<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, 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)
ILLINOIS 36-3442829
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 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> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets -
December 31, 1999 and September 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 nine months ended
September 30, 2000 and 1999 F-4
Consolidated Statements of Changes in Stockholders' Equity For the year
ended December 31, 1999 and for the nine months ended September 30, 2000 F-5
Consolidated Statements of Cash Flows For the year ended December 31,
1999 and for the nine months ended September 30, 2000 and 1999 F-6 - F-7
Notes to Consolidated Financial Statements - December 31, 1999 and
September 30, 2000 and 1999
F-8 - F15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 2
CONDITIONS AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 3
SIGNATURES 5
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
LIFEWAY FOODS, INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
F-1
<PAGE> 4
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
--------------------------- DECEMBER 31,
2000 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalent $ 4,999,952 $ 1,193,098 $ 4,640,923
Marketable Securities 1,583,160 169,199 1,564,200
Accounts receivable, net of allowance
for doubtful accounts of $0 at
September 30, 2000 and 1999 and
December 31, 1999 1,084,829 1,063,428 965,725
Other receivables 50,300 16,620 57,193
Inventories 644,622 761,000 843,959
Prepaid expenses and other assets 0 194,420 0
Deferred income taxes 143,358 46,494 52,362
----------- ----------- -----------
TOTAL CURRENT ASSET 8,506,221 3,444,259 8,124,362
PROPERTY AND EQUIPMENT
Land 658,400 658,400 658,400
Buildings, machinery and equipment 6,776,543 5,540,745 5,966,635
----------- ----------- -----------
Total property and equipment 7,434,943 6,199,145 6,625,035
Less: accumulated depreciation 2,559,007 1,962,633 2,096,842
----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET 4,875,936 4,236,512 4,528,193
OTHER ASSETS
INTANGIBLE ASSETS, NET 1,250 6,250 5,000
----------- ----------- -----------
TOTAL ASSETS $13,383,407 $ 7,687,021 $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
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
--------------------------- DECEMBER 31,
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of notes payable $ 93,909 $ 91,647 $ 91,920
Accounts payable 559,402 404,076 480,043
Accrued expenses 331,601 417,177 192,812
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 964,912 912,900 764,775
LONG-TERM LIABILITIES 1,163,476 1,255,935 1,233,865
DEFERRED INCOME TAXES 326,886 171,960 247,673
STOCKHOLDERS' EQUITY
Common stock 6,509,267 1,601,916 6,509,267
Retained earnings 4,573,066 3,965,002 3,923,766
Accumulated other comprehensive income,
net of tax (139,200) (26,874) (6,791)
Stock subscription receivable (15,000) (175,000) (15,000)
Treasury stock 0 (18,818) 0
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,928,133 5,346,226 10,411,242
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,383,407 $ 7,687,021 $ 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 NINE MONTHS ENDED FOR THE
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED
---------------------------- ---------------------------- DECEMBER 31,
2000 1999 2000 1999 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SALES $ 2,283,584 $ 2,001,305 $ 6,843,592 $ 5,894,493 $ 7,907,571
COST OF GOODS SOLD 1,077,174 955,249 3,502,271 2,858,258 4,664,987
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 1,206,410 1,046,056 3,341,321 3,036,235 3,242,584
OPERATING EXPENSES 850,859 645,486 2,643,227 1,822,477 2,177,637
----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 355,551 400,570 698,094 1,213,758 1,064,947
OTHER INCOME (EXPENSE)
Interest/Dividend income 115,572 10,325 226,827 27,099 110,358
Interest expense (25,634) (27,450) (72,020) (74,613) (112,144)
Gain on sale of marketable
securities 35,458 15,004 237,090 15,004 6,621
----------- ----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 125,396 (2,121) 391,897 (32,510) 4,835
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 480,947 398,449 1,089,991 1,181,248 1,069,782
PROVISION FOR INCOME TAXES 204,803 154,357 440,691 457,554 387,324
----------- ----------- ----------- ----------- -----------
NET INCOME $ 276,144 $ 244,092 $ 649,300 $ 723,694 $ 682,458
=========== =========== =========== =========== ===========
EARNINGS PER SHARE $ .06 $ .06 $ .15 $ .19 $ .17
