UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 (IRS Employer Identification No.)
of 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 MAY 5, 1998, THE ISSUER HAD
3,778,877 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
March 31, 1997 and 1996
Consolidated Balance Sheets
December 31, 1997 and
March 31, 1998 and 1997 F-2 - F-3
Consolidated Statements of Income
for the year ended December 31, 1997
and for the three months ended
March 31, 1998 and 1997 (unaudited) F-4
Consolidated Statements of Changes
in Stockholders' Equity for the year
ended December 31, 1997 and
for the three months ended
March 31, 1998 and 1997 (unaudited) F-5
Consolidated Statements of Cash Flows
for the year ended December 31, 1997 and
for the three months ended March 31, 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
MARCH 31, 1998 AND 1997
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 30,
---------------------- December 31,
ASSETS 1998 1997 1997
---------- ---------- ------------
Current Assets
Cash and cash equivalent $ 482,090 $1,006,636 $ 550,670
Investments 230,115 216,865 227,622
Accounts receivable, net of allowance
for doubtful accounts of $48,000 at
March 31, 1998 and 1997 and
December 31, 1997 857,105 787,719 818,245
Other receivables 16,200 16,000 15,200
Inventories 605,022 423,280 614,022
Prepaid expenses and other assets 43,655 61,570 7,714
Deferred income taxes 17,936 41,418 59,354
---------- ---------- ------------
Total current asset 2,252,123 2,553,488 2,292,827
Property and Equipment
Land 658,400 658,400 658,400
Buildings, machinery and equipment 4,621,169 3,289,302 4,540,891
---------- ---------- ------------
Total property and equipment 5,279,569 3,947,702 5,199,291
Less: accumulated depreciation 1,371,355 1,113,954 1,283,486
---------- ---------- ------------
Property and equipment, net 3,908,214 2,833,748 3,915,805
Other Assets
Intangible assets 330,343 330,343 330,343
Less; accumulated amortization 309,945 274,647 306,477
---------- ---------- ------------
Total other assets 20,398 55,696 23,866
---------- ---------- ------------
Total Assets $6,180,735 $5,442,932 $ 6,232,498
=========== ========== ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
March 31, December 31,
1998 1997 1997
---------- ---------- -----------
Current Liabilities
Current maturities of notes payable $ 668,630 $ 106,869 $ 681,561
Accounts Payable 339,895 237,522 394,390
Accrued expenses 270,706 272,237 429,197
---------- ---------- -----------
Total current liabilities 1,279,231 616,628 1,505,148
Long-Term Liabilities
Notes payable 776,593 1,446,701 791,920
Deferred Income Taxes 37,822 36,362 79,240
Stockholders' Equity
Common Stock 1,396,316 1,374,754 1,396,316
Retained Earnings 2,709,591 1,987,305 2,478,692
Treasury Stock ( 18,818) ( 18,818) ( 18,818)
---------- ---------- -----------
Total stockholders' equity 4,087,089 3,343,241 3,856,190
---------- ---------- -----------
Total Liabilities and Stockholders' Equity $6,180,735 $5,442,932 $ 6,232,498
========== ========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the
For the three months ended year ended
March 31, December 31,
------------------------------- ------------
1998 1997 1997
------------ ------------ ------------
Sales $ 1,630,568 $ 1,413,864 $ 5,960,878
Cost of goods sold 692,302 660,881 3,434,605
------------ ------------ ------------
Gross Profit 938,266 752,983 2,526,273
Operating Expenses 543,876 463,705 1,486,338
------------ ------------ ------------
Income from operations 394,390 289,278 1,039,935
Other income (expense)
Interest income 9,099 12,124 47,344
Interest expense ( 26,656) (36,694) (124,218)
Other Income 0 74,343 214,058
------------ ------------ ------------
Total other income
(expense) ( 17,557) 50,062 137,184
------------ ------------ ------------
Income before income taxes 376,833 339,340 1,177,119
Provision for income taxes 145,934 130,410 476,802
------------ ------------ ------------
Net Income $ 230,899 $ 208,930 $ 700,317
============ ============ ============
Earnings per share $ .06 $ .06 $ .19
============ ============ ============
Weighted average shares
outstanding 3,789,277 3,777,385 3,776,102
============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
<TABLE>
<CAPTION>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock, No par Value
10,000,000 Shares Authorized
----------------------------
# of
Shares of
# of Shares issued Treasury Common Treasury Retained
and outstanding Stock Stock Stock Earnings
------------------ --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1995 3,785,377 0 $ 1,374,754 $ 0 $ 1,160,607
Repurchase of
treasury stock 0 10,400 0 18,818 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
--------- --------- ----------- -------- -----------
Net income for the three months
ended March 31, 1998 0 0 0 0 230,899
--------- --------- ----------- -------- -----------
