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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from: to
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Commission file number: 0-17363
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LIFEWAY FOODS, INC.
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(Name of small business issuer as specified in its charter)
ILLINOIS 36-3442829
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(State or other jurisdiction of IRS Employer Identification No.)
incorporation or organization)
6431 WEST OAKTON, MORTON GROVE, ILLINOIS 60053
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (847) 967-1010
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Securities registered under Section 12(b) of the Exchange Act: NONE
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $7,907,571
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State the aggregate market value of the voting stock held by
non-affiliates, approximately 1,247,216 shares, computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within the past 60 days. $9,276,169 OF FEBRUARY
11, 2000, BASED ON THE AVERAGE CLOSING BID AND ASKED PRICES OF $7.4375 PER SHARE
AS QUOTED ON NASDAQ.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 4,318,444 SHARES OF COMMON
STOCK AS OF MARCH 21, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Notice of Annual Meeting and Proxy Statement for the
Registrant's 1999 Annual Meeting of Shareholders, scheduled to be held June 17,
2000, are incorporated by reference in Part III.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO
DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially for those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earning or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management of Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the Company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
Lifeway Foods, Inc. (the "Company") commenced operations in February,
1986, and was incorporated under the laws of the State of Illinois on May 19,
1986. The Company's primary product is kefir, a drinkable product similar to but
distinct from yogurt, in several flavors sold under the name "Lifeway's Kefir";
a plain farmer's cheese sold under the name "Lifeway's Farmer's Cheese"; fruit
sugar-flavored product similar in consistency to cream cheese sold under the
name of "Sweet Kiss;" and other kefir-based products. The Company also produces
several soy-based products and a vegetable-based seasoning under the name
"Golden Zesta." The Company distributes its products primarily throughout the
United States. The Company also distributes some of its products internationally
by exporting to Eastern Europe.
(a)(1) Subsidiary Corporation
LFI Enterprises, Inc.
On September 30, 1992, the Company formed a wholly-owned subsidiary
corporation, LFI Enterprises, Inc. ("LFIE"), incorporated in the State of
Illinois. LFIE operates a "Russian" theme restaurant and supper club facility,
known as "Moscow Nites," catering to the Chicago area's Russian and East
European ethnic communities.
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(b) Business of Issuer
(b)(1) Products
The Company's primary product is kefir which, like the better-known
product of yogurt, is a fermented dairy product. Kefir has a slightly
effervescent quality, with a taste similar to yogurt and a consistency similar
to buttermilk. It is a distinct product from yogurt because it uses the unique
microorganisms of kefir as the culture to ferment the milk. The Company's basic
kefir is a drinkable product intended for use as a breakfast meal or a snack, or
as a base for lower-calorie dressings, dips, soups or sauces. The kefir is also
used as the base of the Company's plain farmer's cheese, a cheese without salt,
sugar or animal rennet. In addition, kefir is the primary ingredient of the
Company's "Sweet Kiss" product, a fruit sugar-flavored, cream cheese-like spread
which is intended to be used as a dessert spread or frosting.
Kefir contains a unique mixture of several live microorganisms and body
nutrients such as proteins, minerals and vitamins. Kefir is highly digestible
and, due to its acidity and enzymes, stimulates digestion of other foods. Kefir
is considered to be the most favorable milk product for people suffering from
genetically stipulated lactose intolerance. Studies indicate that kefir seems to
stimulate protein digestion and appetite, decrease the cholesterol content in
blood, improve salivation and excretion of stomach and pancreatic enzymes and
peristalsis. As compared to yogurt, many Naturopathic doctors consider kefir to
be the best remedy for digestive troubles because it has a very low curd tension
(the curd breaks up very easily into small particles). The curd of yogurt, on
the other hand, holds together or breaks into lumps. The small size of the kefir
curd facilitates digestion by presenting a large surface for the digestive
agents to work on.
Kefir is a good source of calcium, protein, and Vitamin B-complex. In
addition, because the fermentation process produces a less sour tasting product
than yogurt, less sugar is required to make a desirable product, and the end
product contains fewer calories.
The Company's currently sells the products listed below to various
retail establishments including supermarkets, grocery stores, gourmet shops,
delicatessens and convenience stores.
