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Previous: W-J INTERNATIONAL LTD /DE/, 10QSB, 1999-05-13 |
Next: ELLIGENT CONSULTING GROUP INC, 10QSB, 1999-05-13 |
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31,
1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from ________________ to
__________________ Commission file number: 0-17363
LIFEWAY FOODS, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in it charter)
ILLINOIS 36-3442829
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6431 WEST OAKTON, MORTON GROVE, ILLINOIS 60053
- -------------------------------------------------------------------------------
(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 6, 1999, THE ISSUER
HAD 3,785,677 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS.
<S> <C>
F-1
Lifeway Foods, Inc. and Subsidiaries
March 31, 1999 and 1998
Consolidated Balance Sheets
December 31, 1998 and
March 31, 1999 and 1998 (unaudited) F-2 - F-3
Consolidated Statements of Income
for the year ended December 31, 1998 and
for the three months ended March 31, 1999 and 1998 (unaudited) F-4
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 1998 and
for the three months ended March 31, 1999 and 1998 (unaudited) F-5
Consolidated Statements of Cash Flows
for the year ended December 31, 1998 and
for the three months ended March 31, 1999 and 1998 (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
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
F-1
<PAGE> 4
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
----------------------- DECEMBER 31,
ASSETS 1999 1998 1998
---------- ---------- ------------
CURRENT ASSETS
<S> <C> <C> <C>
Cash and cash equivalent $ 592,420 $ 482,090 $ 628,415
Certificates of Deposit 243,063 230,115 239,993
Marketable Securities 165,221 0 100,435
Accounts receivable, net of allowance
for doubtful accounts of $ 0 at
March 31, 1999 and December 31, 1998,
and $ 48,000 at March 31, 1998 1,037,000 857,105 847,269
Other receivables 16,200 16,200 16,200
Inventories 796,517 605,022 851,517
Prepaid expenses and other assets 51,772 43,655 11,772
Deferred income taxes 36,858 17,936 36,858
---------- ---------- ------------
TOTAL CURRENT ASSET 2,939,051 2,252,123 2,732,459
PROPERTY AND EQUIPMENT
Land 658,400 658,400 658,400
Buildings, machinery and equipment 5,271,833 4,621,169 5,150,248
---------- ---------- ------------
Total property and equipment 5,930,233 5,279,569 5,808,648
Less: accumulated depreciation 1,761,295 1,371,355 1,660,628
---------- ---------- ------------
PROPERTY AND EQUIPMENT, NET 4,168,938 3,908,214 4,148,020
OTHER ASSETS
INTANGIBLE ASSETS, NET 8,750 20,398 10,000
---------- ---------- ------------
TOTAL ASSETS $7,116,739 $6,180,735 $ 6,890,479
========== ========== ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE> 5
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
-------------------------- DECEMBER 31,
1999 1998 1998
----------- ----------- ------------
CURRENT LIABILITIES
<S> <C> <C> <C>
Current maturities of notes payable $ 90,536 $ 668,630 $ 85,191
Accounts Payable 419,903 339,895 513,672
Accrued expenses 279,694 270,706 167,075
----------- ----------- ------------
TOTAL CURRENT LIABILITIES 790,133 1,279,231 765,938
LONG-TERM LIABILITIES 1,307,721 776,593 1,314,812
DEFERRED INCOME TAXES 171,960 37,822 171,960
STOCKHOLDERS' EQUITY
Common Stock 1,426,916 1,396,316 1,426,916
Retained Earnings 3,450,464 2,709,591 3,241,308
Accumulated other comprehensive income, net of tax ( 11,637) 0 (11,637)
Treasury Stock (18,818) (18,818) (18,818)
----------- ----------- ------------
TOTAL STOCKHOLDERS' EQUITY 4,846,925 4,087,089 4,637,769
----------- ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,116,739 $ 6,180,735 $ 6,890,479
=========== =========== ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 6
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED) FOR THE
FOR THE THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
--------------------------
1999 1998 1998
----------- ----------- ------------
<S> <C> <C> <C>
SALES $ 1,853,327 $ 1,630,568 $ 6,795,099
COST OF GOODS SOLD 884,663 692,302 3,697,080
