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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, 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.
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(Name of small business issuer as specified in its charter)
ILLINOIS 36-3442829
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6431 WEST OAKTON, MORTON GROVE, ILLINOIS 60053
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(Address of principal executive offices) (Zip Code)
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. $6,795,099
State the aggregate market value of the voting stock held by
non-affiliates, approximately 1,429,817 shares, 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. $5,719,268 AS OF MARCH
26, 1999, BASED ON THE AVERAGE CLOSING BID AND ASKED PRICES OF $4.00 PER SHARE
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. 3,785,677 SHARES OF COMMON
STOCK AS OF MARCH 26, 1999.
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 June 19, 1999 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"; fruit
sugar-flavored product similar in consistency to cream cheese sold under the
name of "Sweet Kiss;" and other Kefir-based products. The Company also produces
a vegetable-based seasoning under the name "Golden Zesta." The Company
distributes its products primarily throughout the United States. The Company
also distributes some of its products internationally by exporting to Eastern
Europe.
(a)(1) Subsidiary Corporations
Lifeway International, Inc.
The Company's wholly owned subsidiary, Lifeway International, Inc.
("LII"), which had been established to export Kefir to Eastern Europe, dissolved
in 1998 and its operations were merged into the operations of the Company 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.
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(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's currently sells the products listed below to various
retail establishments including supermarkets, grocery stores, gourmet shops,
delicatessens and convenience stores.
LIFEWAY'S KEFIR. "Lifeway's Kefir" is a drinkable Kefir product
manufactured 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.
GOLDEN ZESTA. 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.
FARMER'S CHEESE. "Farmer's Cheese" is based on a cultured soft cheese
and is intended to be used in a variety of recipes as a lowfat, low-cholesterol,
low-calorie substitute for cream cheese or ricotta, and is available in regular
and Swiss style.
ELITA. In 1997, the Company introduced "Elita" a low-fat,
low-cholesterol spreadable Kefir product which is marketed as an alternative to
cream cheese.
KWASHENKA. "Kwashenka" is a kefir product introduced in 1997, that is
designed to be eaten with a spoon, like most yogurt products.
BASICS PLUS. In May 1997, the Company entered into a collaboration
agreement with GalaGen, Inc. for the joint development of a kefir-based product
containing certain "passive immunity products" produced by GalaGen, Inc. "Basics
Plus" is a new beverage product designed to improve gastrointestinal functions
and, thus, enhance the immune system.
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KEFIR STARTER. In 1998, the Company introduced "Kefir Starter" a powder
form of Kefir that is sold in envelope packets and allows a consumer to make
their own drinkable Kefir at home by adding milk, and is developing sales of the
product internationally and via the internet.
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 seven Company-owned trucks, the Company distributes its
products directly to over 1,200 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 7,000 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 are 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.
In addition to local radio stations, newspapers and magazines, the
Company receives further exposure of its products through the internet, catalog
advertising and promotion, inside store demonstrations throughout the U.S, and
participation in various trade shows. In 1998, 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.
In September 1998, the Company hired a new Marketing Director with the
purpose of expanding its marketing program. The Company intends to commence
print advertising on a regional and national level though health and
senior-oriented publications, as well as regional radio advertising. The
expanded marketing program also includes product placement in major films and
prime time television, promotional taste-testing in grocery stores nationwide,
and promotional distribution at major events occurring locally. The Company also
intends to introduce
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a new 8 oz. lowfat drinkable Kefir that will be directed to active, time
constrained people and the health conscious who seek a fast and convenient
method of obtaining nourishment.
The Company expended approximately $241,000 and $158,000 on advertising
and product promotion in 1998 and 1997, 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 1998, two customers accounted for 10.7% and 8.6% of
sales and 19.4% and 14.6% of trade accounts receivable as of December 31, 1998,
respectively. For 1997, these 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.
(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 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.
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.
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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.
