<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 June 30, 2000
[ ] 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 incorporation or organization) (IRS Employer Identification No.)
</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 AUGUST 7, 2000, THE ISSUER HAD
4,318,444 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Lifeway Foods, Inc. and Subsidiary
June 30, 2000 and 1999, and
December 31, 1999 F-1
Consolidated Balance Sheets -
December 31, 1999 and June 30, 2000 and 1999 F-2 - F-3
Consolidated Statements of Income and Comprehensive Income
For the year ended December 31, 1999 and
for the three and six months ended June 30, 2000 and 1999 F-4
Consolidated Statements of Changes in Stockholders' Equity -
For the year ended December 31, 1999 and
for the six months ended June 30, 2000 F-5
Consolidated Statements of Cash Flows -
For the year ended December 31, 1999 and
for the six months ended June 30, 2000 and 1999 F-6 - F-7
Notes to Consolidated Financial Statements -
December 31, 1999 and June 30, 2000 and 1999 F-8 - F-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS 2
PART II - OTHER INFORMATION 3
SIGNATURES 6
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LIFEWAY FOODS, INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
F-1
<PAGE> 4
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30,
--------------------------- DECEMBER 31,
2000 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,158,230 $ 808,459 $ 4,640,923
Certificates of deposit 0 125,078 0
Marketable securities 882,273 179,165 1,564,200
Accounts receivable, net of allowance
for doubtful accounts of $0 at June
30, 2000 and 1999 and December 31, 1999 1,138,834 1,127,793 965,725
Other receivables 18,200 9,200 57,193
Inventories 713,959 836,000 843,959
Prepaid expenses and other assets 0 161,527 0
Deferred income taxes 27,362 36,858 52,362
----------- ----------- -----------
TOTAL CURRENT ASSETS 7,938,858 3,284,080 8,124,362
PROPERTY AND EQUIPMENT
Land 658,400 658,400 658,400
Buildings, machinery and equipment 6,548,575 5,377,598 5,966,635
----------- ----------- -----------
Total property and equipment 7,206,975 6,035,998 6,625,035
Less: accumulated depreciation 2,404,952 1,861,964 2,096,842
----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET 4,802,023 4,174,034 4,528,193
OTHER ASSETS
INTANGIBLE ASSETS, NET 2,500 7,500 5,000
----------- ----------- -----------
TOTAL ASSETS $12,743,381 $ 7,465,614 $12,657,555
=========== =========== ===========
</TABLE>
THIS IS NOT AN AUDIT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE> 5
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30,
--------------------------- DECEMBER 31,
2000 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable $ 93,031 $ 92,568 $ 91,920
Accounts payable 391,214 465,997 480,043
Accrued expenses 149,616 340,364 192,812
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 633,861 898,929 764,775
LONG-TERM LIABILITIES 1,188,013 1,277,354 1,233,865
DEFERRED INCOME TAXES 263,673 171,960 247,673
STOCKHOLDERS' EQUITY
Common stock 6,509,267 1,601,916 6,509,267
Retained earnings 4,296,922 3,720,910 3,923,766
Accumulated other comprehensive income, net
of tax (133,355) (11,637) (6,791)
Stock subscription receivable (15,000) (175,000) (15,000)
Treasury stock 0 (18,818) 0
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,657,834 5,117,371 10,411,242
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,743,381 $ 7,465,614 $12,657,555
=========== =========== ===========
</TABLE>
THIS IS NOT AN AUDIT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 6
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHESIVE INCOME
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED FOR THE
JUNE 30, JUNE 30, YEAR ENDED
--------------------------- --------------------------- DECEMBER 31,
2000 1999 2000 1999 1999
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
SALES $2,287,222 $2,039,861 $4,560,008 $3,893,188 $ 7,907,571
COST OF GOODS SOLD 1,288,341 1,018,346 2,425,097 1,903,009 4,664,987
---------- ---------- ---------- ---------- -----------
GROSS PROFIT 998,881 1,021,515 2,134,911 1,990,179 3,242,584
OPERATING EXPENSES 882,750 567,393 1,792,368 1,176,991 2,177,637
---------- ---------- ---------- ---------- -----------