----------- ----------- ------------
GROSS PROFIT 968,664 938,266 3,098,019
OPERATING EXPENSES 609,598 543,876 1,758,588
----------- ----------- ------------
INCOME FROM OPERATIONS 359,066 394,390 1,339,431
OTHER INCOME (EXPENSE)
Interest income 8,114 9,099 38,104
Interest expense (25,840) (26,656) (106,222)
Gain on sale of marketable securities 0 0 34,624
----------- ----------- ------------
TOTAL OTHER INCOME
(EXPENSE) (17,726) (17,557) (33,494)
----------- ----------- ------------
INCOME BEFORE INCOME TAXES 341,340 376,833 1,305,937
PROVISION FOR INCOME TAXES 132,184 145,934 543,321
----------- ----------- ------------
NET INCOME $ 209,156 $ 230,899 $ 762,616
=========== =========== ============
EARNINGS PER SHARE $ .06 $ .06 $ .20
=========== =========== ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,796,077 3,789,277 3,781,355
=========== =========== ============
COMPREHENSIVE INCOME;
NET INCOME $ 209,155 $ 230,899 $ 762,616
OTHER COMPREHENSIVE INCOME, NET OF TAX:
UNREALIZED LOSSES ON SECURITIES
(NET OF TAX BENEFIT OF $9.994) 0 0 (11,637)
----------- ----------- ------------
COMPREHENSIVE INCOME $ 209,155 $ 230,899 $ 750,979
=========== =========== ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE> 7
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES AUTHORIZED
-------------------------------
# OF ACCUMULATED
SHARES OF OTHER
# OF SHARES ISSUED TREASURY COMMON TREASURY RETAINED COMPREHENSIVE
AND OUTSTANDING STOCK STOCK STOCK EARNINGS INCOME
------------------ ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1996 3,785,377 10,400 $1,374,754 $ (18,818) $1,778,375 $ 0
Stock in exchange for
services rendered 3,900 0 21,562 0 0 0
Net income for the year
ended December 31, 1997 0 0 0 0 700,317 0
------------------ ---------- ---------- ---------- ---------- -------------
BALANCES AT
DECEMBER 31, 1997 3,789,277 10,400 1,396,316 18,818 2,478,692 0
Stock in exchanged for
services rendered 6,800 0 30,600 0 0 0
Other comprehensive income:
Unrealized losses on securities 0 0 0 0 0 (11,637)
Net income for the year
ended December 31, 1998 0 0 0 0 762,616 0
------------------ ---------- ---------- ---------- ---------- -------------
BALANCES AT
DECEMBER 31, 1998 3,796,077 10,400 1,426,916 18,818 3,241,308 (11,637)
Net income for the three months
ended March 31, 1999 0 0 0 0 209,156 0
------------------ ---------- ---------- ---------- ---------- -------------
BALANCES AT
MARCH 31, 1999 3,796,077 10,400 $1,426,916 $ 18,818 $3,450,464 $ (11,637)
================== ========== ========== ========== ========== =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE> 8
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31
--------------------------
1999 1998 1998
--------- --------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 209,156 $ 230,899 $ 762,616
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 101,919 91,337 391,007
Realized gain on sale of marketable securities 0 0 (34,624)
Issuance of common stock in exchange
for services 0 0 30,600
Decrease in allowance for doubtful accounts 0 0 (48,000)
Deferred income taxes 0 0 115,217
(Increase) decrease in operating assets:
Accounts receivable (189,731) (38,860) 18,976
Other receivable 0 (1,000) (1,000)
Inventories 55,000 9,000 (237,495)
Prepaid expenses and other assets (40,000) (35,941) (4,058)
Increase (decrease) in operating liabilities:
Accounts payable (71,767) (54,495) 119,282
Accrued expenses 112,619 (158,491) (262,122)
--------- --------- ------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 177,196 42,449 850,399
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (64,786) (2,493) (305,490)
Sale of marketable securities 0 0 218,048
Purchase of property and equipment (121,585) (80,278) (592,877)
--------- --------- ------------------
NET CASH PROVIDED BY (USED) IN
INVESTING ACTIVITIES (186,371) (82,771) (680,319)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (26,820) (28,258) (92,335)
--------- --------- ------------------
NET CASH USED IN FINANCING ACTIVITIES (26,820) (28,258) (92,335)
--------- --------- ------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (35,995) (68,580) 77,745