On October 17, 1997, GalaGen, Inc., made application to the U.S. Patent
and Trademark Office for the trademark "Basics Plus" for Kefir-based products In
July 1998, GalaGen, Inc., assigned the entire interest, including goodwill, of
the product to the Company. The Company has a nonexclusive license from GalaGen,
Inc., to use the trademark "Proventa" in connection with the Company's sales and
marketing of "Basics Plus."
On September 8, 1998, the Company received trademark approval from the
U.S. Patent and Trademark Office for the trademark "Krestyanski" under which the
Company sells cheese products in the United States.
In October 1998 the Company finalized a sublicense agreement with
GalaGen, Inc., with an effective date of May 1, 1998. Pursuant to the agreement,
the Company obtained the exclusive worldwide rights to two patents, for the
duration of the patents, to produce and sell kefir-culture based products which
contain immunoglobulins such as the Company's new functional food product,
Basics Plus. GalaGen is the Company's supplier of the Proventra brand natural
immune components used in Basics Plus. The owner of the patents is Metagenics,
Incorporated. In exchange for such rights, the Company agreed to pay $10,000 to
GalaGen and a royalty to Metagenics of one percent of the net sales price of any
kefir-culture based products which contain immunoglobulins.
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.
(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. 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)
"Kwashenka" - a spoonable kefir product. In 1998, the Company introduced "Kefir
Starter" a powder form of Kefir that is sold in envelope packets and allows a
consumer to make their own drinkable Kefir at home by adding milk, and "Basics
Plus" a Kefir based beverage containing certain "passive immunity products"
produced by GalaGen, Inc., under the name "Proventa."
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 1998 and 1997, the Company estimates it expended approximately $13,000 and
$16,000, respectively, for research and new product development, which costs
were not borne directly by its customers.
(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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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, was refinanced in 1998 and is payable in monthly installments of $1,767,
including interest at 7.25%, with a balloon payment of $139,838 due November,
2003. At December 31, 1998, the loan had a balance of $184,282.
On October 9, 1992, the Company purchased certain real estate located
at 7800 N. Caldwell, Niles, Illinois. 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, was refinanced in 1998 and has a
balloon payment of $343,151 due in August 2003 and carries an interest rate of
7.25% per annum. The Company's monthly payments are $3,161. At December 31,
1998, the loan had a balance of $395,731. 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, 1998, the loan had a
balance of $802,138.
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 material 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, 1998, 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, as reported
on America Online quotation services, is set forth in the following table:
<TABLE>
<CAPTION>
Low Bid High Bid
------- --------
<S> <C> <C> <C> <C>
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
1st Qtr. 1998 $ 7.50 $ 9.375
2nd Qtr. 1998 $ 6.00 $ 7.5625
3rd Qtr. 1998 $ 4.50 $ 6.25
4th Qtr. 1998 $ 3.00 $ 6.25
</TABLE>
(b) Holders
As of March 25, 1999, there were approximately 148 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 $62,299, up to $762,616 in 1998 from $700,317
in 1997. The material components of this increase are detailed as follows:
Sales and cost of goods sold increased by $834,221 and $262,475,
respectively, up to $6,795,099 and $3,697,080 in 1998 from $5,960,878 and
$3,434,605 in 1997, respectively. These increases are primarily attributable to
increased sales of existing products and the introduction of new products in
1998. Costs of goods sold as a percentage of sales decreased in 1998, and the
gross margin percentage increased in 1998, primarily due to volume purchases and
varying the product mixes.
Interest expense decreased by $17,996 to $106,222 in 1998, from
$124,218 in 1997. The decrease is primarily attributable to refinancing of
mortgages on real property.
Operating expenses increased by $272,250 to $1,758,588 in 1998, from
$1,486,338 in 1997. The increase is primarily attributable to increased
advertising, professional fees and depreciation in 1998.