INCOME FROM OPERATIONS 116,131 454,122 342,543 813,188 1,064,947
OTHER INCOME (EXPENSE)
Interest/dividend income 85,594 8,660 111,255 16,774 110,358
Interest expense (20,953) (21,323) (46,386) (47,163) (112,144)
Gain on sale of marketable
securities 120,006 0 201,632 0 6,621
---------- ---------- ---------- ---------- -----------
TOTAL OTHER INCOME (EXPENSE) 184,647 (12,663) 266,501 (30,389) 4,835
---------- ---------- ---------- ---------- -----------
INCOME BEFORE INCOME TAXES 300,778 441,459 609,044 782,799 1,069,782
PROVISION FOR INCOME TAXES 116,488 171,013 235,888 303,197 387,324
---------- ---------- ---------- ---------- -----------
NET INCOME $ 184,290 $ 270,446 $ 373,156 $ 479,602 $ 682,458
========== ========== ========== ========== ===========
EARNINGS PER SHARE $ .04 $ .07 $ .09 $ .13 $ .17
========== ========== ========== ========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,318,444 3,813,577 4,318,444 3,813,577 3,933,005
========== ========== ========== ========== ===========
COMPREHENSIVE INCOME;
NET INCOME $ 184,290 $ 270,446 $ 373,156 $ 479,602 $ 682,458
OTHER COMPREHENSIVE INCOME, NET OF
TAX:
UNREALIZED LOSSES ON SECURITIES
(NET OF TAX BENEFIT) (109,048) 0 (133,355) 0 (6,791)
LESS: RECLASSIFICATION ADJUSTMENT
FOR LOSSES INCLUDED IN NET INCOME 0 0 6,791 0 11,637
---------- ---------- ---------- ---------- -----------
COMPREHENSIVE INCOME $ 75,242 $ 270,446 $ 246,592 $ 479,602 $ 687,304
========== ========== ========== ========== ===========
</TABLE>
THIS IS NOT AN AUDIT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE> 7
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES AUTHORIZED
-------------------------------
# OF ACCUMULATED
SHARES OF OTHER STOCK
# OF SHARES ISSUED TREASURY COMMON TREASURY RETAINED COMPREHENSIVE SUBSCRIPTION
AND OUTSTANDING STOCK STOCK STOCK EARNINGS INCOME RECEIVABLE
------------------ --------- ---------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1998 3,796,077 10,400 $1,426,916 $( 18,818) $3,241,308 $ (11,637) $ 0
Issuance of common stock 497,767 0 4,977,670 0 0 0 0
Cost of issuance of new
stock 0 0 (51,501) 0 0 0 0
Stock options exercised 35,000 0 175,000 0 0 0 (15,000)
Retirement of treasury
stock (10,400) (10,400) (18,818) 18,818 0 0 0
Other comprehensive income:
Unrealized losses on
securities 0 0 0 0 0 4,846 0
Net income for the year
ended December 31, 1999 0 0 0 0 682,458 0 0
--------- ------- ---------- --------- ---------- ----------- --------
BALANCES AT DECEMBER 31,
1999 4,318,444 0 6,509,267 0 3,923,766 (6,791) (15,000)
Other comprehensive income:
Unrealized losses on
securities 0 0 0 0 0 (126,564) 0
Net income for the six
months ended June 30,
2000 0 0 0 0 373,156 0 0
--------- ------- ---------- --------- ---------- ----------- --------
BALANCES AT
JUNE 30, 2000
(UNUAUDITED) 4,318,444 0 $6,509,267 $ 0 $4,296,922 $ (133,355) $(15,000)
========= ======= ========== ========= ========== =========== ========
</TABLE>
THIS IS NOT AN AUDIT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE> 8
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED
-------------------------- DECEMBER 31,
2000 1999 1999
----------- ----------- -------------------
<S> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 373,156 $ 479,602 $ 682,458
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 313,110 203,836 441,214
Amortization of discounts on securities 0 0 (6,643)
Realized gain on sale of marketable securities (201,632) 0 (6,621)
Deferred income taxes 41,000 0 54,147
(Increase) decrease in operating assets:
Accounts receivable (173,109) (280,524) (118,456)
Other receivables 38,993 7,000 (40,993)
Inventories 130,000 15,517 7,558
Prepaid expenses and other assets 0 (149,755) 11,772
Increase (decrease) in operating liabilities:
Accounts payable (88,829) (47,675) (33,628)
Accrued expenses (43,196) 173,289 25,737
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 389,493 401,290 1,016,545
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Purchase of marketable securities (1,364,964) (64,786) (1,845,570)
Sale of marketable securities 2,119,459 0 645,968
Cash proceeds from maturity of investments
classified as held to maturity 0 122,973 0
Purchase of property and equipment (581,940) (227,350) (794,386)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 172,555 (169,163) (1,993,988)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock 0 0 5,137,670