LIFEWAY'S KEFIR. "Lifeway's Kefir" is a drinkable kefir product
manufactured in eleven flavors - plain (regular and low-fat), raspberry,
blueberry, strawberry, cherry, peach, banana-strawberry, cappuccino, chocolate
and vanilla -- in 32 ounce containers featuring color-coded caps and labels
describing nutritional information. In March 1996, the Company began marketing
its fat-free, low cholesterol kefir in six flavors. The kefir product is
currently marketed under the name "Lifeway's Kefir," and is sold from the dairy
section. Lifeway's Kefir has a shelf life of approximately 60 days. All flavors
contain fructose, fruit juice, kefir culture, and pasteurized, low-fat milk and
natural flavorings.
GOLDEN ZESTA. "Golden Zesta" is a vegetable-based seasoning which,
because of its low sodium content, may also be used as a salt substitute.
FARMER'S CHEESE. "Farmer's Cheese" is based on a cultured soft cheese
and is intended to be used in a variety of recipes as a lowfat, low-cholesterol,
low-calorie substitute for cream cheese or ricotta, and is available in regular
and Swiss style.
ELITA. "Elita" is a low-fat, low-cholesterol spreadable kefir product
which is marketed as an alternative to cream cheese.
KWASHENKA. "Kwashenka" is a kefir product that is designed to be eaten
with a spoon, like most yogurt products.
BASICS PLUS. "Basics Plus" is a kefir-based beverage product designed
to improve gastrointestinal functions and, thus, enhance the immune system. This
product contains certain "passive immunity products" produced by GalaGen, Inc.
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SOYTREAT. SoyTreat is a non-dairy alternative to kefir made from
organic soy milk, which is derived from non-genetically modified soybeans.
SoyTreat can be consumed by those who desire the benefits of kefir, but are
either lactose intolerant or vegan. SoyTreat also provides 6.25g of soy protein
per serving, and features the FDA health claim, "25g of soy protein a day as
part of a diet low in saturated fat can help lower cholesterol and reduce the
risk of heart disease."
KRESTYANSKI TWOROG. Krestyanski Tworog is a European kefir-based soft
style cheese which can also be used in a variety of recipes, eaten with a spoon,
used as a cheese spread, or substituted in recipes for cream cheese, ricotta
cheese, or cottage cheese.
KEFIR STARTER. "Kefir Starter" is a powder form of kefir that is sold
in envelope packets and allows a consumer to make their own drinkable kefir at
home by adding milk, and is developing sales of the product internationally and
via the internet.
The Company intends to continue to develop new products, such as salad
dressing and a frozen dessert product based on kefir and Farmer's Cheese,
although there is no assurance that such products can be developed successfully
or marketed profitably.
(b)(2) Distribution
With its seven Company-owned trucks, the Company distributes its
products directly to over 1,200 stores in the State of Illinois, including major
retail chains such as Jewel Food Stores, Dominick's Finer Foods, Wild Oats
Markets, Treasure Island Food Marts, Whole Foods, Cub Foods and Butera Food
Stores.
In addition to the State of Illinois, the Company's products are
distributed to over 7,000 stores throughout the United States. The Company has
verbal distribution arrangements with various distributors throughout the United
States. These verbal distribution arrangements, in the opinion of the Company,
allow management the necessary latitude to expand into new areas and markets and
establish new relationships with distributors on an ongoing basis. The Company
has not offered any exclusive territories to any distributors.
These distributors are provided Lifeway products at wholesale prices
for distribution to their retail accounts. The Company believes that the price
at which its products are sold to its distributors is competitive with the
prices generally paid by distributors for similar products in the markets
served. In all areas served, distributors currently deliver the products
directly to the refrigerated cases of dairy sections of the retail stores. Each
distributor carries the full complement of Lifeway's products on its trucks, and
checks the retail stores for space allocated to Lifeway's products, determines
inventory requirements, and places Lifeway products directly into the case. The
Company prefers such method of distribution in order to serve the needs of each
retail store, and to ensure consistency and quality of product handling, quality
control, flavor selection and retail display. Under the distribution
arrangements, each distributor must meet certain prescribed product handling,
service and administrative requirements including, among others, frequency of
delivery, replacement of damaged, old or substandard packages, and delivery of
products directly to the refrigerated case.
Additionally, the Company distributes its products internationally by
exporting to Canada, Russia and the Ukraine.