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Rental income decreased by $214,058 to $0.00 in 1998, from $214,058
during 1997. The decrease is attributable to the loss of 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 $66,519, up to $543,321 in 1998
from $476,802 in 1997. The provision for income taxes was approximately 41% of
pre-tax income in both years.
Export sales in 1998 were approximately $298,000, down from
approximately 381,000 in 1997. This decrease is primarily due to the poor
economic conditions in Russia.
LFI Enterprises, Inc., the Company's supper club facility, had sales of
$343,606 in 1998 and $347,948 in 1997, and a net loss of $8,066 in 1998 and a
net loss of $38,400 in 1997.
(a)(2) Liquidity and Capital Resources
As of December 31, 1998 and December 31, 1997, respectively, the
Company had working capital in the amount of $1,966,521 and $787,679, and cash
and cash equivalents in the amounts of $628,415 and $550,670. Cash flow from
operations was generated by the primary business activity of the Company. These
increases are primarily attributable to increases in inventory and an increase
in long-term liabilities and a corresponding decrease in current liabilities due
to the refinancing of several mortgage notes due in 1998, but are now due in
2003. The Company expects all cash requirements can be met internally for the
next 12-month period.
Net cash provided by operating activities decreased by $92,232 to
$850,399 in 1998, from $942,631 in 1997. The decrease is primarily due to a
decrease in operating liabilities (accrued expenses). Net cash used in investing
activities decreased by $606,392 to $680,319 in 1998 from $1,286,711 in 1997.
This decrease is primarily a result of fewer purchases of equipment in 1998.
The Company has reviewed the Year 2000 issue and has determined that
the potential consequences of the Year 2000 issue should have no material
effects on its business as the use of date sensitive computer information is
limited and the commercial software used for administrative purposes is Year
2000 compliant. However, the Company can make no assurance regarding the impact
of the Year 2000 issue on its business as a result of acts or omissions not
within its control, such as acts or omissions of distributors, retailers or
nonaffiliated manufacturers of components used in the Company's business. 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.
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LIFEWAY FOODS, INC. AND SUBSIDIARIES
ANNUAL REPORT
DECEMBER 31, 1998 AND 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report......................................... F2
Consolidated Balance Sheet........................................... F3-F4
Consolidated Statements of Income and Comprehensive 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>
F1
<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, 1998 and the related consolidated statements of
income and comprehensive income, changes in stockholders' equity, and cash flows
for the years ended December 31, 1998 and 1997. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LIFEWAY FOODS, INC. AND
SUBSIDIARIES as of December 31, 1998, and the results of their operations and
their cash flows for the years ended December 31, 1998 and 1997 in conformity
with generally accepted accounting principles.
/s/ Gleeson, Sklar, Sawyers & Cumpata LLP
Elgin, Illinois
February 17, 1999
F2
<PAGE> 12
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 628,415
Certificates of deposit 239,993
Marketable securities 100,435
Accounts receivable 847,269
Other receivables 16,200
Inventories 851,517
Prepaid expenses and other assets 11,772
Deferred income taxes 36,858
-----------
TOTAL CURRENT ASSETS 2,732,459
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 658,400
Buildings, machinery and equipment 5,150,248
-----------
Total 5,808,648
Less accumulated depreciation (1,660,628)
-----------
PROPERTY, PLANT AND EQUIPMENT, NET 4,148,020
OTHER ASSETS
INTANGIBLE ASSETS, NET 10,000
-----------
TOTAL ASSETS $ 6,890,479
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F3
<PAGE> 13
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - CONTINUED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Current maturities of notes payable $ 85,191
Accounts payable 513,672
Accrued expenses 167,075
----------
TOTAL CURRENT LIABILITIES 765,938
LONG-TERM LIABILITIES 1,314,812
DEFERRED INCOME TAXES 171,960
STOCKHOLDERS' EQUITY
Common stock 1,426,916
Retained earnings 3,241,308