Balances at
March 31, 1998 3,789,277 10,400 1,396,316 18,818 2,709,591
========= ========= =========== ======== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE>
<TABLE>
<CAPTION>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended For the year ended
March 31, December 31,
--------------------------
1998 1997 1997
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 230,899 $ 208,930 $ 700,317
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 91,337 55,624 276,491
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 ( 38,860) ( 167,311) ( 197,837)
Other receivable ( 1,000) 7,600 8,400
Inventories 9,000 ( 9,956) ( 200,698)
Prepaid expenses and other assets ( 35,941) ( 53,856) 0
Increase (decrease) in operating liabilities:
Accounts payable ( 54,495) ( 4,557) 152,311
Accrued expenses ( 158,491) 183 157,143
---------- ----------- ------------
Net cash provided (used) by operating activities 42,449 36,062 942,631
Cash flows from investing activities:
Purchase of investments ( 2,493) ( 3,194) ( 13,951)
Purchase of property and equipment ( 80,278) ( 1,071) ( 1,272,760)
---------- ----------- ------------
Net cash provided by (used) in
investing activities ( 82,771) ( 4,265) ( 1,286,711)
Cash flows from financing activities:
Repayments of notes payable ( 28,258) ( 21,262) ( 101,351)
---------- ----------- ------------
Net cash used in financing activities ( 28,258) ( 21,262) ( 101,351)
---------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents ( 68,580) 10,535 ( 445,431)
Cash and cash equivalents at
beginning of period 550,670 996,101 996,101
---------- ----------- ------------
Cash and cash equivalents at end of period $ 482,090 $ 1,006,636 $ 550,670
========== =========== ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE>
<TABLE>
<CAPTION>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended For the year ended
March 31, December 31,
--------------------------
1998 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 26,656 $ 36,694 $ 124,218
=========== =========== ============
Cash paid for income taxes $ 260,000 $ 90,000 $ 267,996
=========== =========== ============
Supplemental schedule of non-cash financial activities:
Issuance of common stock in exchange
for consulting fees $ 0 $ 0 $ 21,562
=========== =========== ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 commenced its
operations in late November 1992.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying financial Statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned and majority owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents
All highly liquid investments purchased with a maturity of three months
or less are considered to be cash equivalents.
The Company maintains cash deposits at several banks located in the
greater Chicago, Illinois metropolitan area. Deposits at each bank are
insured by the Federal Deposit Insurance Corporation up to $100,000.
Bank balances of amounts reported by financial institutions are
categorized as follows at December 31, 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.
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Property and Equipment
Property and equipment are stated at lower of cost or 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:
Category Years
Buildings and improvements 31 and 39
Machinery and equipment 5-12
Office equipment 5-7
Vehicles 5
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:
Covenant not to compete 10 years
U.P.C. Codes 7 years
Organization costs 5 years
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
131 establishes 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>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997
Note 3 - INVENTORIES
Inventories consisted of the following:
(Unaudited)
For the three months ended For the year ended
March 31, December 31,
--------------------------
1998 1997 1997
--------- ----------- ------------
Finished goods $ 305,993 $ 285,291 $ 314,993
Production supplies 138,527 84,088 138,527
Raw materials 160,502 53,901 160,502
---------- ----------- ------------
$ 605,022 $ 423,280 $ 614,022
========== =========== ============
Note 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
(Unaudited)
For the three months ended For the year ended
March 31, December 31,
--------------------------
1998 1997 1997
---------- ----------- -----------
Land $ 658,400 $ 658,400 $ 658,400
Buildings and improvement 1,602,395 1,649,370 1,567,574
Machinery and equipment 2,816,652 1,473,083 2,779,201
Vehicles 119,770 109,877 113,885
Office equipment 82,352 56,972 80,231
----------- ----------- -----------
$ 5,279,569 $ 3,947,702 $ 5,199,291
=========== =========== ===========
Depreciation charged to income for the three months ended March 31,
1998 and 1997 was $44,418, and $87,869 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.