(b)(3) Marketing
The Company continues to promote the verifiable nutritional
characteristics, purity of product, and good taste of its kefir and kefir-based
products. The Company primarily advertises its products through local radio
stations, which are directed to both users and non-users of cultured milk
products of all kinds. In addition, through newspapers and magazines, the
Company provides educational information on its products and appeals to the
common perception that the products may be of particular benefit for a wide
range of ills, including intestinal disorders, and continues to educate the
public on the possible health benefits which could be derived from the use of
kefir and kefir-based products. Although no scientific studies have proven the
certainty of such unverifiable health
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claims, the Company believes that the potential for healthful benefits as
suggested by such studies can serve as the basis for an advertising strategy.
In addition to local radio stations, newspapers and magazines, the
Company receives further exposure of its products through the internet, catalog
advertising and promotion, inside store demonstrations throughout the U.S, and
participation in various trade shows.
On December 24, 1999, the Company entered into a Support Agreement with
a subsidiary of Group Danone. The primary purpose of the Support Agreement,
which provides for an initial term of three years and is renewable annually
thereafter, is to allow the Company access to Danone's brokers and distributors
in the United States.
(b)(4) Competition
Although the Company faces very little direct competition in the United
States for the kefir market, the Company's kefir-based products are subject to
competition from other yogurt and other dairy products. Many producers of yogurt
and other dairy products are well-established and have significantly greater
financial resources than the Company.
In connection with the Support Agreement between the Company and
Danone, the parties agreed that they would not compete with each other during
the term of the Support Agreement and for three years after termination of the
agreement with respect to certain yogurt, cheese and kefir products.
Specifically, the Company agreed not to produce or sell any type of yogurt,
fromage frais, Italian style cheese, chilled desserts or any soy-based products,
other than those that are kefir based or are already being produced and sold by
the Company, in the U.S. and Western Europe; and Danone agreed not to produce or
sell any type of kefir-based products in the U.S.
(b)(5) Suppliers
The Company purchases its raw materials, such as milk, sugar and fruit,
from unaffiliated suppliers, and is not limited or contractually bound to any
one. Prior to making any purchase, the Company determines which supplier can
offer the lowest price for the highest quality of product. The raw and packaging
materials purchased by the Company are considered commodity items and are widely
available on the open market. The Company owns and operates the means of
production of all of its products.
(b)(6) Major Customers
The Company distributes its products to more than 400 accounts
throughout the U.S. Concentrations of credit with regard to trade accounts
receivable and sales are limited due to the fact that the Company's customers
are spread across different geographic areas. The customers are concentrated in
the retail food industry. In 1999, no customer comprised over 10% of sales.
(b)(7) Patents, Trademarks, Licenses, Franchises, Concessions, Royalty
Agreements, Labor Contracts
On December 12, 1989, and June 12, 1990, the U.S. Patent and Trademark
Office granted the Company exclusive trademarks for the names "Lifeway's" and
"Healthy Eating," respectively. In addition, on January 10, 1992, the Company
was granted a trademark for the name "Lifeway's" for its use in Canada since
September 9, 1988. On December 12, 1999, the U.S. Patent and Trademark Office
granted the Company a ten year renewal of the "Lifeway's" trademark.
On December 27, 1990, the Company purchased the Tuscan brand-name
liquid yogurt customer list along with a limited license of the trademark and
use of the Tuscan liquid yogurt U.P.C. codes from a third party.
On June 30, 1992, the Company was granted trademarks for grain based,
non-alcoholic beverages, although it has no claim to the exclusive right to use
the names "KVAS," "KBAC" or "KWASS," apart from the
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mark as shown on the Principal Register. Although the Company has developed the
product under this trademark, it is not currently marketing it.
On August 19, 1997, the Company received trademark approval from the
U.S. Patent and Trademark Office for the stylized drawing trademark for Golden
Zesta.
On February 10, 1998, the Company received trademark approval from the
U.S. Patent and Trademark Office for the trademark "Sweet Kiss," for its fruit
sugar-flavored product similar in consistency to cream cheese.
On February 10, 1998, the Company received trademark approval from the
U.S. Patent and Trademark Office for the trademark "Kwashenka," for its
spoonable kefir.
On October 17, 1997, GalaGen, Inc., made application to the U.S. Patent
and Trademark Office for the trademark "Basics Plus" for kefir-based products In
July 1998, GalaGen, Inc., assigned the entire interest, including goodwill, of
the product to the Company. On September 7, 1999, the U.S. Patent and Trademark
Office granted the Company registration for the trademark "Basics Plus." The
Company has a nonexclusive license from GalaGen, Inc., to use the trademark
"Proventra" in connection with the Company's sales and marketing of "Basics
Plus."
On September 8, 1998, the Company received trademark approval from the
U.S. Patent and Trademark Office for the trademark "Krestyanski" under which the
Company sells cheese products in the United States.
