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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, 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.
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(Name of small business issuer as specified in its charter)
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<S> <C>
ILLINOIS 36-3442829
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(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification No.)
7625 NORTH AUSTIN AVENUE, SKOKIE, ILLINOIS 60077
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(Address of principal executive offices) (Zip Code)
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Issuer's telephone number: (847) 967-1010
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK,
NO PAR VALUE
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 registrant's 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 issuer's revenues for its most recent fiscal year. $5,960,878
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. $10,499,014 AS OF FEBRUARY 26, 1998, BASED ON THE
AVERAGE CLOSING BID AND ASKED PRICES AS QUOTED ON NASDAQ.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 3,778,877 SHARES OF
COMMON STOCK AS OF MARCH 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Notice of Annual Meeting and Proxy Statement for the
Registrant's 1998 Annual Meeting of Shareholders to be held May 16, 1998 are
incorporated by reference in Part III.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO
DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual
results to differ materially for those indicated by the forward looking
statements. Examples of forward looking statements include, but are not
limited to (i) projections of revenues, income or loss, earning or loss per
share, capital expenditures, dividends, capital structure and other financial
items, (ii) statements of the plans and objectives of the Company or its
management of Board of Directors, including the introduction of new products,
or estimates or predictions of actions by customers, suppliers, competitors or
regulatory authorities, (iii) statements of future economic performance, and
(iv) statements of assumptions underlying other statements and statements about
the Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ
materially from those indicated by forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the
actions of competitors, the effects of government regulation, possible delays
in the introduction of new products, customer acceptance of products and
services, and other factors which are described herein and/or in documents
incorporated by reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act.
Forward looking statements are beyond the ability of the Company to control and
in many cases the Company cannot predict what factors would cause results to
differ materially from those indicated by the forward looking statements.
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
Lifeway Foods, Inc. (the "Company") commenced operations in February,
1986, and was 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 primarily 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 ending December 31, 1997 and 1996, export sales of the
Company were approximately $381,000 and $414,000, respectively.
(a)(1) Subsidiary Corporations
Lifeway International, Inc.
In 1992, the Company formed Lifeway International, Inc. ("LII"), as a
majority-owned subsidiary. In exchange for a 98% interest in LII, the Company
transferred $108,000 in cash. The remaining 2% interest in LII was transferred
to other shareholders ("Minority Shareholders") 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 in Svyatoshino was not
feasible. In lieu of this acquisition, LII
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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 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 of the Company as payment of
interest on their investment in LII. During 1995, additional Minority
Shareholders owning 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 had been exchanged or cashed out under the terms of the
exchange offer.
The Company is considering merging the operations of LII into the
operations of the Company in 1998 to simplify the exporting of its products.
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 operates a "Russian" theme restaurant and supper club facility,
known as "Moscow Nites," catering to the Chicago area's Russian and East
European ethnic communities. 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.
(b) Business of Issuer
(b)(1) Products
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, cappuccino, 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.
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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.
In 1997, the Company introduced two new products: 1) "Elita" - a
low-fat, low-cholesterol spreadable kefir product which is marketed as a
substitute for cream cheese; and 2) "Kwashenka" - a spoonable kefir product.
In May 1997, the Company entered into a collaboration agreement with
GalaGen, Inc. for the joint development of kefir-based products containing
certain "passive immunity products" produced by GalaGen, Inc. No assurance can
be given that the collaboration agreement will be successful.
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
With its six Company-owned trucks, the Company distributes its
products directly to over 1,100 stores in the State of Illinois, including
major retail chains such as Jewel Food Stores, Dominick's Finer Foods, Wild
Oats Markets, Treasure Island Food Marts, Whole Foods, Cub Foods and Butera
Food Stores.
In addition to the State of Illinois, the Company's products are
distributed to over 3,000 stores throughout the United States. 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 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.
Additionally, the Company distributes its products internationally by
exporting to Canada, Russia and the Ukraine.
(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 unverifiable health claims, the Company believes that the
potential for healthful benefits as suggested by such studies can serve as the
basis for an advertising strategy.
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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 1997, the Company's products were
represented at approximately 12 trade shows. The cost of participating in the
shows is split between the distributor and the Company.