Accumulated other comprehensive income, net of tax (11,637)
Treasury stock, at cost (18,818)
----------
TOTAL STOCKHOLDERS' EQUITY 4,637,769
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,890,479
==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F4
<PAGE> 14
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
SALES $ 6,795,099 $ 5,960,878
Cost of goods sold 3,697,080 3,434,605
----------- -----------
GROSS PROFIT 3,098,019 2,526,273
Operating expenses 1,758,588 1,486,338
----------- -----------
INCOME FROM OPERATIONS 1,339,431 1,039,935
Other income (expense):
Interest income 38,104 47,344
Interest expense (106,222) (124,218)
Gain on sale of marketable securities 34,624 --
Rental income -- 214,058
----------- -----------
Total other income (expense) (33,494) 137,184
INCOME BEFORE PROVISION FOR INCOME TAXES 1,305,937 1,177,119
Provision for income taxes 543,321 476,802
----------- -----------
NET INCOME $ 762,616 $ 700,317
=========== ===========
EARNINGS PER SHARE COMMON SHARE $ 0.20 $ 0.19
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,781,355 3,776,102
=========== ===========
COMPREHENSIVE INCOME:
NET INCOME $ 762,616 $ 700,317
OTHER COMPREHENSIVE INCOME, NET OF TAX:
UNREALIZED LOSSES ON SECURITIES
(NET OF TAX BENEFIT OF $9,994) (11,637) --
----------- -----------
COMPREHENSIVE INCOME $ 750,979 $ 700,317
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F5
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK,
NO PAR VALUE
10,000,000 SHARES # OF
AUTHORIZED SHARES ACCUMULATED
----------------------- OF OTHER
# OF SHARES # OF SHARES TREASURY COMMON TREASURY RETAINED COMPREHENSIVE
ISSUED OUTSTANDING STOCK STOCK STOCK EARNINGS INCOME
----------- ----------- -------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996 3,785,377 3,785,377 10,400 $1,374,754 $ (18,818) $1,778,375 $ --
Stock in exchange for
services rendered 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 --
Stock in exchange for
6,800 6,800 -- 30,600 -- -- --
Other comprehensive income:
Unrealized losses on securities -- -- -- -- -- -- (11,637)
Net income for the year
ended December 31, 1998 -- -- -- -- -- 762,616 --
------------ ----------- -------- ---------- ---------- ---------- -------------
BALANCES AT DECEMBER 31, 1998 3,796,077 3,796,077 10,400 $1,426,916 $ (18,818) $3,241,308 $ (11,637)
============ =========== ======== ========== ========== ========== =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F6
<PAGE> 16
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 762,616 $ 700,317
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 391,007 276,491
Realized gain on sale of marketable securities (34,624) --
Issuance of common stock in exchange
for services rendered 30,600 21,562
Decrease in allowance for doubtful accounts (48,000) --
Deferred income taxes 115,217 24,942
(Increase) decrease in operating assets:
Accounts receivable 18,976 (197,837)
Other receivables (1,000) 8,400
Inventories (237,495) (200,698)
Prepaid expenses and other assets (4,058) --
Increase (decrease) in operating liabilities:
Accounts payable 119,282 152,311
Accrued expenses (262,122) 157,143
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 850,399 942,631
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (305,490) (13,951)
Sale of marketable securities 218,048 --
Purchase of property, plant and equipment (592,877) (1,272,760)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (680,319) (1,286,711)
CASH FLOWS USED IN FINANCING ACTIVITIES:
REPAYMENT OF NOTES PAYABLE (92,335) (101,351)
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 77,745 (445,431)
Cash and cash equivalents at the beginning of the year 550,670 996,101
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 628,415 $ 550,670
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F7
<PAGE> 17
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 106,222 $ 124,218
========= =========
Cash paid for income taxes $ 623,000 $ 267,996
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Refinancing of mortgages $ 582,696 $ --
========= =========
Purchase of automobile by issuing a note payable $ 18,857 $ --
========= =========
Issuance of common stock in exchange for consulting fees $ 30,600 $ 21,562
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F8
<PAGE> 18
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 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'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 Farmer's 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.