In October 1998 the Company finalized a sublicense agreement with
GalaGen, Inc., with an effective date of May 1, 1998. Pursuant to the agreement,
the Company obtained the exclusive worldwide rights to two patents, for the
duration of the patents, to produce and sell kefir-culture based products which
contain immunoglobulins such as the Company's new functional food product,
Basics Plus. GalaGen is the Company's supplier of the Proventra brand natural
immune components used in Basics Plus. The owner of the patents is Metagenics,
Incorporated. In exchange for such rights, the Company pays a royalty to
Metagenics of one percent of the net sales price of any kefir-culture based
products which contain immunoglobulins.
On September 11, 1999 the Company made application to the U.S. Patent
and Trademark office to register the name "SoyTreat" as a trademark.
In addition, the Company maintains various state licenses and permits
required to operate its businesses, including a restaurant and liquor license,
renewed annually, held by the Company's wholly-owned subsidiary, LFI
Enterprises, Inc., for the operation of its "Russian" theme restaurant and
supper club.
(b)(8) Regulation
The Company is subject to regulation by federal, state and local
governmental authorities regarding the distribution and sale of food products.
Although the Company believes that it currently has all material government
permits, licenses, qualifications and approvals for its operations, there can be
no assurance that the Company will be able to maintain its existing licenses and
permits or to obtain any future licenses, permits, qualifications or approvals
which may be required for the operation of the Company's business. The Company
believes that it is currently in compliance with all applicable environmental
laws.
(b)(9) Research and Development
The Company continues its program of new product development, centered
around the nutritional and "low calorie" features of its proprietary kefir
formulas.
The Company conducts primarily all of its research internally, but at
times will employ the services of an outside testing facility. During 1999, the
amount the Company expended for research and new product development was not
material to the financial position of the Company.
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(b)(10) Employees
The Company and its subsidiary, LFI Enterprises, Inc., currently employ
approximately 47 employees, 4 of whom are part-time employees. Approximately 42
of those employees are engaged in the manufacturing process of the Company's
kefir and kefir-based products and 5 are employed in the restaurant operation.
None of the Company's employees are covered by collective bargaining agreements.
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ITEM 2. DESCRIPTION OF PROPERTY.
On May 16, 1988, the Company purchased a 26,000 square foot parcel of
real property, including an 8,500 square foot one-story building, located at
7625 N. Austin Avenue, Skokie, Illinois. The purpose of the purchase was to
enable the Company to expand its production facilities and capacity pursuant to
its business plan and growing demand for its product. The Company brought the
facility to full capacity and completed its remodeling in 1994. In addition to
the increase in capacity, because of improved storage facilities, the Company
has been able to incur savings in the purchase of milk and other raw materials,
by virtue of its increased capacity to store bulk purchases. The loan to the
Company from 1st National Bank of Morton Grove, collateralized by the real
estate, was refinanced in 1998 and is payable in monthly installments of $1,767,
including interest at 7.25%, with a balloon payment of $139,838 due November,
2003. At December 31, 1999, the loan had a balance of $174,668.
On October 9, 1992, the Company purchased certain real estate located
at 7800 N. Caldwell, Niles, Illinois. This property consists of approximately
75,000 square feet of commercially zoned property, and a 7,750 square foot
building. The loan to the Company from American National Bank and Trust Company
of Chicago, collateralized by the real estate, was refinanced in 1998 and has a
balloon payment of $343,151 due in August 2003 and carries an interest rate of
7.25% per annum. The Company's monthly payments are $3,161. At December 31,
1999, the loan had a balance of $386,590. The Company refurbished the property
in late 1992 and put it into productive use as a supper club facility, known as
"Moscow Nites," catering to the Chicago area's Russian and East European ethnic
communities. The premises are operated by the Company's wholly-owned subsidiary,
LFI Enterprises, Inc., an Illinois corporation.
On October 16, 1996, the Company purchased a 110,000 square foot parcel
of real property, zoned commercial, including a 46,000 square foot one-story
building, located at 6431 Oakton Avenue, Morton Grove, Illinois. The purchase
enabled the Company to further expand its production facilities and capacity.
The loan to the Company from American National Bank and Trust Company of
Chicago, collateralized by the real estate, has a balloon payment of $618,214
due in November 2001. The mortgage note is payable in monthly installments of
principal of $5,109 plus interest at 8.05%. At December 31, 1999, the loan had a
balance of $735,721.