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 628,415 550,670 550,670
--------- --------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 592,420 $ 482,090 $ 628,415
========= ========= ==================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE> 9
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31
--------------------------
1999 1998 1998
------------ ------------ ------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<S> <C> <C> <C>
Cash paid for interest $ 25,840 $ 26,656 $ 106,222
============ ============ ==================
Cash paid for income taxes $ 50,000 $ 260,000 $ 623,000
============ ============ ==================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Refinancing of mortgages $ 0 $ 0 $ 582,696
============ ============ ==================
Purchase of automobile by issuing a note payable $ 22,002 $ 0 $ 18,857
============ ============ ==================
Issuance of common stock in exchange
for consulting fees $ 0 $ 0 $ 30,600
============ ============ ==================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE> 10
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998
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's principle business activity is the production of dairy
products. Specifically, 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 plain farmer's cheese sold under the
name "Lifeway's Farmers Cheese;" a fruit sugar-flavored product similar
in consistency to cream cheese sold under the name of "Sweet Kiss;" and a
new dairy beverage, similar to Kefir, with increased protein and calcium,
sold under the name "Basics Plus." 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, 1998 and 1997 export sales of the Company were approximately
$298,000 and $381,000, respectively.
In 1992, the Company formed Lifeway International, Inc. ("LII") a
wholly-owned subsidiary incorporated in the state of Illinois, to
facilitate the distribution of its products to Eastern Europe. LII was
dissolved in 1998, and its operations were merged into the operations of
the Company to simplify the exporting of its products.
On September 30, 1992, the Company formed a wholly-owned subsidiary
corporation, LFI Enterprises, Inc., (LFIE) incorporated in the State of
Illinois. LFIE was formed for the purpose of operating a "Russian" theme
restaurant and supper club on the property acquired by the Company on
October 9, 1992. The restaurant/supper club commenced operations in late
November 1992.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned 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 a maturity of three months
or less are considered to be cash equivalents.
The Company maintains cash deposits at several banks located in the
greater Chicago, Illinois metropolitan area. Deposits at each bank are
insured by the Federal Deposit Insurance Corporation up to $100,000.
F-8
<PAGE> 11
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Bank balances of amounts reported by financial institutions are
categorized as follows at December 31, 1998:
<TABLE>
<S> <C>
Amounts insured by FDIC $ 212,418
Uninsured and uncollateralized amounts 537,431
------------
Total bank balances $ 749,849
============
</TABLE>
Marketable Securities
Marketable securities are classified as available-for-sale and are stated
at market value. Gains and losses related to marketable securities sold
are determined by the specific identification method.
Accounts Receivable
The allowance for doubtful accounts is based on management's evaluation
of outstanding accounts receivable at the end of the year. At December
31, 1998, no allowance for doubtful accounts has been made since all
receivables were considered collectible.
Inventory
Inventories are stated at lower of cost or market, cost being determined
by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at lower of cost or net realized value.
Depreciation is computed using the straight line method. When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or
loss is recognized in income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and
betterments are capitalized.
