<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 September 30, 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)
<TABLE>
<S> <C>
ILLINOIS 36-3442829
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
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 NOVEMBER 5, 1999, THE ISSUER
HAD 4,318,444 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
ITEM 1. FINANCIAL STATEMENTS.
F-1
Lifeway Foods, Inc. and Subsidiaries
September 30, 1999 and 1998
Consolidated Balance Sheets
December 31, 1998 and
September 30, 1999 and 1998 F-2 - F-3
Consolidated Statements of Income
for the year ended December 31, 1998 and
for the three months ended September 30, 1999 and 1998
(unaudited) for the nine months ended September 30, 1999 and
1998 (unaudited) F-4
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 1998 and
for the nine months ended September 30, 1999 and 1998 (unaudited) F-5
Consolidated Statements of Cash Flows
for the year ended December 31, 1998 and
for the nine months ended September 30, 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 6
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<PAGE> 4
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
----------------------------- DECEMBER 31,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalent $ 1,193,098 $ 695,799 $ 628,415
Certificates of Deposit 0 236,686 239,993
Marketable Securities 169,199 0 100,435
Accounts receivable, net of allowance
for doubtful accounts of $ 0 at
September 30, 1999 and December 31, 1998,
and $ 48,000 at September 30, 1998 1,063,428 868,145 847,269
Other receivables 16,620 16,200 16,200
Stockholder notes receivable 175,000 0 0
Inventories 761,000 721,000 851,517
Prepaid expenses and other assets 194,420 13,629 11,772
Deferred income taxes 46,494 17,936 36,858
------------ ------------ ------------
TOTAL CURRENT ASSET 3,619,259 2,569,395 2,732,459
PROPERTY AND EQUIPMENT
Land 658,400 658,400 658,400
Buildings, machinery and equipment 5,540,745 4,873,748 5,150,248
------------ ------------ ------------
Total property and equipment 6,199,145 5,532,148 5,808,648
Less: accumulated depreciation 1,962,633 1,547,093 1,660,628
------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET 4,236,512 3,985,055 4,148,020
OTHER ASSETS
INTANGIBLE ASSETS, NET 6,250 13,462 10,000
------------ ------------ ------------
TOTAL ASSETS $ 7,862,021 $ 6,567,912 $ 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)
SEPTEMBER 30,
------------------------------ DECEMBER 31,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of notes payable $ 91,647 $ 266,964 $ 85,191
Accounts Payable 404,076 356,183 513,672
Accrued expenses 417,177 293,896 167,075
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 912,900 917,043 765,938
LONG-TERM LIABILITIES 1,255,935 1,128,087 1,314,812
DEFERRED INCOME TAXES 171,960 37,822 171,960
STOCKHOLDERS' EQUITY
Common Stock 1,601,916 1,396,316 1,426,916
Retained Earnings 3,965,002 3,107,462 3,241,308
Accumulated other comprehensive income, net of tax (26,874) 0 (11,637)
Treasury Stock (18,818) (18,818) (18,818)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,521,226 4,484,960 4,637,769
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,862,021 $ 6,567,912 $ 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) (UNAUDITED) FOR THE
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------------------------ ------------------------------ ------------
1999 1998 1999 1998 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SALES $ 2,001,305 $ 1,747,870 5,894,493 5,072,862 $ 6,795,099
COST OF GOODS SOLD 955,249 914,117 2,858,258 2,313,480 3,697,080
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 1,046,056 833,753 3,036,235 2,759,382 3,098,019
OPERATING EXPENSES 645,486 510,435 1,822,477 1,679,994 1,758,588
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 400,570 323,318 1,213,758 1,079,388 1,339,431
OTHER INCOME (EXPENSE)
Interest income 10,325 8,904 27,099 28,412 38,104
Interest expense (27,450) (32,842) (74,613) (81,502) (106,222)
Gain on sale of
marketable securities 15,004 0 15,004 0 34,624
------------ ------------ ------------ ------------ ------------
TOTAL OTHER INCOME
(EXPENSE) (2,121) (23,938) (32,510) (53,090) (33,494)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 398,449 299,380 1,181,248 1,026,298 1,305,937
PROVISION FOR INCOME TAXES 154,357 115,976 457,554 397,528 543,321
------------ ------------ ------------ ------------ ------------
NET INCOME $ 244,092 $ 183,404 $ 723,694 $ 628,770 $ 762,616
============ ============ ============ ============ ============
EARNINGS PER SHARE $ .06 $ .05 $ .19 $ .17 $ .20
============ ============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,813,577 3,789,277 3,813,577 3,789,277 3,781,355
============ ============ ============ ============ ============
COMPREHENSIVE INCOME;
NET INCOME $ 244,092 $ 183,404 $ 723,694 $ 628,770 $ 762,616
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
UNREALIZED LOSSES ON SECURITIES