The Company expended approximately $158,000 and $193,000 on
advertising and product promotion in 1997 and 1996, respectively.
(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
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 1997, two customers accounted for 9.8% and
9.6% of sales and 12.7% and 22.2% of trade accounts receivable as of December
31, 1997, respectively. For 1996, these two customers accounted for 11.7% and
10.6% of sales and 16.4% and 19.9% of trade accounts receivable, respectively.
(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.
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.
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In the first quarter of 1996, the Company made application to the U.S.
Patent and Trademark Office for the trademark "Golden Zesta," for its
vegetable-based seasoning. The Company received trademark approval in December
1996.
In the fourth quarter of 1997, the Company received trademark approval
from the U.S. Patent and Trademark Office for the trademark "Sweet Kiss," for
its fruit sugar-flavored product similar in consistency to cream cheese.
In the fourth quarter of 1997, the Company received trademark approval
from the U.S. Patent and Trademark Office for the trademark "Kwashenka," for
its spoonable kefir.
In the fourth quarter of 1997, the Company made application to the
U.S. Patent and Trademark Office for the trademark "Elita" for its spreadable
kefir.
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.
The Company believes that it is currently in compliance with all applicable
environmental laws.
(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. The Company's
research and development efforts have resulted in the successful introduction
to market of a "drinkable yogurt." In 1997, the Company introduced two new
products: 1) "Elita" - a low-fat, low-cholesterol spreadable kefir product
which is marketed as a substitute for cream cheese; and 2) "Kwashaka" - a
spoonable kefir product.
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 1997 and 1996, the Company estimates it expended approximately $16,000
and $10,000, respectively, for research and new product development, which
costs were not borne directly by its customers.
In May 1997, the Company entered into a collaboration agreement with
GalaGen, Inc. for the joint development of kefir-based products containing
certain "passive immunity products" produced by GalaGen, Inc. No assurance can
be given that the collaboration agreement will be successful.
(b)(10) Employees
The Company and its subsidiary, LFI Enterprises, Inc., currently
employ approximately 43 employees, none of whom are part-time employees.
Approximately 37 of those employees are engaged in the manufacturing process of
the Company's Kefir and Kefir-based products and 6 are employed in the
restaurant operation. None of the Company's employees are covered by
collective bargaining agreements.
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The President of the Company, Michael Smolyansky, was engaged by the
Company under an employment agreement that expired in April 1997. A formal
extension to the agreement is currently being negotiated. It is anticipated
that the extension will continue to provide for a base salary, which may be
increased, subject to approval of the Board of Directors, on a yearly basis in
proportion to the Company's profitability and cash bonuses at the discretion of
the Board of Directors.
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 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 improved storage facilities, the Company
has been able to incur 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 monthly installments of $2,548, including interest at
7.5%, with a balloon payment of $184,900 due November, 1998. At December 31,
1997, the loan had a balance of $197,106.
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 payment of
$394,300 due 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, 1997, the loan had a balance of $416,220. 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, Illinois. The
purchase enabled 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 payment of
$618,214 due in November 2001. The mortgage note is payable in monthly
installments of principal of $5,109 plus interest at 8.05%. At December 31,
1997, the loan had a balance of $858,339.
In the fourth quarter of 1997, the Company commenced production in its
new 46,000 square foot plant located in Morton Grove, Illinois, giving the
Company the ability to significantly increase capacity.
For financial statement and tax purposes, the Company depreciates its
real property buildings on a straight line basis over 31 to 39 years.
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, 1997, 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:
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Low Bid High Bid
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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
1st Qtr. 1997 $3.25 $4.1875
2nd Qtr. 1997 $3.125 $4.1875
3rd Qtr. 1997 $4.0625 $6.00
4th Qtr. 1997 $5.625 $9.00
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(b) Holders
As of March 23, 1998, there were approximately 162 holders of record
of the Company's Common Stock (not including beneficial owners holding in
"street-name").
(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 $82,549, up to $700,317 in 1997 from $617,768
in 1996. The material components of this increase are detailed as follows:
Sales and cost of goods sold increased by $665,473 and $458,298,
respectively, up to $5,960,878 and $3,434,605 in 1997 from $5,295,405 and
$2,976,307 in 1996, respectively. These increases are primarily attributable
to increased sales of existing products and the introduction of two new
products, "Elita" and "Kwashenka." Costs of goods sold as a percentage of
sales increased in 1997, and the gross margin percentage decreased in 1997,
primarily due to higher costs of raw materials. As first reported in the
Company's Annual Report on 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 had previously been classified as operating
expenses are now classified under cost of goods sold.