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,318,444 3,813,577 4,318,444 3,813,577 3,933,005
=========== =========== =========== =========== ===========
COMPREHENSIVE INCOME:
NET INCOME $ 276,144 $ 244,092 $ 649,300 $ 723,694 $ 682,458
OTHER COMPREHENSIVE INCOME, NET
OF TAX:
UNREALIZED LOSSES
ON SECURITIES (NET OF TAX
BENEFIT) (5,845) (15,237) (132,409) (15,237) (6,791)
LESS: RECLASSIFICATION
ADJUSTMENT FOR LOSSES 0 0 0 0 11,637
----------- ----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 270,299 $ 228,855 $ 516,891 $ 708,457 $ 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 (132,409) 0
Net income for the nine months
ended September 30, 2000 0 0 0 0 649,300 0 0
----------- ----------- ----------- ----------- ----------- ----------- ---------
BALANCES AT
SEPTEMBER 30, 2000
(UNUAUDITED) 4,318,444 0 $ 6,509,267 $ 0 $ 4,573,066 $ (139,200) (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 NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------------
2000 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 649,300 $ 723,694 $ 682,458
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 465,915 305,755 441,214
Amortization of discounts on securities 0 0 (6,643)
Realized gain on sale of marketable securities (237,090) (15,004) (6,621)
Deferred income taxes 11,783 0 54,147
(Increase) decrease in operating assets:
Accounts receivable (119,104) (216,159) (118,456)
Other receivables (6,893) 420 (40,993)
Inventories 199,337 90,517 7,558
Prepaid expenses and other assets 0 (182,648) 11,772
Increase (decrease) in operating liabilities:
Accounts payable 79,359 (109,596) (33,628)
Accrued expenses 118,789 250,102 25,737
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,161,396 847,081 1,016,545
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Purchase of marketable securities (2,500,536) (188,429) (1,845,570)
Sale of marketable securities 2,576,477 123,740 645,968
Cash proceeds from maturity of investments
classified as held to maturity 0 247,211 0
Purchase of property and equipment (809,908) (390,497) (794,386)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (733,967) (207,975) (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 (68,400) (74,423) (96,218)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (68,400) (74,423) 4,989,951
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 359,029 564,683 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 $ 4,999,952 $ 1,193,098 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------- DECEMBER 31,
2000 1999 1999
----------- ------------ ------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 65,888 $ 74,163 $112,144
======== ======== ========
Cash paid for income taxes $209,000 $267,500 $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 $ 0 $ 15,000
======== ======== ========
Issuance of common stock from exercise
of stock options by stockholder note $ 0 $175,000 $ 0
======== ======== ========
</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
SEPTEMBER 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 nine months ended
September 30, 2000 and 1999, export sales of the Company were approximately
$162,000, $141,000 and $130,000, 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 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 SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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>
September 30, September 30, December 31,
2000 1999 1999
------------- ------------- ------------
<S> <C> <C> <C>
Amounts insured $ 293,275 $ 262,070 $ 396,799
Uninsured and uncollateralized amounts 650,241 355,399 373,059
--------- --------- ---------
Total bank balances $ 943,516 $ 617,469 $ 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
September 30, 2000, 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
SEPTEMBER 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 1999 and for
the nine months ended September 30, 2000 and 1999, $491,751, $370,896 and
$240,636, 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 for the nine months
ended September 30, 2000 and 1999, 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, 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
September 30, 1999 - Equities $ 194,072 0 $ 24,873 $ 169,199
September 30, 2000 - Equities $1,332,372 $ 24,196 $257,785 $1,098,783
September 30, 2000 - Government
Obligations, maturing within one year $ 484,377 0 0 $ 484,377
</TABLE>
Proceeds from the sale of marketable securities were $645,968, $2,576,477 and
$123,740 in December 31, 1999 and September 30, 2000 and 1999, respectively.