(NET OF TAX BENEFIT) (15,237) 0 (15,237) 0 (11,637)
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 228,855 $ 183,404 $ 708,457 $ 628,770 $ 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)
Stock Options Exercised 35,000 0 175,000 0 0 0
Other comprehensive income:
Unrealized losses on securities 0 0 0 0 0 (15,237)
Net income for the nine months
ended September 30, 1999 0 0 0 0 723,694 0
---------- ---------- ---------- ---------- ---------- ----------
BALANCES AT
SEPTEMBER 30, 1999 3,831,077 10,400 $1,601,916 $ (18,818) $3,965,002 $ (26,874)
========== ========== ========== ========== ========== ==========
</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 NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------------ DECEMBER 31
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 723,694 $ 628,770 $ 762,616
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 305,755 274,011 391,007
Realized gain on sale of marketable securities (15,004) 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 (216,159) (49,900) 18,976
Other receivable 420 (1,000) (1,000)
Inventories 90,517 (106,978) (237,495)
Prepaid expenses and other assets (182,648) (5,915) (4,058)
Increase (decrease) in operating liabilities:
Accounts payable (109,596) (38,207) 119,282
Accrued expenses 250,102 (135,301) (262,122)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 847,081 565,480 850,399
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (188,429) (9,064) (305,490)
Sale of marketable securities 123,740 0 218,048
Cash proceeds from maturity of investments 247,211 0 0
classified as held to maturity
Purchase of property and equipment (390,497) (332,857) (592,877)
------------ ------------ ------------
NET CASH PROVIDED BY (USED) IN
INVESTING ACTIVITIES (207,975) (341,921) (680,319)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (74,423) (78,430) (92,335)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (74,423) (78,430) (92,335)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 564,683 145,129 77,745
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 628,415 550,670 550,670
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,193,098 $ 695,799 $ 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 NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, FOR THE YEAR ENDED
----------------------------- DECEMBER 31
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 74,613 $ 81,502 $ 106,222
============ ============ ============
Cash paid for income taxes $ 267,500 $ 502,000 $ 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
============ ============ ============
Issuance of common stock from exercise
of stock options by stockholder note $ 175,000 $ 0 $ 0
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE> 10
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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
wholy-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
SEPTEMBER 30, 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 and September 30, 1999, 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
SEPTEMBER 30, 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 the year 1998
and for the nine months ended September 30, 1999, $240,636 and $145,694,
respectively, were expensed. As of September 30, 1999, advertising costs
of $194,420 were prepaid for future advertising campaigns and magazine
advertising.
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 are as
follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
December 31, 1998 - Equities $ 122,066 $ -0- $ (21,631) $100,435
September 30, 1999 - Equities $ 194,072 $ -0- $ (24,873) $169,199
</TABLE>
Proceeds from the sale of marketable securities were $218,048 and $123,740
in 1998 and 1999 respectively. Gross gains of $34,624 and $15,004 were
realized on those sales in 1998 and 1999 respectively
NOTE 4 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------------ DECEMBER 31
1999 1998 1998
------------- ------------- --------------
<S> <C> <C> <C>
Finished goods $ 480,000 $ 330,000 $ 534,224
Work in Process 0 0 49,560
Production supplies 125,000 206,000 132,281
Raw materials 156,000 185,000 135,452
------------- ------------- --------------
$ 761,000 $ 721,000 $ 851,517
============= ============= ==============
</TABLE>
F-10
<PAGE> 13
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------------ DECEMBER 31,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 658,400 $ 658,400 $ 658,400
Buildings and improvements 1,649,370 1,649,370 1,631,557
Machinery and equipment 3,628,278 3,022,256 3,261,618
Vehicles 180,676 119,770 176,842
Office equipment 82,421 82,352 80,231
------------ ------------ ------------
$ 6,199,145 $ 5,532,148 $ 5,808,648
============ ============ ============
</TABLE>
Depreciation charged to income for the three and nine months ended
September 30, 1999 and 1998 was $100,669, $302,007 and $87,869, $263,607
respectively, and $377,142 for the year ended December 31, 1998.