Interest expense increased by $62,050, up to $124,218 in 1997, from
$62,168 in 1996. The increase is primarily attributable to interest paid on a
mortgage note payable on real property that was purchased in late 1996.
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Other income increased by $154,971, up to $214,058 in 1997, from
$59,087 during 1996. The increase is attributable to the receipt of rent
revenues from a tenant who occupied the real property that was acquired by the
Company in late 1996. The tenant vacated the property during the second
quarter of 1997, and the Company is now occupying the property for its own use.
Provision for income taxes increased by $109,462, up to $476,802 in
1997 from $367,340 in 1996. The increase is attributable to an increase in the
deferred tax provision in 1997.
LFI Enterprises, Inc., the Company's supper club facility, had sales
of $347,948 in 1997 and $432,066 in 1996, and net loss of $38,400 in 1997 and
net income of $65,080 in 1996.
(a)(2) Liquidity and Capital Resources
As of December 31, 1997 and December 31, 1996, respectively, the
Company had working capital in the amount of $787,679 and $1,696,175, and cash
and cash equivalents in the amounts of $550,670 and $996,101. Cash flow from
operations was generated by the primary business activity of the Company.
These decreases are primarily attributable to increased costs in connection
with the start-up of the new production facility in 1997, including the
purchase of additional equipment, a build-up of inventories and the employment
of additional persons. 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 expects all cash requirements can be met internally for the next
12-month period.
Net cash provided by operating activities increased by $217,239, up to
$942,631 in 1997 from $725,392 in 1996. The increase is primarily due to the
Company's increase in sales and net income, as well as increased balances in
operating liabilities (accounts payable and accrued expenses) and is partially
offset by increased balances in operating assets (accounts receivable and
inventories) primarily attributable to the start-up of the new production
facility in 1997.
Net cash (used in) financing activities in 1997 was $(101,351), as
compared to net cash provided by financing activities in 1996 of $854,356, a
difference of $955,707. This change is primarily attributable to proceeds
received from notes payable in 1996 that were not received in 1997.
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 reflected the Board's belief that the Company's Common
Stock was undervalued. The resolution of the Board of Directors gave the
Company one year to repurchase 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. No shares were repurchased in 1997.
The Company has not yet addressed the "Year 2000" issue, but intends
to do so in 1998. The Year 2000 issue is the result of computer programs that
use two digits rather than four to define the applicable year.
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.
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-15, which
pages follow this page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTANT AND
FINANCIAL DISCLOSURE
Not Applicable.
9
<PAGE> 10
LIFEWAY FOODS, INC. AND SUBSIDIARIES
ANNUAL REPORT
DECEMBER 31, 1997 AND 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<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 - F15
</TABLE>
F-1
<PAGE> 11
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, 1997 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the years ended
December 31, 1997 and 1996. 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, 1997, and the results of their
operations and their cash flows for the years ended December 31, 1997 and 1996
in conformity with generally accepted accounting principles.