Gross gains of $6,621, $237,090 and $15,004 were realized on those sales in
December 31, 1999 and September 30, 2000 and 1999, respectively
NOTE 4 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
------------------------------- DECEMBER 31,
2000 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
Finished goods $ 286,863 $ 480,000 $ 420,328
Production supplies 166,217 125,000 218,283
Raw materials 191,542 156,000 205,348
--------- --------- ----------
$ 644,622 $ 761,000 $ 843,959
========= ========= ==========
</TABLE>
F-10
<PAGE> 13
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999 AND DECEMBER 31, 1999
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
----------------------- DECEMBER 31,
2000 1999 1999
---------- ---------- ------------
<S> <C> <C> <C>
Land $ 658,400 $ 658,400 $ 658,400
Buildings and improvements 2,635,766 1,649,370 2,538,942
Machinery and equipment 3,818,070 3,628,278 3,133,718
Vehicles 250,328 180,676 222,443
Office equipment 72,379 82,421 71,532
---------- ---------- ----------
$7,434,943 $6,199,145 $6,625,035
========== ========== ==========
</TABLE>
Depreciation charged to income for the three and nine months ended September 30,
2000 and 1999 was $154,055, $462,165, $100,669 and $302,007 respectively, and
$436,214 for the year ended December 31, 1999.
NOTE 6 - NOTES PAYABLE
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 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 $168,100 $176,780 $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 379,379 388,147 386,590
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 689,739 751,048 735,721
Note payable, Ford Motor credit, payable in monthly installments of $540,
including interest at 1.9%, due October 2001. Collateralized by vehicle 6,939 13,220 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 13,228 18,387 17,146
-------- -------- --------
</TABLE>
F-11
<PAGE> 14
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999 AND DECEMBER 31, 1999
NOTE 6 - NOTES PAYABLE
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
------------------------ DECEMBER 31,
2000 1999 1999
---------- ---------- ------------
<S> <C> <C> <C>
Total 1,257,385 1,347,582 1,325,785
Less current maturities 93,909 91,647 91,920
---------- ---------- ----------
Total $1,163,476 $1,255,935 $1,233,865
========== ========== ==========
</TABLE>
Maturities of notes payable are as follows:
<TABLE>
<CAPTION>
Year Ending September 30,
<S> <C>
2000 $ 93,909
2001 693,880
2002 26,670
2003 442,926
---------
Total $1,257,385
==========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, FOR THE YEAR ENDED
-------------------------- ------------------------- DECEMBER 31,
2000 1999 2000 1999 1999
------------ ------------ ------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
Current
Federal $131,345 $125,777 $290,163 $372,065 $274,263
State 35,783 28,610 71,853 84,742 58,914
-------- -------- -------- -------- --------
Total current 167,128 154,387 362,016 457,554 333,177
Deferred 37,675 0 78,675 0 54,147
-------- -------- -------- -------- --------
Provision for income taxes $204,803 $154,387 $440,691 $457,554 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 $138,728 $125,777 $344,013 $372,842 $337,635
State taxes, expense 31,587 28,610 78,190 84,742 76,739
Permanent book/tax
differences 34,488 0 18,488 0 (27,050)
-------- -------- -------- -------- --------
Provision for income taxes $204,803 $154,387 $440,691 $457,554 $387,324
======== ======== ======== ======== ========
</TABLE>
F-12
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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>
SEPTEMBER 30, SEPTEMBER 30, DEC. 31,
2000 1999 1999
------------- ------------- --------
<S> <C> <C> <C>
Non-current deferred tax liabilities arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $326,886 $171,960 $247,673
Total deferred tax liabilities $326,886 $171,960 $247,673
Current deferred tax assets arising from:
Book/tax, allowance for unrealized losses $ 94,389 $ 19,630 $ 3,931
Book/tax, inventory 48,969 26,864 48,431
-------- -------- --------
Total deferred tax assets 143,358 46,494 52,362
-------- -------- --------
Net deferred tax liability $183,528 $125,466 $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 September 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>
SEPTEMBER 30, SEPTEMBER 30, DEC. 31,
2000 1999 1999
------------- ------------- --------
<S> <C> <C> <C>
Covenant Not to Compete $50,000 $50,000 $50,000
Less: Accumulated amortization 48,750 43,750 45,000
------- ------- -------
$ 1,250 $ 6,250 $ 5,000
