.
The Company's balance in inventory increased by $62,600, up to $721,000
as of September 30, 1998, as compared to $658,400 as of September 30, 1997. The
increase is primarily due to an increase in production and sales.
<PAGE>
Net cash used in investing activities for the nine months ended
September 30, 1998 was $341,921, as compared to $1,042,404 for the same period
in 1997, a decrease of $700,483. The use of cash in both periods is primarily
due to the purchase of property and equipment for use in the new production
facility.
The Company is not aware of any circumstances or trends which would
have a negative impact upon future sales or earnings. There have been no
material fluctuations in the standard seasonal variations of the Company's
business. The accompanying financial statements include all adjustments which in
the opinion of management are necessary in order to make the financial
statements not misleading.
<PAGE>
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 -
In October 1998 the Company finalized a sublicense agreement with
GalaGen, Inc., with an effective date of May 1, 1998. Pursuant to the agreement,
the Company obtained the exclusive worldwide rights to two patents, for the
duration of the patents, to produce and sell kefir-culture based products which
contain immunoglobulins, such as the Company's new functional food product,
Basic Plus (TM). GalaGen is the Company's supplier of the Proventra (TM) brand
natural immune components used in Basic Plus. The owner of the patents is
Metagenics, Incorporated. In exchange for such rights, the Company agreed to
pay $10,000 to GalaGen and a royalty to Metagenics of one percent of the net
sales price of any kefir-culture based products which contain immunoglobulins.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit Number and Brief Description
3.1 Articles of Incorporation, with Certificate, and Amendments. (1)
3.2 Bylaws of issuer. (1)
3.3 Corrected Amendment to the Bylaws. (1)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated
June 5, 1995. (2)
27 Financial Data Schedule. (3)
----------------------------
footnotes:
(1) Incorporated by reference to the Company's registration statement on
Form S-18 (File No. 33-14329-C), and Post-Effective Amendments thereto.
(2) Incorporated by reference to the Company's registration statement on
Form S-8 (File No. 33-93306).
(3) Filed herewith.
(b) Reports on Form 8-K - None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LIFEWAY FOODS, INC.
By: /s/ Michael Smolyansky
--------------------------------------------
Michael Smolyansky, Chief Executive Officer,
Chief Financial and Accounting Officer,
President, Treasurer and Director
Date: November 5, 1998
<PAGE>
EXHIBIT INDEX
NUMBER BRIEF DESCRIPTION
3.1 Articles of Incorporation, with Certificate, and Amendments. (1)
3.2 Bylaws of issuer. (1)
3.3 Corrected Amendment to the Bylaws. (1)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan,
dated June 5, 1995. (2)
27 Financial Data Schedule. (3)
----------------------------
(1) Incorporated by reference to the Company's registration statement on
Form S-18 (File No. 33-14329-C), and Post-Effective Amendments thereto.
(2) Incorporated by reference to the Company's registration statement on
Form S-8 (File No. 33-93306).
(3) Filed herewith.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE FORM
10-SB FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH (B) FORM 10-QSB.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 695,799
<SECURITIES> 236,686
<RECEIVABLES> 916,145
<ALLOWANCES> 48,000
<INVENTORY> 721,000
<CURRENT-ASSETS> 2,599,995
<PP&E> 5,532,148
<DEPRECIATION> 1,547,093
<TOTAL-ASSETS> 6,598,512
<CURRENT-LIABILITIES> 917,043
<BONDS> 1,128,087
0
0
<COMMON> 1,426,916
<OTHER-SE> 3,088,644
<TOTAL-LIABILITY-AND-EQUITY> 6,598,512
<SALES> 5,072,862
<TOTAL-REVENUES> 5,101,274
<CGS> 2,313,480
<TOTAL-COSTS> 1,679,994
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,502
<INCOME-PRETAX> 1,026,298
<INCOME-TAX> 397,528
<INCOME-CONTINUING> 628,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 628,770
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