Stock issuance costs 0 0 (51,501)
Repayment of notes payable (44,741) (52,083) (96,218)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (44,741) (52,083) 4,989,951
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 517,307 180,044 4,012,508
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,640,923 628,415 628,415
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,158,230 $ 808,459 $ 4,640,923
=========== =========== ===========
</TABLE>
THIS IS NOT AN AUDIT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE> 9
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED
-------------------------- DECEMBER 31,
2000 1999 1999
----------- ----------- -------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 46,386 $ 47,163 $ 112,144
=========== =========== ===========
Cash paid for income taxes $ 209,000 $ 158,750 $ 376,250
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of automobile by issuing a note payable $ 0 $ 22,002 $ 22,000
=========== =========== ===========
Issuance of common stock in exchange
for note payable $ 0 $ 175,000 $ 15,000
=========== =========== ===========
</TABLE>
THIS IS NOT AN AUDIT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE> 10
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 AND DECEMBER 31, 1999
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 principal 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
also produces several soy-based products and a vegetable-based seasoning under
the name "Golden Zesta." 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 year ended December 31, 1999 and the six months ended
June 30, 2000 and 1999, export sales of the Company were approximately $162,000,
$86,000 and $68,000, respectively.
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:
Management's Opinion
In the opinion of management, all necessary adjustments have been made for fair
presentation of the consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
it's wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash Equivalents
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
The Company maintains cash deposits at several institutions located in the
greater Chicago, Illinois metropolitan area. Deposits at each institution are
insured up to $100,000 by the Federal Deposit Insurance Corporation or the
Securities Investor Protector Corporation.
F-8
<PAGE> 11
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 AND DECEMBER 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Bank balances of amounts reported by financial institutions are categorized as
follows:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
2000 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
Amounts insured $ 363,367 $ 354,050 $396,799
Uninsured and uncollateralized amounts 75,119 335,165 373,059
--------- --------- --------
Total bank balances $ 438,486 $ 689,215 $769,858
========= ========= ========
</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, 1999 and
June 30, 2000 and 1999, 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 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 Asset
Lifeway Foods has a covenant not to compete, which is stated at cost and is
amortized over ten years using the straight-line method.
F-9
<PAGE> 12
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 AND DECEMBER 31, 1999
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 and capitalization of indirect costs for tax
purposes.
Advertising Costs
The Company expenses advertising costs as incurred. During the year ended
December 31, 1999 and for the six months ended June 30, 2000 and 1999, $491,751,
$251,635 and $280,224, respectively, were expensed.
Earning Per Common Share
Earnings per common share were computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the year. For the year ended December 31, 1999, and the six months ended
June 30, 2000 and 1999 diluted and basic earnings per share were the same, as
the effect of dilutive securities options outstanding was not significant.
Reclassification
Certain items from the June 30, 1999 financial statements have been reclassified
to conform to current year classifications. Such reclassifications had no effect
on previously reported net income.