======= ======= =======
</TABLE>
Total amortization charged against income for the three and nine months ended
September 30, 2000 and 1999 was $1,250, $3,750, $1,250 and $3,750 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 September
30, 2000 and 269,300 at September 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
SEPTEMBER 30, 2000 AND 1999 AND DECEMBER 31, 1999
NOTE 10 - STOCK OPTION PLANS (CONTINUED)
In 1997, 55,000 options we 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 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 0
Exercised (35,000) 5.00
Forfeited (by agreement) (20,000) 0
-------
Outstanding and exercisable at December 31, 1999 0 5.00
=======
</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>
At September 30, 2000: Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Cash and cash equivalents $4,999,952 $4,999,952
Marketable securities 1,583,160 1,583,160
Notes payable 1,257,385 1,178,798
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999: Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 1,193,098 $ 1,193,098
Marketable securities 169,199 169,199
Notes payable 1,347,582 1,304,112
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999: Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
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
SEPTEMBER 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 $949,099, up to $6,843,592 during the nine month
period ending September 30, 2000, from $5,894,493 during the same nine month
period in 1999 (a 16% increase). This increase is attributable to increased
sales of existing products. However, net income decreased by $74,394, down to
$649,300 for the nine month period ending September 30, 2000, from $723,694
during the same nine month period in 1999 (a 10% 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 $644,013, up to $3,502,271 during the
nine month period ending September 30, 2000, from $2,858,258 during the same
nine month period in 1999 (a 23% 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.
Cost of goods sold as a percentage of sales for the nine months ended September
30, 2000 was 51%, compared to 48% for the same nine month period in 1999.
Operating expenses increased by $820,750, up to $2,643,227 for the nine
month period ending September 30, 2000, from $1,822,477 during the same nine
month period in 1999 (a 45% increase). This increase is due in part to increased
operations in the current year. Additionally, during the nine month period ended
September 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. Also, depreciation expenses (a
non-cash expense) incurred during the nine month period ending September 30,
2000 was $462,165, which is approximately $160,000 more than during the same
nine month period in 1999.
Total other income for the nine month period ended September 30, 2000
was $391,897, as compared to total other expenses of $32,510 for the same nine
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 September 30, 2000, as compared to September 30, 1999, the
Company had working capital in the amount of $7,541,309 as compared to
$2,531,359, respectively, an increase of $5,009,950. This increase is
attributable to increases in current assets, primarily cash on hand ($3,806,854
increase) and marketable securities ($1,413,961 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 September 30, 2000 was $4,875,936, a
$639,424 increase from $4,236,512 as of September 30, 1999. This increase is
primarily due to additional building improvements of $986,396, and is partially
offset by increased depreciation of $160,158.
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.
2
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the pending legal
proceeding described in the Company's quarterly report on Form 10-QSB for the
quarter ended June 30, 2000.
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 - None.
ITEM 5. OTHER INFORMATION - None.
3
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Exhibit Number and Brief Description
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. (Incorporated by reference to Exhibit 3.5
of the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2000.)
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.)
(b) Reports on Form 8-K - None.
4
<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 8, 2000
5
<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. (Incorporated by reference to Exhibit 3.5
of the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2000.)
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>