Property and equipment are being depreciated over the following useful
lives:
<TABLE>
<CAPTION>
Category Years
-------- -----
<S> <C>
Buildings and improvements 19 and 31
Machinery and equipment 5-12
Office equipment 5-7
Vehicles 5
</TABLE>
Intangible Assets
Intangible Assets are stated at cost and are amortized over estimated
useful lives of the assets using the straight-line method as follows:
<TABLE>
<S> <C>
Covenant not to compete 10 years
U.P.C. Codes 7 years
Organization costs 5 years
</TABLE>
F-9
<PAGE> 12
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998
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.
Advertising Costs
The Company expenses advertising costs as incurred. During 1998 and 1997,
$240,636 and $158,183, respectively, were expensed.
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, 1998 and
1997, diluted and basic earnings per share were the same, as the effect
of dilutive securities options outstanding was not significant.
NOTE 3 - MARKETABLE SECURITIES
The cost and fair value of marketable securities available for sale at
December 31, 1998 follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Equities $ 122,066 $ -0- $ (21,631) $ 100,435
</TABLE>
Proceeds from the sale of marketable securities were $218,048 in 1998.
Gross gains of $34,624 were realized on those sales.
NOTE 4 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31
--------------------------
1999 1998 1998
------------ ------------ ------------------
<S> <C> <C> <C>
Finished goods $ 534,362 $ 305,993 $ 534,224
Work in Process 0 0 49,560
Production supplies 126,803 138,527 132,281
Raw materials 135,352 160,502 135,452
------------ ------------ ------------------
$ 796,517 $ 605,022 $ 851,517
============ ============ ==================
</TABLE>
F-10
<PAGE> 13
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31
1999 1998 1998
------------ ------------ ------------------
<S> <C> <C> <C>
Land $ 658,400 $ 658,400 $ 658,400
Buildings and improvement 1,649,370 1,649,370 1,631,557
Machinery and equipment 3,022,256 2,503,863 3,261,618
Vehicles 119,770 109,877 176,842
Office equipment 82,352 56,972 80,231
------------ ------------ ------------------
$ 5,532,148 $ 4,978,482 $ 5,808,648
============ ============ ==================
</TABLE>
Depreciation charged to income for the three months ended March 31, 1999
and 1998 was $ 100,669 and $87,869 respectively, and $377,142 for the
year ended December 31, 1998.
NOTE 6 - NOTES PAYABLE
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31
--------------------------
1999 1998 1998
------------ ------------ ------------------
<S> <C> <C> <C>
Mortgage note payable, 1st National Bank of Morton Grove, payable in
monthly installments of $1,767, including interest at 7.25%, with a
balloon payment of $139,838 due November
2003. Collateralized by real estate. $ 180,890 $ 193,108 $ 184,282
Mortgage note payable, American National Bank and Trust Company of
Chicago, payable in monthly installments of $3,161 including interest at
7.25%, with a balloon payment of $343,151 due August
2003. Collateralized by real estate. 393,409 408,647 395,731
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. 786,811 843,010 802,138
Note payable, Ford Motor credit, payable in monthly installments of $540,
including interest at 1.9%, due
October 2001. Collateralized by vehicle. 16,315 0 17,852
Note payable, 1st National Bank of Morton Grove,
payable in monthly installments of $532, including
interest at 7.5%, due December 2002. Collateralized
by vehicle. 20,832 0 0
</TABLE>
F-11
<PAGE> 14
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 6 - NOTES PAYABLE - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31
1999 1998 1998
------------ ------------ ------------------
<S> <C> <C> <C>
Note payable, Glenview State Bank, payable in
monthly installments of $460, including interest
at 6.25%, due March 1998. Collateralized by
automobile 0 458 0
------------ ------------ ------------------
Total 1,398,257 1,445,223 1,400,003
Less current maturities 90,536 668,630 85,191
------------ ------------ ------------------
Total $ 1,307,721 $ 776,593 $ 1,314,812
============ ============ ==================
</TABLE>
Maturities of notes payable are as follows:
Year Ending December 31,
<TABLE>
<S> <C> <C>
1999 $ 85,191
2000 86,636
2001 705,315
2002 21,974
2003 500,887
-----------
Total $ 1,400,003
===========
</TABLE>
NOTE 7 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31
1999 1998 1998
------------ ------------ ------------------
<S> <C> <C> <C>