For financial statement and tax purposes, the Company depreciates its
real property buildings on a straight line basis over 31 to 39 years.
The Company believes it has adequate insurance coverage for all its
properties.
ITEM 3. LEGAL PROCEEDINGS.
The Company filed a lawsuit against Fresh Made, Inc. in August 1999, in
United State District Court, Eastern District of New York, Civil Action No. CV
99 4830. The lawsuit primarily claims intentional trademark infringement of the
Company's federally registered trademark for a Russian term transliterated as
"Krest'yanskiy" which the Company uses on one brand of its kefir cheese. The
Company is seeking monetary damages and injunctive relief.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 1999, to a vote of security holders through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The Company's Common Stock, no par value, the only class of common
equity of the Company, is traded on the National Association of Securities
Dealer's Automated Quotation System ("NASDAQ") under the symbol "LWAY." Trading
commenced on March 29, 1988.
The range of high and low bid quotations for the Company's Common Stock
for the quarterly periods within the two most recent fiscal years, as reported
on America Online quotation services, is set forth in the following table:
<TABLE>
<CAPTION>
Low Bid High Bid
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<S> <C> <C>
1st Qtr. 1998 $7.50 $9.375
2nd Qtr. 1998 $6.00 $7.5625
3rd Qtr. 1998 $4.50 $6.25
4th Qtr. 1998 $3.00 $6.25
1st Qtr. 1999 $3.50 $5.00
2nd Qtr. 1999 $3.56 $7.875
3rd Qtr. 1999 $6.00 $9.50
4th Qtr. 1999 $6.0625 $8.625
</TABLE>
(b) Holders
As of March 21, 2000, there were approximately 155 holders of record of
the Company's Common Stock (not including beneficial owners holding in
"street-name").
(c) Dividends
The Company has paid no cash dividends on its Common Stock and
management does not anticipate that such dividends will be paid in the
foreseeable future.
(d) Sales of Unregistered Securities
On October 1, 1999, the Company issued and sold 497,767 shares of
restricted common stock to Danone Foods, Inc. ("Danone"), a subsidiary of Groupe
Danone based in Paris, France. The purchase price paid to the Registrant was
$10.00 per share, for gross proceeds of $4,977,670. This transaction did not
involve any public offering, no sales commissions were paid, and a restrictive
legend was placed on each certificate evidencing the shares. The Company
believes that issuance of the shares of common stock was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(a) Management's Discussion and Analysis of Financial Condition and Results
of Operations
(a)(1) Results of Operations
For the year ended December 31, 1999, sales were $7,907,571, which is a
$1,112,472 (or 16%) increase from $6,795,099 in 1998. This increase is primarily
attributable to increased sales of existing products as a result of increased
advertising and marketing in 1999.
Cost of Goods Sold as a percentage of sales was 59% in 1999, which is
an increase over 54% in 1998. The increase in Cost of Goods Sold is primarily
attributable to increased costs of raw materials in 1999, and also increased
costs of direct labor resulting from the expansion of the Company's
manufacturing facilities and the increased sales in 1999.
Operating Expenses for 1999 were $2,177,637, which is a $419,049
increase from $1,758,588. This increase is primarily attributable to increased
marketing and advertising expenses in 1999.
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While 1999 was a record year for sales, Net Income for 1999 was
$682,458, which is a decrease of $80,158 from $762,616 in 1998. This decrease is
primarily due to two factors. First, operating expenses in 1999 increased by
24%, primarily as a result of the expansion of the Company's manufacturing
facilities. Second advertising expenses more than doubled, from $240,636 in 1998
to $491,751 in 1999, as a result of the Company's expanding marketing efforts.
Earnings per share in 1999 was $.17, which is a $.03 per share decrease
from 1998. However, in 1999, the weighted average number of shares outstanding
increased by 4% as a result of the issuance and sale of common stock to Groupe
Danone (described below). Also, in furtherance of the Company's plan to spend
more earnings on marketing and advertising, the Company expended the equivalent
of approximately $.13 per share (based on the weighted average number of shares
outstanding) on advertising in 1999.
(a)(2) Liquidity and Capital Resources
As of December 31, 1999, the Company had working capital in the amount
of $7,359,587, cash and cash equivalents in the amount of $4,640,923, and
marketable securities of $1,564,200. These amount are a significant increase
over 1998 due to an equity investment of almost $5 million by Groupe Danone
(described below). The Company expects all cash requirements can be met
internally for the next 12-month period.