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, 1999 - Equities $ 595,177 $ 35,089 $ 46,896 $583,370
December 31, 1999 - Government
Obligations, maturing within one year 979,745 1,085 0 980,830
June 30, 1999 - Equities 179,165 0 0 179,165
June 30, 2000 - Equities $1,015,628 $ 24,600 $157,955 $882,273
</TABLE>
Proceeds from the sale of marketable securities were $645,968, $2,119,459 and $0
in December 31,1999 and June 30, 2000 and 1999, respectively.
Gross gains of $6,621, $201,632 and $ 0 were realized on those sales in December
31, 1999 and June 30, 2000 and 1999, respectively.
NOTE 4 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30,
----------------------- DECEMBER 31,
2000 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Finished goods $337,328 $530,000 $420,328
Production supplies 176,283 130,000 218,283
Raw materials 200,348 176,000 205,348
-------- -------- --------
$713,959 $836,000 $843,959
======== ======== ========
</TABLE>
F-10
<PAGE> 13
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 AND DECEMBER 31, 1999
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30,
----------------------- DECEMBER 31,
2000 1999 1999
---------- ---------- ------------
<S> <C> <C> <C>
Land $ 658,400 $ 658,400 $ 658,400
Buildings and improvements 2,612,688 1,649,370 2,538,942
Machinery and equipment 3,612,577 3,465,131 3,133,718
Vehicles 250,328 180,676 222,443
Office equipment 72,982 82,421 71,532
---------- ---------- ----------
$7,206,975 $6,035,998 $6,625,035
========== ========== ==========
</TABLE>
Depreciation charged to income for the three and six months ended June 30, 2000
and 1999 was $154,055, $ 310,610, $ 100,669 and $201,336 respectively, and
$436,214 for the year ended December 31, 1999.
NOTE 6 - NOTES PAYABLE
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30,
------------------------- DECEMBER 31,
2000 1999 1999
---------- ---------- ------------
<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. $ 170,329 $ 178,853 $ 174,668
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. 382,573 390,409 386,590
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. 705,067 766,375 735,721
Note payable, Ford Motor credit, payable in
monthly installments of $540, including interest
at 1.9%, due October 2001. Collateralized by
vehicle. 8,520 14,771 11,660
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. 14,555 19,514 17,146
---------- ---------- ----------
</TABLE>
F-11
<PAGE> 14
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 AND DECEMBER 31, 1999
NOTE 6 - NOTES PAYABLE
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30,
------------------------- DECEMBER 31,
2000 1999 1998
---------- ---------- ------------
<S> <C> <C> <C>
Total 1,281,044 1,369,922 1,325,785
Less current maturities 93,031 92,568 91,920
---------- ---------- ----------
Total $1,188,013 $1,277,354 $1,233,865
========== ========== ==========
</TABLE>
Maturities of notes payable are as follows:
<TABLE>
<S> <C>
Year Ending June 30,
2000 $ 93,031
2001 691,650
2002 23,480
2003 472,883
----------
Total $1,281,044
===========
</TABLE>
NOTE 7 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30, FOR THE YEAR ENDED
-------------------------- ------------------------ DECEMBER 31,
2000 1999 2000 1999 1999
---------- ---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Current
Federal $ 79,518 $139,317 $158,818 $247,065 $274,263
State 16,470 31,696 36,070 56,132 58,914
-------- -------- -------- -------- --------
Total current 95,988 171,013 194,888 303,197 333,177
Deferred 20,500 0 41,000 0 54,147
-------- -------- -------- -------- --------
Provision for income taxes $116,488 $171,013 $235,888 $303,197 $387,324
======== ======== ======== ======== ========
</TABLE>
A reconciliation of the provision for income taxes and the income tax computed
at the statutory rate is as follows:
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30, FOR THE YEAR ENDED
-------------------------- ------------------------ DECEMBER 31,
2000 1999 2000 1999 1999
---------- ---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Federal income tax expense computed
at the statutory rate $101,485 $139,317 $205,285 $247,065 $337,635
State taxes, expense 23,003 31,696 46,603 56,132 76,739
Permanent book/tax differences (8,000) 0 (16,000) 0 (27,050)
-------- -------- -------- -------- --------
Provision for income taxes $116,488 $171,013 $235,888 $303,197 $387,324
======== ======== ======== ======== ========
</TABLE>
F-12
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 AND DECEMBER 31, 1999
NOTE 7 - PROVISION FOR INCOME TAXES - CONTINUED
Amounts for deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DEC. 31,
2000 1999 1999
-------- -------- --------
<S> <C> <C> <C>
Non-current deferred tax liabilities arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $263,673 $171,960 $247,673
Total deferred tax liabilities $263,673 $171,960 $ 47,673
Current deferred tax assets arising from:
Book/tax, allowance for unrealized losses $(21,069) $ 9,994 $ 3,931
Book/tax, inventory 48,431 26,864 48,431
-------- -------- --------
Total deferred tax assets 27,362 36,858 52,362
-------- -------- --------
Net deferred tax liability $236,311 $135,102 $195,311
======== ======== ========
</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. In 1999 and June 30, 2000, no customers comprised over
10% of sales.
