<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 Identification No.)
incorporation or organization)
6431 WEST OAKTON, MORTON GROVE, ILLINOIS 60053
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(847) 967-1010
---------------------------
(issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: AS OF MARCH 10, 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>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS.
F-1
Lifeway Foods, Inc. and Subsidiaries
March 31, 2000 and 1999, and
December 31, 1999
Consolidated Balance Sheets
December 31, 1999 and
March 31, 2000 and 1999 (unaudited) F-2 - F-3
Consolidated Statements of Income and
Comprehensive Income
for the year ended December 31, 1999 and
for the three months ended March 31, 2000 and 1999 (unaudited) F-4
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 1999 and
for the three months ended March 31, 2000 and 1999 (unaudited) F-5
Consolidated Statements of Cash Flows
for the year ended December 31, 1999 and
for the three months ended March 31, 2000 and 1999 (unaudited) F-6 - F-7
Notes to Consolidated Financial Statements (unaudited) F-8 - F-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS 2
PART II - OTHER INFORMATION 3
SIGNATURES 4
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LIFEWAY FOODS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
F-1
<PAGE> 4
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
--------------------------- DECEMBER 31,
ASSETS 2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,529,310 $ 592,420 $ 4,640,923
Certificates of deposit -- 243,063 --
Marketable securities 1,561,606 165,221 1,564,200
Accounts receivable, net of allowance for doubtful
accounts of $ 0 at March 31, 2000 and 1999 and
December 31, 1999 1,138,904 1,037,000 965,725
Other receivables 14,200 16,200 57,193
Inventories 888,959 796,517 843,959
Prepaid expenses and other assets -- 51,772 --
Deferred income taxes 52,362 36,858 52,362
------------ ------------ ------------
TOTAL CURRENT ASSETS 8,185,341 2,939,051 8,124,362
PROPERTY AND EQUIPMENT
Land 658,400 658,400 658,400
Buildings, machinery and equipment 6,215,055 5,271,833 5,966,635
------------ ------------ ------------
Total property and equipment 6,873,455 5,930,233 6,625,035
Less: accumulated depreciation 2,250,897 1,761,295 2,096,842
------------ ------------ ------------
PROPERTY AND EQUIPMENT, NET 4,622,558 4,168,938 4,528,193
OTHER ASSETS
INTANGIBLE ASSETS, NET 3,750 8,750 5,000
------------ ------------ ------------
TOTAL ASSETS $ 12,811,649 $ 7,116,739 $ 12,657,555
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE> 5
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
---------------------------- DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of notes payable $ 99,420 $ 90,536 $ 91,920
Accounts payable 499,968 419,903 480,043
Accrued expenses 173,212 279,694 192,812
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 772,500 790,133 764,775
LONG-TERM LIABILITIES 1,208,783 1,307,721 1,233,865
DEFERRED INCOME TAXES 247,673 171,960 247,673
STOCKHOLDERS' EQUITY
Common stock 6,509,267 1,426,916 6,509,267
Retained earnings 4,112,632 3,450,464 3,923,766
Accumulated other comprehensive income, net of tax (24,306) (11,637) (6,791)
Stock subscription receivable (15,000) -- (15,000)
Treasury stock -- (18,818) --
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,582,593 4,846,925 10,411,242
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,811,649 $ 7,116,739 $ 12,657,555
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 6
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE
MARCH 31, YEAR ENDED
------------------------------ DECEMBER 31,
2000 1999 1999
------------- ------------- -------------
<S> <C> <C> <C>
SALES $ 2,272,786 $ 1,853,327 $ 7,907,571
Cost of goods sold 1,136,756 884,663 4,664,987
------------- ------------- -------------
GROSS PROFIT 1,136,030 968,664 3,242,584
Operating expenses 909,618 609,598 2,177,637
------------- ------------- -------------
INCOME FROM OPERATIONS 226,412 359,066 1,064,947
Other income (expense):
Interest/dividend income 25,661 8,114 110,358
Interest expense (25,433) (25,840) (112,144)
Gain on sale of
marketable securities 81,626 -- 6,621
------------- ------------- -------------
Total other income (expense) 81,854 (17,726) 4,835
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 308,266 341,340 1,069,782
Provision for income taxes 119,400 132,184 387,324
------------- ------------- -------------
NET INCOME $ 188,866 $ 209,156 $ 682,458
============= ============= =============
Earnings per share $ .04 $ .06 $ .17
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 4,318,444 3,796,077 3,933,005
============= ============= =============
COMPREHENSIVE INCOME
NET INCOME $ 188,866 $ 209,156 $ 682,458