On September 30, 1992, the Company formed a wholly-owned subsidiary, 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.
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.
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 and cash equivalents
All highly liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents.
F9
<PAGE> 19
LIFEWAY FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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, 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.
Inventories
Inventories are stated at lower of cost or market, cost being
determined by the first-in, first-out method.
Property, plant and equipment
Property, plant 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, plant and equipment are being depreciated over the following
useful lives:
<TABLE>
<CAPTION>
Category Years
-------- -------
<S> <C> <C>
Buildings and improvements 19 - 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 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>
F10
<PAGE> 20
LIFEWAY FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 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,
unrealized gains or losses related to marketable securities,
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.
Advertising costs
The Company expenses advertising costs as incurred. During 1998 and
1997, $240,636 and $158,183, respectively, were expensed.
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, 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 follow:
<TABLE>
<CAPTION>
Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Equities $ 122,066 $ -- $ (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 at December 31, 1998:
<TABLE>
<S> <C>
Raw materials $ 135,452
Production supplies 132,281
Work in process 49,560
Finished goods 534,224
---------
Total $ 851,517
=========
</TABLE>
F11
<PAGE> 21
LIFEWAY FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
Note 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
1998:
<TABLE>
<S> <C>
Land $ 658,400
Buildings and improvements 1,631,557
Machinery and equipment 3,261,618
Vehicles 176,842
Office equipment 80,231
-----------
Total $ 5,808,648
===========
</TABLE>
Depreciation charged to income was $377,142 and $234,050 in 1998 and 1997,
respectively.
The Company acquired its main facility in 1996, and continued to rent to
the previous tenant until the middle of 1997. Accordingly, the Company
recognized $214,058 of rental income during 1997.
Note 6 - NOTES PAYABLE
<TABLE>
<S> <C>
Mortgage note payable, First 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. $ 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. 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. 802,138
Note payable, Ford Motor Credit, payable in monthly installments of $540, including interest
at 1.9%, due October 2001. Collateralized by a vehicle. 17,852
-----------
1,400,003
Total
85,191
Less current maturities
-----------
$ 1,314,812
Total
===========
</TABLE>
<TABLE>
<S> <C> <C>
Maturities of notes payable are as follows:
Year Ending December 31
1999 $ 85,191
2000 86,636
2001 705,315
2002 21,974
2003 500,887
-----------
Total $ 1,400,003
===========
</TABLE>
F12
<PAGE> 22
LIFEWAY FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
Note 7 - PROVISION FOR INCOME TAXES
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
Current 1998 1997
-------- --------
<S> <C> <C>
Federal $339,750 $369,507
State 78,362 82,353
-------- --------
Total current 418,112 451,860
Deferred
Federal 104,154 21,843
State 21,055 3,099
-------- --------
Provision for income taxes $543,321 $476,802
======== ========
</TABLE>
A reconciliation of the provision for income taxes and the income tax
computed at the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Federal income tax expense computed at the statutory rate $444,019 $399,596
State taxes, expense 69,373 58,764
Permanent book/tax differences 29,929 18,442
-------- --------
Provision for income taxes $543,321 $476,802
======== ========
</TABLE>
Amounts for deferred tax assets and liabilities as of December 31, 1998
were are as follows:
<TABLE>
<CAPTION>
<S> <C>
Non-current deferred tax liabilities arising from:
Temporary differences - principally
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, inventories 26,864
--------
Total deferred tax assets 36,858
--------
Net deferred tax liability $135,102
========
</TABLE>
Note 8 - 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 10.7% and 8.6% of 1998 sales and 19.4% and 14.6% of trade
accounts receivable as of December 31, 1998, respectively. For 1997, these
two customers accounted for 9.8% and 9.6% of sales and 12.7% and 22.2% of
trade accounts receivable, respectively.