NOTE 9 - INTANGIBLE ASSETS
Amounts for deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DEC. 31,
2000 1999 1999
-------- -------- --------
<S> <C> <C> <C>
Covenant Not to Compete $50,000 $50,000 $50,000
Less: Accumulated amortization 47,500 42,500 45,000
-------- -------- --------
$ 2,500 $ 7,500 $ 5,000
======= ======= =======
</TABLE>
Total amortization charged against income for the three and six months ended
June 30, 2000 and 1999 was $1,250, $2,500, $1,250 and $2,500 respectively, and
$5,000 for the year ended December 31, 1999.
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. There were 234,300
shares available for issuance under the Plan at December 31, 1999 and June 30,
2000 and 269,300 at June 30, 1999.
The option price, number of shares, grant date and vesting terms are determined
at the discretion of the Company's Board of Directors.
F-13
<PAGE> 16
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 AND DECEMBER 31, 1999
NOTE 10 - STOCK OPTION PLANS (CONTINUED)
In 1997, 55,000 options were granted to certain consultants and employees of the
Company. 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 not have increased in
1999 or for the six months ended June 30, 2000 and net income would have
remained the same.
A summary of option transactions during the year ended December 31, 1999
is shown below:
<TABLE>
<CAPTION>
Number Weighted-Average
of Exercise
Shares Price
------- ----------------
<S> <C> <C>
Outstanding and exercisable at January 1, 1999 55,000 $5.00
Granted 0
Exercised (35,000) 5.00
Forfeited (by agreement) (20,000) 5.00
-------
Outstanding and exercisable at December 31, 1999 0
=======
</TABLE>
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:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
At June 30, 2000:
Cash and cash equivalents $5,158,230 $5,158,230
Marketable securities 882,273 882,273
Notes payable 1,281,044 1,248,540
<CAPTION>
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
At June 30, 1999:
Cash and cash equivalents $ 808,459 $ 808,459
Marketable securities 179,165 179,165
Notes payable 1,369,922 1,321,200
<CAPTION>
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
At December 31, 1999:
Cash and cash equivalents $4,640,923 $4,640,923
Marketable securities 1,564,200 1,564,200
Notes payable 1,325,785 1,293,275
</TABLE>
F-14
<PAGE> 17
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999 AND DECEMBER 31, 1999
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values of cash and cash equivalents and marketable securities
approximate fair values. The fair Value of the notes payable is based on the
discount value of contractual cash flows. The discount rate is estimated using
rates currently offered for debt with similar maturities.
NOTE 12 - COMMON STOCK TRANSACTION
On October 1, 1999, the company entered into a stock purchase agreement and
shareholders' agreement with Danone Foods, Inc. ("Danone"). As part of these
agreements, the Company issued and sold 497,767 unregistered shares of
restricted common stock to Danone, at a purchase price of $10.00 per share. Net
of stock issuance costs of $51,501, this transaction resulted in an aggregate
equity investment of $4,926,169.
On December 24, 1999, the Company and Danone entered into a support agreement,
which allowed the Company access to Danone's brokers and distributors in the
United States and created a non-compete agreement between the Company and Danone
for a period of three years from the termination of this support agreement. In
addition, the parties have entered into a reciprocal stock rights of first
refusal and Danone has been granted anti-dilutive rights relating to future
offerings and limited registration rights.