OTHER COMPREHENSIVE INCOME, NET OF TAX:
UNREALIZED LOSSES ON SECURITIES
(NET OF TAX BENEFIT) (24,306) -- (6,791)
LESS: RECLASSIFICATION ADJUSTMENT
FOR LOSSES INCLUDED IN NET INCOME 6,791 -- 11,637
------------- ------------- -------------
COMPREHENSIVE INCOME $ 171,351 $ 209,156 $ 687,304
============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE> 7
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES AUTHORIZED
------------------------------
# of Accumulated
Shares Other Stock
# of Shares Treasury Common Treasury Retained Comprehensive Subscription
Issued 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) $ --
Issuance of common
stock 497,767 -- 4,977,670 -- -- -- --
Cost of issuance of
new stock -- -- (51,501) -- -- -- --
Stock options
exercised 35,000 -- 175,000 -- -- -- (15,000)
Retirement of
treasury stock (10,400) (10,400) (18,818) 18,818 -- -- --
Other comprehensive
income:
Unrealized losses
on securities -- -- -- -- -- 4,846 --
Net income for the
year ended
December 31, 1999 -- -- -- -- 682,458 -- --
------------- ------------- ------------- ------------- ------------- ------------- -------------
BALANCES AT
DECEMBER 31, 1999 4,318,444 -- -- -- 3,923,766 (6,791) (15,000)
Other comprehensive
income:
Unrealized losses
on securities -- -- 6,509,267 -- -- (17,515) --
Net income for the
three months ended
March 31, 2000 -- -- -- -- 188,866 -- --
------------- ------------- ------------- ------------- ------------- ------------- -------------
BALANCES AT
MARCH 31, 2000 4,318,444 $ 6,509,267 $ -- $ 4,122,632 $ (24,306) $ (15,000)
============= ============= ============= ============= ============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE> 8
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended
March 31, For the year ended
------------------------------ December 31
2000 1999 1999
------------- ------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 188,866 $ 209,156 $ 682,458
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 155,305 101,919 441,214
Amortization of discounts on securities -- -- (6,643)
Realized gain on sale of marketable securities (81,626) -- (6,621)
Deferred income taxes -- -- 54,147
(Increase) decrease in operating assets:
Accounts receivable (173,179) (189,731) (118,456)
Other receivable 42,993 -- (40,993)
Inventories 45,000 55,000 7,558
Prepaid expenses and other assets -- (40,000) 11,772
Increase (decrease) in operating liabilities:
Accounts payable 19,925 (71,767) (33,628)
Accrued expenses (19,600) 112,619 25,737
------------- ------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 177,684 177,196 1,016,545
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (1,973,011) (64,786) (1,845,570)
Sale of marketable securities 1,950,966 -- 645,968
Purchase of property and equipment (248,420) (121,585) (794,386)
------------- ------------- -------------
NET CASH PROVIDED BY (USED) IN
INVESTING ACTIVITIES (270,465) (186,371) (1,993,988)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- -- 5,137,670
Stock issuance costs -- -- (51,501)
Repayment of notes payable (17,582) (26,820) (96,218)
------------- ------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (17,582) (26,820) 4,989,951
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (111,613) (35,995) 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 $ 4,529,310 $ 592,420 $ 4,640,923
============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE> 9
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended
March 31, For the year ended
--------------------------- December 31
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 25,433 $ 25,840 $ 112,144
------------ ------------ ------------
Cash paid for income taxes $ 109,000 $ 50,000 $ 376,250
------------ ------------ ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of automobile by issuing a note payable $ -- $ 22,000 $ 22,000
------------ ------------ ------------
Issuance of common stock in exchange
For note payable $ -- $ -- $ 15,000
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE> 10
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 Farmer's Cheese";
a fruit sugar-flavored product similar in consistency to cream cheese sold under
the name of "Sweet Kiss"; and a new dairy beverage, similar to Kefir, with
increased protein and calcium, sold under the name "Basics Plus". The Company
also produces several soy-based products under the name "SoyTreat (TM) " 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 years ended December 31,
1999 and 1998, export sales of the Company were approximately $162,000 and
$298,000, 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:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its 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 over three
months or less are considered to be cash equivalents.