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997
Note 5 - NOTES PAYABLE
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended For the year ended
March 31, 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. $ 193,108 $ 209,820 $ 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 $394,000 due August 1998. Collaterlized
by real estate. 408,647 433,663 416,220
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. 843,010 904,318 858,339
Note payable, Glenview State Bank, payable in
monthly installments of $460, including
interest at 6.25%, due March, 1998.
Collateralized by automobile. 458 5,769 1,816
---------- ---------- ----------
Total $1,445,223 $1,553,570 $1,473,481
=========== =========== ===========
</TABLE>
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997
Note 5 - NOTES PAYABLE - Continued
(Unaudited)
For the three months ended For the year ended
March 31, December 31,
--------------------------
1998 1997 1997
---------- ---------- ------------
Less current maturities 668,630 106,869 681,561
---------- ---------- ------------
Total $ 776,593 $1,446,701 $ 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
==========
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997
Note 6 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
(Unaudited)
For the three months ended For the year ended
March 31, December 31,
--------------------------
1998 1997 1997
----------- ---------- ------------
Current
Federal $ 118,948 $ 106,118 $ 369,507
State 26,986 24,292 82,353
----------- ---------- ------------
Total current 145,934 130,410 451,860
Deferred 0 0 24,942
----------- ---------- ------------
Provision for income taxes $ 145,934 $ 130,410 $ 476,802
=========== ========== ============
A reconciliation of the provision for income taxes and the income tax
computed at the statutory rate is as follows:
(Unaudited)
For the three months ended For the year ended
March 31, December 31,
1998 1997 1997
---------- ----------- -----------
Federal income tax expense
computed at the statutory rate $ 118,522 $ 106,118 $ 399,596
State taxes, expense 26,986 24,292 58,764
Permanent book/tax difference 0 0 18,442
---------- ----------- -----------
Provision for income taxes $ 145,934 $ 130,410 $ 476,802
========== =========== ===========
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 8 - INTANGIBLE ASSETS
Intangible assets consisted of the following at Decemnber 31, 1997:
Covenant Not to Compete $ 50,000
UPC Codes 200,000
Organization Costs 44,343
------------
294,343
Less: Accumulated amortization 270,477
------------
$ 23,866
============
Total amortization charged against income for the three months ended
March 31, 1998 and 1997 was $3,468 and $10,611 respectively, and
$42,441 for the year ended December 31, 1997.
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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:
Dairy Corporate
1997 Products Restaurant & Other Consolidated
---- -------- ---------- --------- ------------
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
----
Sales $ 4,863,339 $ 432,066 $ 0 $ 5,295,405
Net Income $ 558,134 $ 65,080 $ (5,446) $ 617,768
Identifiable Assets $ 5,054,029 $ 114,878 $ 90,731 $ 5,259,638
Depreciation and
Amortization $ 223,210 $ 11,129 $ 8,869 $ 243,208
Capital Additions $ 1,401,494 $ 0 $ 0 $ 1,401,494
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.
<PAGE>
Note 10 - STOCK OPTION PLANS - Continued
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 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.