Current
Federal $ 107,748 $ 118,948 $ 339,750
State 24,436 26,986 78,362
------------ ------------ ------------------
Total current 132,184 145,934 418,112
Deferred 0 0 125,209
------------ ------------ ------------------
Provision for income taxes $ 132,184 $ 145,934 $ 543,321
============ ============ ==================
</TABLE>
F-12
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 7 - PROVISION FOR INCOME TAXES - CONTINUED
A reconciliation of the provision for income taxes and the income tax
computed at the statutory rate is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31
1999 1998 1998
------------ ----------- ------------------
Federal income tax expense
<S> <C> <C> <C>
computed at the statutory rate $ 107,748 $ 118,948 $ 444,019
State taxes, expense 24,436 26,986 69,373
Permanent book/tax difference 0 0 29,929
------------ ----------- ------------------
Provision for income taxes $ 132,184 $ 145,934 $ 543,321
============ =========== ==================
</TABLE>
Amounts for deferred tax assets and liabilities as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Non-current deferred tax liabilities arising from:
Temporary differences - principally
<S> <C>
Book/tax, accumulated depreciation $ 171,960
------------
Total deferred tax liabilities $ 171,960
Current deferred tax assets arising from:
Book/tax, allowance for unrealized losses $ 9,994
Book/tax, inventory 26,864
Total deferred tax assets 36,858
------------
Net deferred tax liability $ 135,102
============
</TABLE>
NOTE 8 - CUSTOMER AND CREDIT CONCENTRATIONS
Concentrations of credit with regard to trade accounts receivable, which
are uncollateralized, and sales are limited due to the fact the Company's
customers are spread across different geographic areas. The customers are
concentrated in the retail food industry. Two customers accounted for
10.7% and 8.6% of 1998 sales and 19.4% and 14.6% of trade accounts
receivable as of December 31, 1998, respectively.
NOTE 9 - INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1998:
<TABLE>
<S> <C>
Covenant Not to Compete $ 50,000
UPC Codes 200,000
Organization Costs 44,343
----------
294,343
Accumulated amortization 284,343
----------
$ 10,000
==========
</TABLE>
Total amortization charged against income for the three months ended
March 31, 1999 and 1998 was $1,250 and $3,468 respectively, and $13,865
for the year ended December 31, 1998.
F-13
<PAGE> 16
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 10 - STOCK OPTION PLANS
The Company has a registration statement filed with the Securities and
Exchange Commission in connection with a Consulting Service Compensation
Plan covering up to 300,000 of the Company's Common Stock shares.
Pursuant to the Plan, the Company may issue Common Stock or Option to
purchase Common Stock to certain consultants, service providers and
employees of the Company.
The option price, number of shares and grant date are determined at the
discretion of the Company's Board of Directors and are considered 100%
vested at the grant date. Options issued under the plan expire June 30,
2000.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option- pricing model with the following
weight-average assumptions used for grants: dividend yield of 0%,
expected volatility of 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 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:
<TABLE>
<CAPTION>
Number Weighted-Average
of Exercise
Shares Price
------- ----------------
<S> <C> <C>
Outstanding and excerisable at January 1, 1998 -- N/A
Granted 55,000 $ 5.00
Exercised -- 5.00
Forfeited -- --
Expired -- --
-------
Outstanding and excerisable at December 31, 1998 55,000 5.00
=======
Available for issuance at December 31, 1998 245,000
=======
</TABLE>
F-14
<PAGE> 17
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, none of
which are held for trading purposes, are as follows at December 31, 1998:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 628,415 $ 628,415
Certificates of Deposit 239,993 239,993
Note payable to bank 17,852 17,852
Marketable securities 100,435 100,435
Mortgages payable 1,382,151 1,377,303
---------- ----------
Total $2,368,846 $2,363,998
========== ==========
</TABLE>
The carrying values of cash and cash equivalents, certificates of deposit
and the note payable to bank approximate fair values. The fair value of
the mortgage payable is based on the discounted value of contractual cash
flows. The discount rate is estimated using rates currently offered for
debt with similar maturities.