The Company maintains cash deposits at several institution located in the great
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
MARCH 31, 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 at March 31, 2000:
<TABLE>
<S> <C>
Amounts insured $ 374,486
Uninsured and uncollateralized amounts 375,158
------------
Total bank balances $ 749,644
============
</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
March 31, 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.
Deprecation 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
Lifeway Foods has a covenant not to compete, which is stated at cost and are
amortized over ten years using the straight-line method.
F-9
<PAGE> 12
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 three months ended March 31, 2000, $491,751 and
$190,801, 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 three months
ended March 31, 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
March 31, 2000 - Equities $ 1,585,212 $ 25,958 $ 50,264 $ 1,561,606
</TABLE>
Proceeds from the sale of marketable securities were $645,968 and $1,950,966 in
the year ended December 31, 1999, and the three months ended March 31, 2000,
respectively.
Gross gains of $6,621 and $81,626 were realized on those sales in the year ended
December 31,1999 and the three months ended March 31, 2000, respectively.
F-10
<PAGE> 13
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 AND DECEMBER 31, 1999
NOTE 4 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
--------------------------- DECEMBER 31,
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Finished goods $ 435,328 $ 534,362 $ 420,328
Production supplies 233,283 126,803 218,283
Raw materials 220,348 135,352 205,348
------------ ------------ ------------
$ 888,959 $ 796,517 $ 843,959
============ ============ ============
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
--------------------------- DECEMBER 31,
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 658,400 $ 658,400 $ 658,400
Buildings and improvements 2,538,942 2,047,455 2,538,942
Machinery and equipment 3,382,138 3,033,076 3,133,718
Vehicles 222,443 119,770 222,443
Office equipment 71,532 71,532 71,532
------------ ------------ ------------
$ 6,873,455 $ 5,930,233 $ 6,625,035
============ ============ ============
</TABLE>
Depreciation charged to income for the three months ended March 31, 2000 and
1999 was $154,055 and $100,669 respectively, and $436,214 for the year ended
December 31, 1999.
F-11
<PAGE> 14
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,2000 AND 1999 AND DECEMBER 31, 1999
NOTE 6 - NOTES PAYABLE
<TABLE>
<CAPTION>
(Unaudited)
March 31,
------------------------------- 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. $ 172,518 $ 180,890 $ 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. Collateralized by real estate. 384,328 393,409 386,590
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. 725,503 786,811 735,721
Note payable, Ford Motor credit, payable in monthly installments of $540,
including interest at 1.9%, due October 2001. Collateralized by vehicle. 10,094 16,315 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. 15,760 20,832 17,146
-------------- -------------- --------------
Total 1,308,203 1,398,257 1,325,785
Less current maturities 99,420 90,536 91,920
-------------- -------------- --------------
Total $ 1,208,783 $ 1,307,721 $ 1,233,865
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ending March 31,
<S> <C>
2000 $ 99,420
2001 695,830
2002 24,360
2003 488,593
------------
Total $ 1,308,203
============
</TABLE>
F-11
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,2000 AND 1999 AND DECEMBER 31, 1999
NOTE 7 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended
March 31, For the year ended
---------------------------------- December 31
2000 1999 1999
--------------- --------------- ------------------
<S> <C> <C> <C>
Current
Federal $ 97,300 $ 107,748 $ 274,263
State 22,100 24,436 58,914
--------------- --------------- ---------------
Total current 119,400 132,184 333,177
Deferred 0 0 54,147
--------------- --------------- ---------------
Provision for income taxes $ 119,400 $ 132,184 $ 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)
For the three months ended
March 31, For the year ended
---------------------------------- December 31
2000 1999 1999
--------------- --------------- ------------------
<S> <C> <C> <C>
Federal income tax expense
computed at the statutory rate $ 97,300 $ 107,748 $ 337,635
State taxes, expense 22,100 24,436 76,739
Permanent book/tax differences (8,000) 0 (27,050)
--------------- --------------- ---------------
Provision for income taxes $ 119,400 $ 132,184 $ 387,324
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Amounts for deferred tax assets and liabilities are as follows: MARCH 31, DEC 31,
2000 1999
------------ ------------
<S> <C> <C>
Non-current deferred tax liabilities arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $ 247,673 $ 247,673
Total deferred tax liabilities $ 247,673 $ 247,673
Current deferred tax assets arising from:
Book/tax, allowance for unrealized losses $ 3,931 $ 3,931
Book/tax, inventory 48,431 48,431
------------ ------------
Total deferred tax assets 52,362 52,362
------------ ------------
Net deferred tax liability $ 195,311 $ 195,311
============ ============
</TABLE>
F-12
<PAGE> 16
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,2000 AND 1999 AND DECEMBER 31, 1999
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
March 31, 2000, no customers Comprised over 10% of sales.