A summary of option transactions during the year ended December 31,
1997 is shown below:
Number Weighted-Average
of Exercise
Shares Price
------ ----------------
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 values 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
=========== ===========
<PAGE>
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997
Note 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(1) Material Changes in Results of Operations
Net income increased by $21,969, up to $230,899 for the three month
period ending March 31, 1998, from $208,930 during the same three month period
in 1997. The material components of this increase are detailed as follows:
Sales and cost of goods sold increased by $216,704 and $31,421,
respectively, up to $1,630,568 and $692,302, respectively, during the three
month period ending March 31, 1998, from $1,413,864 and $660,881, respectively,
during the same three month period in 1997. These increases are attributable to
increased sales of existing products.
Operating expenses increased by $80,171, up to $543,876 for the three month
period ending March 31, 1998, from $463,705 during the same three 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 three month period ending March 31, 1998,
compared to $74,373 for the same three 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 three month period ending March 31, 1998, as compared to the
three month period ending March 31, 1997, the Company had working capital in the
amount of $972,892 as compared to $1,936,860, respectively, a decrease of
$963,968; and cash on hand in the amounts of $482,090 as compared to $1,006,636,
respectively, a decrease of $524,546. These decreases are primarily attributable
to increased costs in connection with the new production facility, including the
purchase of additional equipment and a build-up of inventories. 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 $181,742, up to
$605,022 as of March 31, 1998, as compared to $423,280 as of March 31, 1997. The
increase is primarily due to an increase in production and sales.
There was a net decrease of $68,580 in cash and cash equivalents for
the three months ended March 31, 1998, as compared to a net increase of $10,535
in cash and cash equivalents for the same period in 1997. This is primarily due
to the use of cash in 1998 to 1) decrease balances in operating liabilities
accounts (accounts payable and accrued expenses), partially offset by a
decreased balance in operating assets (primarily accounts receivable), and 2)
purchase property and equipment.
<PAGE>
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 - None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit Number and Brief Description
3.1 Articles of Incorporation of issuer, with Certificate,
and Amendments. (1)
3.2 Bylaws of issuer. (1)
3.3 Corrected Amendment to the Bylaws of issuer. (1)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan,
dated June 5, 1995. (2)
10.9 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. (3)
27 Financial Data Schedule. (4)
------------------------------
footnotes:
(1) Incorporated by reference to the issuer's registration statement on
Form S-18 (File No. 33-14329-C), and Post-Effective Amendments thereto.
(2) Incorporated by reference to the issuer's registration statement on
Form S-8 (File No. 33-93306).
(3) Incorporated by reference to the issuer's Quarterly Report on Form
10-QSB for the period ended March 31, 1996.
(4) 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: May 11, 1998
<PAGE>
EXHIBIT INDEX
NUMBER BRIEF DESCRIPTION
3. Articles of Incorporation of issuer, with Certificate, and
Amendments. (1)
3.2 Bylaws of issuer. (1)
3.3 Corrected Amendment to the Bylaws of issuer. (1)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan,
dated June 5, 1995. (2)
10.9 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. (3)
27 Financial Data Schedule. (4)
--------------------------
(1) Incorporated by reference to the issuer's registration statement on Form
S-18 (File No. 33-14329-C), and Post-Effective Amendments thereto.
(2) Incorporated by reference to the issuer's registration statement on Form S-8
(File No. 33-93306).
(3) Incorporated by reference to the issuer's Quarterly Report on Form 10-QSB
for the period ended March 31, 1996.
(4) Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 482,090
<SECURITIES> 230,115
<RECEIVABLES> 905,105
<ALLOWANCES> 48,000
<INVENTORY> 605,022
<CURRENT-ASSETS> 2,252,123
<PP&E> 5,279,569
<DEPRECIATION> 1,371,355
<TOTAL-ASSETS> 6,180,735
<CURRENT-LIABILITIES> 1,279,231
<BONDS> 776,593
0
0
<COMMON> 1,396,316
<OTHER-SE> 2,690,773
<TOTAL-LIABILITY-AND-EQUITY> 6,180,735
<SALES> 1,630,568
<TOTAL-REVENUES> 1,639,667
<CGS> 692,302
<TOTAL-COSTS> 543,876
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,656
<INCOME-PRETAX> 376,833
<INCOME-TAX> 145,934
<INCOME-CONTINUING> 230,899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,899
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