NOTE 6 - NOTES PAYABLE
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, OR THE YEAR ENDED
------------------------- 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 $ 176,780 $ 184,932 $ 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. Collaterlized by real estate 388,147 397,763 395,731
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 751,048 812,356 802,138
Note payable, Ford Motor credit, payable in monthly
installments of $540, including interest at 1.9%, due
October 2001. Collateralized by vehicle 13,220 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 18,387 0 0
---------- ---------- ----------
</TABLE>
F-11
<PAGE> 14
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 6 - NOTES PAYABLE - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
----------------------------- DECEMBER 31,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Total 1,347,582 1,395,051 1,400,003
Less current maturities 91,647 266,964 85,191
------------ ------------ ------------
Total $ 1,255,935 $ 1,128,087 $ 1,314,812
============ ============ ============
</TABLE>
Maturities of notes payable are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <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 NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
----------------------------- DECEMBER 31,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal $ 247,065 $ 323,912 $ 339,750
State 56,132 73,616 78,362
------------ ------------ ------------
Total current 303,197 397,528 418,112
Deferred 0 0 125,209
------------ ------------ ------------
Provision for income taxes $ 303,197 $ 397,528 $ 543,321
============ ============ ============
</TABLE>
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 NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
----------------------------- DECEMBER 31,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax expense
computed at the statutory rate $ 372,842 $ 323,912 $ 444,019
State taxes, expense 84,742 73,616 69,373
Permanent book/tax differences 0 0 29,929
------------ ------------ ------------
Provision for income taxes $ 457,554 $ 397,528 $ 543,321
============ ============ ============
</TABLE>
F-12
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 7 - PROVISION FOR INCOME TAXES - CONTINUED
Amounts for deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPT. 30, DEC, 31,
1999 1998
------------ ------------
<S> <C> <C>
Non-current deferred tax liabilities arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $ 171,960 $ 171,960
Total deferred tax liabilities $ 171,960 $ 171,960
Current deferred tax assets arising from:
Book/tax, allowance for unrealized losses $ 9,994 $ 19,630
Book/tax, inventory 26,864 26,864
------------ ------------
Total deferred tax assets 36,858 46,494
------------ ------------
Net deferred tax liability $ 135,102 $ 145,096
============ ============
</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:
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
1999 1998
------------ ------------
<S> <C> <C>
Covenant Not to Compete $ 50,000 $ 50,000
UPC Codes 200,000 200,000
Organization Costs 44,343 44,343
------------ ------------
294,343 294,343
Accumulated amortization 284,343 288,093
------------ ------------
$ 10,000 $ 6,250
============ ============
</TABLE>
Total amortization charged against income for the three and nine months
ended September 30, 1999 and 1998 was $1,250, $3,750 and $3,469, $10,611
respectively, and $13,865 for the year ended 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.
F-13
<PAGE> 16
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 10 - STOCK OPTION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weight-average assumptions used for grants: dividend yield of 0%, expected
volatility of 54%, risk free interest rate of 6.2% and expected lives of
three years. The weighted-average fair value of options granted during
1997 was $1.48 per share.
The Company has chosen to account for stock-based compensation in
accordance with APB Opinion 25. If compensation cost would have been
recognized in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," compensation cost
would have increased by approximately $81,000, net income would have been
reduced by approximately $48,000 and earnings per share would have been
reduced by $0.01.
A summary of option transactions during the year ended December 31, 1998
is shown below:
<TABLE>
<CAPTION>
Number Weighted-Average
of Exercise
Shares Price
----------- -----------
<S> <C> <C>
Outstanding and exercisable at January 1, 1998
-- N/A
Granted 55,000 $5.00
Exercised 0 5.00
Forfeited 0 0
Expired 0 0
-----------
Outstanding and exercisable at December 31, 1998 55,000 5.00
===========
Available for issuance at December 31, 1998 245,000
===========
</TABLE>
As of September 30, 1999, 35,000 shares were issued from stock options
previously granted at a weighted average exercise price of $5.00 per
share.
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-14
<PAGE> 17
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998 AND DECEMBER 31, 1998
NOTE 12 - SUBSEQUENT EVENT
On October 1, 1999, the company entered into a Stock Purchase Agreement
and Shareholders' Agreement with Danone Foods, Inc. ("Danone"), a
subsidiary of Groupe Danone based in Paris France. Pursuant to the
agreements, the company issued and sold 497,767 shares of restricted
common stock to Danone. The purchase price paid to the company was $10.00
per share, for an aggregate equity investment of $4,977,670.