NOTE 9- INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DEC. 31,
2000 1999
------------ ------------
<S> <C> <C>
Covenant Not to Compete $ 50,000 $ 50,000
Less: Accumulated amortization 46,250 45,000
------------ ------------
$ 3,750 $ 5.000
============ ============
</TABLE>
Total Amortization charged against income for the three months ended March 31,
2000 and 1999 was $ 1,250 respectively, and $ 5,000 for the last 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.
The option price, number of shares, grant date and vesting terms are
determined at the discretion of the Company's Board of Directors.
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.
F-13
<PAGE> 17
LIFEWAY FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,2000 AND 1999 AND DECEMBER 31, 1999
NOTE 10- STOCK OPTION PLANS (CONTINUED)
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 -- --
Exercised (35,000) 5.00
Forfeited (by agreement) (20,000) --
----------
Outstanding and exercisable at December 31, 1999 -- 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 at March 31,
2000:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 4,529,310 $ 4,529,310
Marketable securities 1,561,606 1,561,606
Notes payable 1,308,203 1,259,225
----------- -----------
</TABLE>
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 discounted 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 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 with 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 offering and
limited registration rights.
F-14
<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 $419,459, up to $2,272,786 during the three month
period ending March 31, 2000, from $1,853,327 during the same three month period
in 1999 (a 23% increase). This increase is attributable to increased sales of
existing products. However, net income decreased by $20,290, down to $188,866
for the three month period ending March 31, 2000, from $209,156 during the same
three month period in 1999 (a 10% decrease). This small 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 $252,093, up to $1,136,756 during the
three month period ending March 31, 2000, from $884,663 during the same three
month period in 1999 (a 28% increase). This increase corresponds with the
increased Sales.
Operating expenses increased by $300,020, up to $909,618 for the three
month period ending March 31, 2000, from $609,598 during the same three month
period in 1999 (a 49% increase). This increase is primarily attributable to
increased marketing and advertising expenses.
(2) Liquidity and Capital Resources
As of March 31, 2000, as compared to March 31, 1999, the Company had
working capital in the amount of $7,412,841 as compared to $2,148,918,
respectively, an increase of $5,263,923. This increase is attributable to
increases in current assets, primarily cash on hand ($3,936,890 increase) and
marketable securities ($1,396,385 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 March 31, 2000 was $4,622,558, a
$453,620 increase from $4,168,938 as of March 31, 1999. This increase is due to
the purchase of $943,222 of additional machinery and equipment, and is partially
offset by increased depreciation of $489,602.
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
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.
ITEM 2. CHANGES IN SECURITIES - None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - None.
ITEM 5. OTHER INFORMATION - None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number and Brief Description
3.1 Articles of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999.)
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.)
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
On January 11, 2000, The Company filed a current report on Form 8-K to
report that on December 24, 1999, the Company entered into additional agreements
with Danone, including a Support Agreement, and to announce the appointment of
Thomas Kunz, the nominee of Danone, to the board of directors of the Company.
3
<PAGE> 20
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LIFEWAY FOODS, INC.
By: /s/ Michael Smolyansky
---------------------------------------------
Michael Smolyansky, Chief Executive Officer,
Chief Financial and Accounting Officer,
President, Treasurer and Director
Date: May 12, 2000
4
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Articles of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999.)
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.)
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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM A FORM
10-QSB FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,529,310
<SECURITIES> 1,561,606
<RECEIVABLES> 1,153,104
<ALLOWANCES> 0
<INVENTORY> 888,959
<CURRENT-ASSETS> 8,185,341
<PP&E> 6,873,455
<DEPRECIATION> 2,250,897
<TOTAL-ASSETS> 12,811,649
<CURRENT-LIABILITIES> 772,500
<BONDS> 1,208,783
0
0
<COMMON> 6,509,267
<OTHER-SE> 4,073,326
<TOTAL-LIABILITY-AND-EQUITY> 12,811,649
<SALES> 2,272,286
<TOTAL-REVENUES> 2,272,286
<CGS> 1,136,756
<TOTAL-COSTS> 909,618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,433
<INCOME-PRETAX> 308,266
<INCOME-TAX> 119,400
<INCOME-CONTINUING> 188,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 188,866
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