/s/ GLEESON, SKLAR, SAWYERS & CUMPATA LLP
Gleeson, Sklar, Sawyers & Cumpata LLP
Elgin, Illinois
February 20, 1998
F-2
<PAGE> 12
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 550,670
Investments 227,622
Accounts receivable, net of allowance
for doubtful accounts of $48,000 818,245
Other receivables 15,200
Inventories 614,022
Prepaid expenses and other assets 7,714
Deferred income taxes 59,354
----------
TOTAL CURRENT ASSETS 2,292,827
PROPERTY AND EQUIPMENT
Land 658,400
Buildings, machinery and equipment 4,540,891
----------
Total property and equipment 5,199,291
Less: accumulated depreciation 1,283,486
----------
PROPERTY AND EQUIPMENT, NET 3,915,805
OTHER ASSETS
INTANGIBLE ASSETS, NET 23,866
----------
TOTAL ASSETS $6,232,498
==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 13
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable $ 681,561
Accounts payable 394,390
Accrued expenses 429,197
-----------
TOTAL CURRENT LIABILITIES 1,505,148
LONG-TERM LIABILITIES 791,920
DEFERRED INCOME TAXES 79,240
STOCKHOLDERS' EQUITY
Common stock 1,396,316
Retained earnings 2,478,692
Treasury stock, at cost (18,818)
-----------
TOTAL STOCKHOLDERS' EQUITY 3,856,190
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,232,498
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE> 14
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
SALES $ 5,960,878 $ 5,295,405
Cost of goods sold 3,434,605 2,976,307
----------- -----------
GROSS PROFIT 2,526,273 2,319,098
Operating expenses 1,486,338 1,383,049
----------- -----------
INCOME FROM OPERATIONS 1,039,935 936,049
Other income (expense)
Interest income 47,344 52,140
Interest expense (124,218) (62,168)
Other income 214,058 59,087
----------- -----------
Total other income (expense) 137,184 49,059
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,177,119 985,108
Provision for income taxes 476,802 367,340
----------- -----------
NET INCOME $ 700,317 $ 617,768
=========== ===========
EARNINGS PER COMMON SHARE $ 0.19 $ 0.16
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,776,102 3,777,385
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<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, 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
Stock exchanged in
non-cash transactions 3,900 3,900 -- 21,562 -- --
Net income for the year
ended December 31, 1997 -- -- -- -- -- 700,317
---------- ---------- ---------- ---------- ---------- ----------
BALANCES AT
DECEMBER 31, 1997 3,789,277 3,789,277 10,400 $1,396,316 $ 18,818 $2,478,692
========== ========== ========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE> 16
\
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 700,317 $ 617,768
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 276,491 243,208
Issuance of common stock in exchange
for services rendered 21,562 --
Deferred income taxes 24,942 (15,971)
(Increase) decrease in operating assets:
Accounts receivable (197,837) (15,787)
Other receivables 8,400 2,600
Inventories (200,698) (125,224)
Prepaid expenses and other assets -- 13,492
Increase (decrease) in operating liabilities:
Accounts payable 152,311 (3,145)
Accrued expenses 157,143 8,451
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 942,631 725,392
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (13,951) (13,671)
Sale of investments -- 129,411
Purchase of property and equipment (1,272,760) (1,401,494)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,286,711) (1,285,754)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 919,645
Repayments of notes payable (101,351) (46,471)
Purchase of treasury stock -- (18,818)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (101,351) 854,356
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (445,431) 293,994
Cash and cash equivalents at beginning of year 996,101 702,107
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 550,670 $ 996,101
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE> 17
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $124,218 $ 62,168
======== ========
Cash paid for income taxes $267,996 $486,900
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common stock in exchange for consulting fees $ 21,562 $ --
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-8
<PAGE> 18
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 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 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 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 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.
Cash Equivalents
All highly liquid investments purchased with an original 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-9
<PAGE> 19
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997 AND 1996
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Bank balances of amounts reported by financial institutions are
categorized as follows at December 31, 1997:
<TABLE>
<S> <C>
Amounts insured by FDIC $ 227,910
Uninsured and uncollateralized amounts 507,524
---------------
Total bank balances $ 735,434
===============
</TABLE>
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.
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 the lower of cost or net realizable
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:
<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 and 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
U.P.C. Codes 7 years
Organization costs 5 years
</TABLE>
F-10
<PAGE> 20
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997 AND 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 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 available to
common stockholders by the weighted average number of common shares
outstanding during the year. For the years 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's required adoption
date is January 1, 1998. SFAS 130 establishes standards for the reporting
and display of comprehensive income. SFAS 131 establishes reporting
requirements for information about operating segments. The Company
anticipates the adoption of SFAS 130 and SFAS 131 will not have a material
impact on its financial statements.
Note 3 - INVENTORIES
Inventories consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Raw materials $160,502
Production supplies 138,527
Finished goods 314,993
--------
Total $614,022
========
</TABLE>
F-11
<PAGE> 21
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997 AND 1996
Note 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Land $ 658,400
Buildings and improvements 1,567,574
Machinery and equipment 2,779,201
Vehicles 113,885
Office equipment 80,231
---------------
Total $ 5,199,291
===============
</TABLE>
Depreciation charged to income was $234,050 and $200,767 in 1997 and 1996,
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 $214,058 and
$59,000 of rent during 1997 and 1996, respectively, included in other
income.