F-15
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(1) Material Changes in Results of Operations
Sales increased by $666,820, up to $4,560,008 during the six month
period ending June 30, 2000, from $3,893,188 during the same six month period in
1999 (a 17% increase). This increase is attributable to increased sales of
existing products. However, net income decreased by $106,446, down to $373,156
for the six month period ending June 30, 2000, from $479,602 during the same six
month period in 1999 (a 22% decrease). This decrease in net income is primarily
attributable to increases in cost of goods sold and operating expenses, as
described below.
Cost of goods sold increased by $522,088, up to $2,425,097 during the
six month period ending June 30, 2000, from $1,903,009 during the same six month
period in 1999 (a 27% increase). While this increase generally corresponds with
the increased sales, it is also partially attributable to increased costs of raw
materials and increased transportation costs in 2000.
Operating expenses increased by $615,377, up to $1,792,368 for the six
month period ending June 30, 2000, from $1,176,991 during the same six month
period in 1999 (a 52% increase). During the six month period ended June 30,
2000, the Company paid non-recurring expenses in excess of $300,000 for: 1)
initial filing fees and legal fees in connection with the listing of the
Company's common stock on the NASDAQ National Market System (NMS) stock
exchange, and 2) legal fees in connection with the Company's successful efforts
to protect one of its trademarks in the legal matter described in Part II, Item
1, A., below. Also, depreciation expenses (a non-cash expense) incurred during
the six month period ending June 30, 2000 were over $100,000 more than during
the same six month period in 1999.
Total other income for the six month period ended June 30, 2000 was
$266,501, as compared to total other expenses of 30,389 for the same six month
period in 1999. This difference is due to increased interest income and a gain
on the sale of marketable securities in 2000.
(2) Liquidity and Capital Resources
As of June 30, 2000, as compared to June 30, 1999, the Company had
working capital in the amount of $7,304,997 as compared to $2,375,151,
respectively, an increase of $4,929,846. This increase is attributable to
increases in current assets, primarily cash on hand ($4,349,771 increase) and
marketable securities ($703,108 increase) due to an equity investment of almost
$5 million by Groupe Danone in the fourth quarter of 1999 (which is described in
detail in the annual report on Form 10-KSB for the year ended December 31,
1999). The Company expects all cash requirements can be met internally for the
next 12-month period.
Net property and equipment as of June 30, 2000 was $4,802,023, a
$627,989 increase from $4,174,034 as of June 30, 1999. This increase is due to
the purchase of $1,170,977 of additional machinery and equipment, and is
partially offset by increased depreciation of $542,988.
The Company is not aware of any circumstances or trends which would
have a negative impact upon future sales or earnings. There have been no
material fluctuations in the standard seasonal variations of the Company's
business. The accompanying financial statements include all adjustments which in
the opinion of management are necessary in order to make the financial
statements not misleading.
3
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A. In April 2000, the Company settled its trademark infringement lawsuit against
Fresh Made, Inc. The Company had filed the lawsuit in August 1999, alleging
intentional trademark infringement of the Company's federally registered
trademark for a Russian term transliterated as "Krest'yanskiy." Under the terms
of the settlement agreement, Fresh Made is prohibited from using the term in
connection with any cheeses, cottage cheeses and/or other milk products.
B. On June 22, 2000, the Niles Park District of Illinois filed a lawsuit in the
Circuit Court of Cook County, Illinois, naming the Company as a defendant. The
Park District, through the lawsuit, is attempting to exercise its rights of
eminent domain to acquire and take possession of the Company's property situated
at 7800 Caldwell Avenue, Niles, Illinois, where the Moscow Nights Restaurant
currently operates. Although the Company has not yet filed a responsive pleading
to the lawsuit, the Company intents to vigorously defend the lawsuit as well as
prosecute all claims it may possess, and does not intend to detour from this
course of action unless the Park District offers a purchase price that is
acceptable to the Company in excess of the appraised value of the property.