F-15
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(1) Material Changes in Results of Operations
Sales increased by $222,759 up to $1,853,327 during the three month
period ending March 31, 1999, from $1,630,568 during the same three month
period in 1998. This increase is attributable to increased sales of existing
products. However, net income decreased by $21,743, down to $209,156 for the
three month period ending March 31, 1999, from $230,899 during the same three
month period in 1998. This small decrease in net income is attributable to
increases in cost of goods sold and operating expenses, as described below.
Cost of goods sold increased by $192,361 up to $884,663 during the
three month period ending March 31, 1999, from $692,302 during the same three
month period in 1998. This increase is attributable to increased cost of milk,
which reached record levels during the first quarter of 1999. Wholesale milk
prices have since dropped sharply in the second quarter.
Operating expenses increased by $65,722, up to $609,598 for the three
month period ending March 31, 1999, from $543,876 during the same three month
period in 1998. This increase is primarily attributable to increased production
and additional advertising.
(2) Liquidity and Capital Resources
As of the three month period ending March 31, 1999, as compared to the
three month period ending March 31, 1998, the Company had working capital in
the amount of $2,148,918 as compared to $972,892, respectively, an increase of
$1,176,026. This increase is attributable to increases in current assets,
primarily cash on hand ($110,330 increase), marketable securities ($165,221
increase) and inventory ($191,459 increase); as well as decreases in current
liabilities, primarily current maturities of notes payable (578,094 decrease)
due to the refinancing of several mortgage notes that were due in 1998, but are
now due in 2003.
Net cash provided by operating activities increased by $134,747 to
$177,196 for the three month period ending March 31, 1999, from $42,449 for the
same three month period in 1998. The increase is primarily due to a substantial
increase in operating liabilities (accrued expenses), due to a timing
difference for the payment of income taxes in the first quarter of 1998,
compared to an accrued tax liability for the first quarter of 1999 that will be
paid in the second quarter. The increase is partially offset by an increase in
operating assets (accounts receivable).
Net cash used in investing activities increased by $103,600 to
$186,371 for the three month period ending March 31, 1999 from $82,771 for the
same three month period in 1998. This increase is primarily a result of
purchases of additional equipment and marketable securities in 1999.
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.
3
<PAGE> 19
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
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 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)
27.......Financial Data Schedule. (3)
------------------------------------
footnotes:
(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) Filed herewith.
(b) Reports on Form 8-K
None.
</TABLE>
4
<PAGE> 20
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 13, 1999
5
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER 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)
27 Financial Data Schedule. (3)
- --------------------------------------------
(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) Filed herewith.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM(A)
A FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-QSB
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 835,483
<SECURITIES> 165,221
<RECEIVABLES> 1,053,200
<ALLOWANCES> 0
<INVENTORY> 796,517
<CURRENT-ASSETS> 2,939,051
<PP&E> 5,930,233
<DEPRECIATION> 1,761,295
<TOTAL-ASSETS> 7,116,739
<CURRENT-LIABILITIES> 790,133
<BONDS> 1,307,721
0
0
<COMMON> 1,426,916
<OTHER-SE> 3,420,009
<TOTAL-LIABILITY-AND-EQUITY> 7,116,739
<SALES> 1,853,327
<TOTAL-REVENUES> 1,861,441
<CGS> 884,663
<TOTAL-COSTS> 609,598
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,840
<INCOME-PRETAX> 341,340
<INCOME-TAX> 132,184
<INCOME-CONTINUING> 209,156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 209,156
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
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