Note 5 - NOTES PAYABLE
<TABLE>
<S> <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. $ 197,106
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 $394,300 due August, 1998. Collateralized by real
estate. 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. 858,339
Note payable, Glenview State Bank, payable in monthly installments of $460,
including interest at 6.25%, due March, 1998. Collateralized by an automobile. 1,816
------------
Total 1,473,481
Less current maturities 681,561
------------
Total $ 791,920
============
</TABLE>
Maturities of notes payable are as follows:
<TABLE>
<CAPTION>
Year Ending December 31
<S> <C>
1998 $ 681,561
1999 61,308
2000 61,308
2001 669,304
---------------
Total $ 1,473,481
===============
</TABLE>
F-12
<PAGE> 22
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997 AND 1996
Note 6 - PROVISION FOR INCOME TAXES
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
Current 1997 1996
--------- ---------
<S> <C> <C>
Federal $ 369,507 $ 312,270
State 82,353 71,041
--------- ---------
Total current 451,860 383,311
Deferred 24,942 (15,971)
--------- ---------
Provision for income taxes $ 476,802 $ 367,340
========= =========
</TABLE>
A reconciliation of the provision for income taxes and the income tax
computed at the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Federal income tax expense computed at the statutory rate $ 399,596 $ 334,937
State taxes, expense 58,764 49,255
Permanent book/tax difference 18,442 (16,852)
--------- ---------
Provision for income taxes $ 476,802 $ 367,340
========= =========
</TABLE>
Amounts for deferred tax assets and liabilities as of December 31, 1997
were are as follows:
<TABLE>
<S> <C>
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, inventories 37,178
--------
Total deferred tax assets 59,354
--------
Net deferred tax liability $ 19,886
========
</TABLE>
Note 7 - 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 9.8% and 9.6% of 1997 sales and 12.7% and 22.2% of trade
accounts receivable as of December 31, 1997, respectively. For 1996, these
two customers accounted for 11.7% and 10.6% of sales and 16.4% and 19.9% of
trade accounts receivable, respectively.
F-13
<PAGE> 23
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997 AND 1996
Note 8 - INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Covenant not to compete $ 50,000
U.P.C. Codes 200,000
Organization costs 44,343
---------------
294,343
Accumulated amortization (270,477)
---------------
Total $ 23,866
===============
</TABLE>
Total amortization charged against income for the years ended December 31,
1997 and 1996 was $42,441 and $42,441, respectively.
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 $ -- $5,960,878
Net Income (Loss) $ 750,564 $ (38,400) $ (11,847) $ 700,317
Identifiable Assets $6,056,942 $ 119,261 $ 56,295 $6,232,498
Depreciation and 257,073 10,548 8,870 276,491
Amortization $ $ $ $
Capital Additions $1,272,760 $ -- $ -- $1,272,760
1996
- ----
Sales $4,863,339 $ 432,066 $ -- $5,295,405
Net Income (Loss) $ 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
</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 options to purchase
Common Stock to certain consultants, service providers, and employees of
the Company.
F-14
<PAGE> 24
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997 AND 1996
Note 10 - STOCK OPTION PLANS - Continued
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 weighted-average
assumptions used for grants: dividend yield of 0%, expected volatility of
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 been 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. There would have been no effect in 1996.
A summary of option transactions during the year ended December 31, 1997 is
shown below:
<TABLE>
<CAPTION>
Number Weighed-Average
of Exercise
Shares Price
------- --------------
<S> <C> <C>
Outstanding at January 1, 1997 -- N/A
Granted 55,000 $ 5.00
Exercised -- 5.00
Forfeited -- --
Expired -- --
-------
Outstanding at December 31, 1997 55,000 5.00
=======
Available for issuance at December 31, 1996 300,000
=======
Available for issuance at December 31, 1997 245,000
=======
</TABLE>
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 values of the Company's financial instruments, none of
which are held for trading purposes, are as follows at December 31, 1997:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
---------- -----------
<S> <C> <C>
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
========== ==========
</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-15
<PAGE> 25
PART III
Certain information required by Part III is omitted from this report in
that the Company will file a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this Report, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information regarding the Company's directors and certain other
information required by this Item is incorporated by reference to the Company's
Proxy Statement.