F13
<PAGE> 23
LIFEWAY FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
Note 9 - INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1998:
<TABLE>
<S> <C>
Covenant not to compete $ 50,000
U.P.C. Codes 200,000
Organization costs 44,343
--------
Total 294,343
Less accumulated amortization 284,343
--------
Intangible assets, net $ 10,000
========
</TABLE>
Total amortization charged against income for the years ended December
31, 1998 and 1997 was $13,865 and $42,441, respectively.
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.
The option price, number of shares, grant date, and vesting terms are
determined at the discretion of the Company's Board of Directors. 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 weighed-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 these 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 not have increased for 1998, and net income would have remained the
same for 1998. For 1997, compensation cost would have been 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.
F14
<PAGE> 24
LIFEWAY FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
Note 10 - STOCK OPTION PLANS - Continued
A summary of stock option transactions during the years ended December 31,
1998 and 1997 is shown below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ------------------------------------
Number Weighted-Average Number Weighted-Average
of Exercise of Exercise
Shares Price Shares Price
------------- ---------------------- ---------- ------------------------
<S> <C> <C> <C> <C>
Outstanding and exercisable 55,000 $ 5.00 -- N/A
at beginning of year
Granted -- -- 55,000 $ 5.00
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
------------- ----------- ---------- -----------
Outstanding and exercisable
at end of year 55,000 $ 5.00 55,000 $ 5.00
============= =========== ========== ===========
Available for issuance
at December 31, 1997 245,000
=============
Available for issuance
at December 31, 1998 245,000
=============
</TABLE>
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, 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
Marketable securities 100,435 100,435
Note payable to bank 17,852 17,852
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,
marketable securities, 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.
F15
<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 51 CEO, CFO, President, Treasurer and Director 1986
Valeriy Nikolenko 53 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, 1998, 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 one direct
transaction by Michael Smolyansky, one indirect transaction by the Smolyansky
Family Foundation, a private charitable foundation of which Michael Smolyansky
is a trustee, and six indirect transactions by the spouse of Michael Smolyansky,
all of which were reported on Form 5.
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)
21.2 List of Subsidiaries of the Registrant. (3)
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.
(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 26, 1999
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 26, 1999
By /s/ Pol Sikar
----------------------------------------------
Pol Sikar, Director
Date: March 26, 1999
By /s/ Rick D. Salm
----------------------------------------------
Rick D. Salm, Director
Date: March 26, 1999
By /s/ Lorenzo Bernardi
----------------------------------------------
Lorenzo Bernardi, Director
Date: March 26, 1999
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)
21.2 List of Subsidiaries of the Registrant. (3)
27 Financial Data Schedule. (3)
</TABLE>
------------------------
(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.
<PAGE> 1
EXHIBIT 21.2
List of Subsidiaries of the Registrant.
LFI Enterprises, Inc., incorporated in the State of Illinois on
September 30, 1992.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM A FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 628,415
<SECURITIES> 340,428
<RECEIVABLES> 847,269
<ALLOWANCES> 0
<INVENTORY> 851,517
<CURRENT-ASSETS> 2,732,459
<PP&E> 5,808,648
<DEPRECIATION> 1,660,628
<TOTAL-ASSETS> 6,890,479
<CURRENT-LIABILITIES> 765,938
<BONDS> 1,400,003
0
0
<COMMON> 1,426,916
<OTHER-SE> 3,210,853
<TOTAL-LIABILITY-AND-EQUITY> 6,890,479
<SALES> 6,795,009
<TOTAL-REVENUES> 6,795,009
<CGS> 3,697,080
<TOTAL-COSTS> 3,697,080
<OTHER-EXPENSES> 1,758,588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106,222
<INCOME-PRETAX> 1,305,937
<INCOME-TAX> 543,321
<INCOME-CONTINUING> 762,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 762,616
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