ITEM 2. CHANGES IN SECURITIES
On June 17, 2000 the shareholders of the Company approved an Amendment
to the Articles of Incorporation to clarify that the Company has the power to
grant pre-emptive rights to any of its shareholders by contract by adding the
following sentence immediately following existing provisions relating to
pre-emptive rights:
"Notwithstanding anything contained herein to the contrary, the
Corporation shall have the power to grant preemptive rights to any
of its shareholders by contract."
On July 26, 2000 the Articles of Incorporation were amended to reflect
this change.
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 June 17, 2000.
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 3,400,419 2,200
Pol Sikar 3,402,419 200
Rick D. Salm 3,402,419 200
Lorenzo Bernardi 3,402,419 200
Thomas Kunz 3,401,919 700
</TABLE>
2. Adoption of an Amendment to the Company's Articles of
Incorporation to clarify that the Company has the power to grant
preemptive rights to any of its stockholders by contact:
<TABLE>
<CAPTION>
For Against Abstain Not Voted
--------- ------- ------- ---------
<S> <C> <C> <C>
2,543,537 9,100 17,000 832,982
</TABLE>
4
<PAGE> 20
3. Ratification of Gleeson, Sklar, Sawyers & Cumpata LLP as
independent auditors for the next fiscal year:
<TABLE>
<CAPTION>
For Against Abstain
--------- ------- -------
<S> <C> <C>
3,398,719 2,800 1,100
</TABLE>
ITEM 5. OTHER INFORMATION
On May 24, 2000, the Company's common stock began trading on the Nasdaq
National Market System (NMS) stock exchange. Previously, a market for the
Company's common stock had been maintained on the Nasdaq SmallCap Market. The
Nasdaq NMS has higher listing requirements than the Nasdaq SmallCap.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Exhibit Number and Brief Description
<TABLE>
<S> <C>
3.4 Bylaws, as amended. (Incorporated by reference to Exhibit 3.4 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999.)
3.5 Articles of Incorporation, as amended on July 26, 2000 and currently in effect. (Filed
herewith.)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated June 5, 1995.
(Incorporated by reference to Exhibit 10.1 of 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 Exhibit 10.10 of 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 Exhibit 10.11 of the Company's Current Report on
Form 8-K dated October 1, 1999, and filed October 12, 1999.)
10.12 Letter Agreement dated December 24, 1999 amending the Stockholders' Agreement
with Danone Foods, Inc. dated October 1, 1999. (Incorporated by reference to
Exhibit 10.12 of the Company's Current Report on Form 8-K dated December 24,
1999 and filed January 11, 2000.)
10.13 Support Agreement with The Dannon Company, Inc. dated December 24, 1999. (Incorporated by
reference to Exhibit 10.13 of the Company's Current Report on Form 8-K dated December 24, 1999
and filed January 11, 2000.)
27 Financial Data Schedule. (Filed herewith.)
</TABLE>
(b) Reports on Form 8-K - None.
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: August 8, 2000
6
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER BRIEF DESCRIPTION
<S> <C>
3.4 Bylaws, as amended. (Incorporated by reference to Exhibit 3.4 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999.)
3.5 Articles of Incorporation, as amended on July 26, 2000 and currently in effect. (Filed
herewith.)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated June 5, 1995.
(Incorporated by reference to Exhibit 10.1 of 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 Exhibit 10.10 of 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 Exhibit 10.11 of the Company's Current Report on
Form 8-K dated October 1, 1999, and filed October 12, 1999.)
10.12 Letter Agreement dated December 24, 1999 amending the Stockholders' Agreement
with Danone Foods, Inc. dated October 1, 1999. (Incorporated by reference to
Exhibit 10.12 of the Company's Current Report on Form 8-K dated December 24,
1999 and filed January 11, 2000.)
10.13 Support Agreement with The Dannon Company, Inc. dated December 24, 1999. (Incorporated by
reference to Exhibit 10.13 of the Company's Current Report on Form 8-K dated December 24, 1999
and filed January 11, 2000.)
27 Financial Data Schedule. (Filed herewith.)
</TABLE>