(a) Executive Officers. The executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position Officer Since
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Michael Smolyansky 50 CEO, CFO, President, Treasurer and Director 1986
Valeriy Nikolenko 52 Vice President-Production and Secretary 1993
</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 reporting company.
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.
(b) 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. Based solely on its review of copies of such reports received or
written representations from certain reporting persons, the Company believes
that, during the year ended December 31, 1997, all Section 16(a) filing
requirements applicable to its officers, directors and ten percent shareholders
were complied with except for the late filing of reports of six transactions by
the spouse of Michael Smolyansky, which were reported on Form 5 by Mr.
Smolyansky due to his indirect ownership.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
the Registrant's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
the Registrant's Proxy Statement.
10
<PAGE> 26
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
the Registrant's Proxy Statement.
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)
10.4 Industrial Building Lease between Lifeway Foods, Inc. and
Michael Smolyansky, and Addendum to Building Lease. (3)
10.9 Real Estate Sales Contract, dated April 24, 1996, to purchase
a 110,000 square foot parcel of real property, zoned industrial,
in Morton Grove, Illinois. (4)
21.1 List of Subsidiaries of the Registrant. (5)
27 Financial Data Schedule. (6)
------------------------
(1) Incorporated by reference to the Company's Registration
Statement on Form S-18 (Commission File No. 33-14329-C), and
Post-Effective Amendments thereto.
(2) Incorporated by reference to the Company's Registration
Statement on Form S-8 (Commission File No. 33-93306).
(3) Incorporated by reference to the Company's Current Reports filed
under cover of Form 8-K and amendments thereto.
(4) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the period ended March 31, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996
(6) Filed herewith.
(b) Reports on Form 8-K
None.
11
<PAGE> 27
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 31, 1998
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 31, 1998
By /s/ Pol Sikar
---------------------------------------------
Pol Sikar, Director
Date: March 31, 1998
By /s/ Rick D. Salm
---------------------------------------------
Rick D. Salm, Director
Date: March 31, 1998
By /s/ Lorenzo Benardi
---------------------------------------------
Lorenzo Bernardi, Director
Date: March 31, 1998
12
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number and brief description
<S> <C>
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)
10.4 Industrial Building Lease between Lifeway Foods, Inc. and
Michael Smolyansky, and Addendum to Building Lease. (3)
10.9 Real Estate Sales Contract, dated April 24, 1996, to purchase
a 110,000 square foot parcel of real property, zoned industrial,
in Morton Grove, Illinois. (4)
21.1 List of Subsidiaries of the Registrant. (5)
27 Financial Data Schedule. (6)
- ------------------------
(1) Incorporated by reference to the Company's Registration
Statement on Form S-18 (Commission File No. 33-14329-C), and
Post-Effective Amendments thereto.
(2) Incorporated by reference to the Company's Registration
Statement on Form S-8 (Commission File No. 33-93306).
(3) Incorporated by reference to the Company's Current Reports filed
under cover of Form 8-K and amendments thereto.
(4) Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the period ended March 31, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996
(6) Filed herewith.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS SET FORTH IN THE FORM 10-KSB FOR THE YEAR ENDED DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 550,670
<SECURITIES> 227,622
<RECEIVABLES> 818,245
<ALLOWANCES> 48,000
<INVENTORY> 614,022
<CURRENT-ASSETS> 2,292,827
<PP&E> 5,199,291
<DEPRECIATION> 1,283,486
<TOTAL-ASSETS> 6,232,498
<CURRENT-LIABILITIES> 1,505,148
<BONDS> 791,920
0
0
<COMMON> 1,396,316
<OTHER-SE> 2,459,874
<TOTAL-LIABILITY-AND-EQUITY> 6,232,498
<SALES> 5,960,878
<TOTAL-REVENUES> 5,960,878
<CGS> 3,434,605
<TOTAL-COSTS> 3,434,605
<OTHER-EXPENSES> 1,486,338
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124,218
<INCOME-PRETAX> 1,177,119
<INCOME-TAX> 476,802
<INCOME-CONTINUING> 700,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 700,317
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