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
Net income for the nine month period ending September 30, 1999 was
$723,694, compared to $628,770 during the same nine month period in 1998, an
increase of $94,924. The material components of the increase in net income are
detailed as follows:
Sales during the nine month period ending September 30, 1999 were
$5,894,493, compared to $5,072,862 during the same nine month period in 1998, an
increase of $771,631 (a 15% increase). The increase in sales is attributable to
increased sales of existing products as a result of increased advertising and
marketing of the Company's products.
Cost of Goods Sold during the nine month period ending September 30,
1999 were $2,858,258, compared to $2,313,480 for the same nine month period in
1998, an increase of $544,778 (a 23% increase). This increase, while generally
corresponding to the increased sales in 1999, is also partially attributable to
higher wholesale prices of milk.
Operating Expenses during the nine month period ending September 30,
1999 were $1,822,477, compared to $1,679,994 for the same nine month period in
1998, an increase of $142,483 (an 8% increase). This increase is primarily
attributable to increased marketing and advertising in 1999.
(2) Liquidity and Capital Resources
As of September 30, 1999, as compared to September 30, 1998, the
Company had working capital in the amount of $2,706,352 as compared to
$1,652,352, respectively, an increase of $1,054,007. This 164% increase in
working capital is attributable to increases in current assets, primarily cash
on hand ($224,408 increase), marketable securities ($179,165 increase), accounts
receivable ($245,994 increase), stockholder notes receivable for employee stock
option exercises ($175,000 increase) and prepaid expenses ($180,791 increase).
As of September 30, 1999, as compared to September 30, 1998, total
current liabilities remained virtually unchanged, with a decrease in current
maturities on notes payable ($175,317 decrease) due to the refinancing of
several mortgage notes, offset by increases of accounts payable ($47,893
increase) and accrued expenses ($123,281 increase). The increases in accounts
payable and accrued expenses are due to increased operations generally,
increased advertising and timing differences with respect to payment of taxes
and other expenses.
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) Material Subsequent Event
Subsequent the end of the period covered by this quarterly report, on
October 1, 1999, the Company completed a sale of 497,767 shares of its common
stock at a price of $10.00 per share to Danone Foods, Inc., a subsidiary of
Groupe Danone based in Paris, France. The transaction resulted in an increase in
stockholders' equity of almost $5 million. The transaction is further describe
in Item 6(b) of this report.
3
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company filed a lawsuit against Fresh Made, Inc. in August 1999, in
United State District Court, Eastern District of New York, Civil Action No. CV
99 4830. The lawsuit primarily claims intentional trademark infringement of the
Company's federally registered trademark for a Russian term transliterated as
"Krest'yanskiy" which the Company uses on one brand of its kefir cheese. The
Company is seeking monetary damages and injunctive relief.
ITEM 2. CHANGES IN SECURITIES - None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on July 17, 1999.
Proxies were solicited pursuant to Regulation 14A under the Exchange Act, and
the election of directors was uncontested. The matters voted upon and the
results thereof were as follows:
1. Election of Directors to serve until the next meeting and
until their successors are duly elected and qualified:
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
Michael Smolyansky 3,694,665 1,237
Pol Sikar 3,694,665 1,237
Rick D. Salm 3,694,665 1,237
Lorenzo Bernardi 3,694,665 1,237
</TABLE>
2. Ratification of Gleeson, Sklar, Sawyers & Cumpata LLP as
independent auditors for the next fiscal year:
<TABLE>
<CAPTION>
For Against Abstain
--------- ------- -------
<S> <C> <C>
3,692,658 2,137 1,107
</TABLE>
ITEM 5. OTHER INFORMATION
Subsequent to the end of the quarter covered by this report, the
Company entered into a transaction with Danone Foods, Inc., a subsidiary of
Groupe Danone based in Paris France, which resulted in an equity investment in
the Company of almost $5 million ($10.00 per share of common stock). A current
report on Form 8-K describing the transaction was filed on October 12, 1999, and
is summarized below in Item 6(b).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Exhibit Number and Brief Description
3.1 .... Articles of Incorporation of issuer, with Certificate, and
Amendments. (Incorporated by reference to the Company's
registration statement on Form S-18 (File No. 33-14329-C), and
Post-Effective Amendments thereto.)
3.2 .... Bylaws of issuer. (Incorporated by reference to the Company's
registration statement on Form S-18 (File No. 33-14329-C) and
Post-Effective Amendments thereto).
4
<PAGE> 20
3.3 .... Corrected Amendment to the Bylaws of issuer. (Incorporated by
reference to the Company's registration statement on Form S-18
(File No. 33-14329-C), and Post-Effective Amendments thereto).
10.1 ... Lifeway Foods, Inc. Consulting and Services Compensation Plan,
dated June 5, 1995. (Incorporated by reference to the
Company's registration statement on Form S-8 (File No.
33-93306).
10.10 .. Stock Purchase Agreement with Danone Foods, Inc., dated
October 1, 1999. (Incorporated by reference to the Company's
current report on Form 8-K dated October 1, 1999, and filed
October 12, 1999).
10.11 .. Stockholders' Agreement with Danone Foods, Inc. dated October
1, 1999. (Incorporated by reference to the Company's current
report on Form 8-K dated October 1, 1999, and filed October
12, 1999).
27 ..... Financial Data Schedule. (Filed herewith).
(b) Reports on Form 8-K
Subsequent to the end of the period covered by this quarterly report,
on October 12, 1999, the Company filed a current report on Form 8-K dated
October 1, 1999, to report that on October 1, 1999, the Company issued and sold
497,767 shares of restricted common stock to Danone Foods, Inc. ("Danone"), a
subsidiary of Groupe Danone based in Paris, France. The purchase price paid to
the Company was $10.00 per share, for an aggregate equity investment of
$4,977,670.
Pursuant to the terms and conditions of a Stock Purchase Agreement and
a Stockholders' Agreement, the Company granted certain limited rights to Danone,
which include a right to nominate one director, anti-dilutive rights relating to
future offerings, and limited registration rights.
The Company and Danone also agreed that they would not compete with
each other for a period of five years with respect to certain yogurt, cheese and
kefir products.
In connection with the transaction, Danone also purchased 150,000
outstanding shares of common stock from certain shareholders, including the
Registrant's controlling shareholder, on similar terms. As a result of these
purchases, Danone became the beneficial owner of 15% of the outstanding common
stock of the Registrant.
The parties agreed that for a period of five years, Danone may increase
its ownership interest up to, but not more than, 20% of the outstanding common
stock of the Registrant.
The Company has been advised by Danone that subsequent to the closing
of the above described transaction, Danone has increased its ownership interest
to approximately 17% through non-public transactions with three shareholders.
5
<PAGE> 21
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LIFEWAY FOODS, INC.
By: /s/ Michael Smolyansky
----------------------------------------------
Michael Smolyansky, Chief Executive Officer,
Chief Financial and Accounting Officer,
President, Treasurer and Director
Date: November 10, 1999
6
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Articles of Incorporation of issuer, with Certificate,
and Amendments. (Incorporated by reference to the
Company's registration statement on Form S-18 (File No.
33-14329-C), and Post-Effective Amendments thereto.)
3.2 Bylaws of issuer. (Incorporated by reference to the
Company's registration statement on Form S-18 (File No.
33-14329-C) and Post-Effective Amendments thereto).
3.3 Corrected Amendment to the Bylaws of issuer.
(Incorporated by reference to the Company's registration
statement on Form S-18 (File No. 33-14329-C), and
Post-Effective Amendments thereto).
10.1 Lifeway Foods, Inc. Consulting and Services Compensation
Plan, dated June 5, 1995. (Incorporated by reference to
the Company's registration statement on Form S-8 (File
No. 33-93306).
10.10 Stock Purchase Agreement with Danone Foods, Inc., dated
October 1, 1999. (Incorporated by reference to the
Company's current report on Form 8-K dated October 1,
1999, and filed October 12, 1999).
10.11 Stockholders' Agreement with Danone Foods, Inc. dated
October 1, 1999. (Incorporated by reference to the
Company's current report on Form 8-K dated October 1,
1999, and filed October 12, 1999).
27 Financial Data Schedule. (Filed herewith).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,193,098
<SECURITIES> 169,199
<RECEIVABLES> 1,255,048
<ALLOWANCES> 0
<INVENTORY> 761,000
<CURRENT-ASSETS> 3,619,259
<PP&E> 6,199,145
<DEPRECIATION> 1,962,633
<TOTAL-ASSETS> 7,862,021
<CURRENT-LIABILITIES> 912,900
<BONDS> 0
0
0
<COMMON> 1,601,916
<OTHER-SE> 3,919,310
<TOTAL-LIABILITY-AND-EQUITY> 7,862,021
<SALES> 5,894,493
<TOTAL-REVENUES> 5,936,596
<CGS> 2,858,258
<TOTAL-COSTS> 1,822,477
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,613
<INCOME-PRETAX> 1,181,248
<INCOME-TAX> 457,554
<INCOME-CONTINUING> 723,694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 723,694
<EPS-BASIC> .19
<EPS-DILUTED> .19
</TABLE>