Net cash provided by operating activities increased by $166,146, to
$1,016,545 in 1999, from $850,399 in 1998. This increase is primarily due to
increased sales.
Net cash provided by financing activities was $4,989,951 in 1999,
compared to net cash used in investing activities of $92,335 in 1998. This
substantial increase was the result of the proceeds from the issuance of common
stock upon exercise of stock options and an investment of almost $5 million from
Groupe Danone (described below).
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.
TRANSACTIONS WITH GROUPE DANONE
On October 1, 1999, the Company issued and sold 497,767 shares of
restricted common stock to Danone Foods, Inc. ("Danone"), a subsidiary of Groupe
Danone based in Paris, France. The purchase price paid to the Company was $10.00
per share, for gross proceeds of $4,977,670.
Pursuant to the terms and conditions of a Stock Purchase Agreement and
a Stockholders' Agreement, the Company granted certain limited rights to Danone,
which include a right to nominate one director, anti-dilutive rights relating to
future offerings, and limited registration rights.
The Company and Danone also agreed that they would not compete with
each other for a period of five years with respect to certain yogurt, cheese and
kefir products.
In connection with the transaction, Danone also purchased 150,000
outstanding shares of common stock from certain shareholders, including the
Company's controlling shareholder, on similar terms. As a result of these
purchases, Danone became the beneficial owner of 15% of the outstanding common
stock of the Company.
Subsequent to the initial transactions described above, Danone
purchased an additional 215,922 shares of common stock in private transactions
with certain shareholders, including the Company's controlling shareholder and
two other affiliates. As a result of these additional purchases, Danone is
presently the beneficial owner of 20% of the outstanding common stock of the
Company. The parties have agreed that, subject to limited exceptions, for a
period of five years, Danone may not own more than 20% of the outstanding common
stock of the Company.
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<PAGE> 11
On November 15, 1999, Mr. Thomas Kunz, as the nominee of Danone, joined
the Board of Directors. Mr. Kunz is President and CEO of The Dannon Company,
Inc. In this position, Mr. Kunz has strategic and direct responsibilities for
Groupe Danone's dairy products in the U.S. and Canada as well as worldwide
category responsibility for dairy desserts.
On December 24, 1999, the Company entered into a Support Agreement with
The Dannon Company, Inc. (a subsidiary of Danone). The primary purpose of the
Support Agreement, which provides for an initial term of three years and is
renewable annually thereafter, is to allow the Company access to Danone's
brokers and distributors in the United States. The parties agreed that they
would not compete with each other during the term of the Support Agreement and
for three years after termination of the agreement with respect to certain
yogurt, cheese and kefir products.
On December 24, 1999, the Company also entered into a letter agreement
which amended the original Stockholders' Agreement with Danone. The purposes of
the amendments were to 1) clarify that Danone's anti-dilutive rights, Danone's
Right of First Refusal, and Michael Smolyansky's reciprocal Right of First
Refusal would apply to any form of capital stock (not just common stock); and 2)
that the parties shall cause a vote at the next annual shareholders' meeting to
amend the Articles of Incorporation to clarify that the Company has the power to
grant preemptive rights to any of its shareholders by contract.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements that constitute Item 7 of this
report and a table of contents thereto commence on page F-1 through F-16, which
pages follow this page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTANT AND
FINANCIAL DISCLOSURE
None.
11
<PAGE> 12
LIFEWAY FOODS, INC. AND SUBSIDIARY
ANNUAL REPORT
DECEMBER 31, 1999 AND 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................... F2
Consolidated Balance Sheet............................................ F3-F4
Consolidated Statements of Income and Comprehensive Income............ F5
Consolidated Statements of Changes in Stockholders' Equity............ F6
Consolidated Statements of Cash Flows................................. F7-F8
Notes to Consolidated Financial Statements............................ F9-F16
</TABLE>
<PAGE> 13
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
LIFEWAY FOODS, INC. AND SUBSIDIARY
Skokie, Illinois
We have audited the consolidated balance sheet of LIFEWAY FOODS, INC. AND
SUBSIDIARY as of December 31, 1999 and the related consolidated statements of
income and comprehensive income, changes in stockholders' equity, and cash flows
for the years ended December 31, 1999 and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LIFEWAY FOODS, INC. AND
SUBSIDIARY as of December 31, 1999, and the results of their operations and
their cash flows for the years ended December 31, 1999 and 1998 in conformity
with generally accepted accounting principles.
/s/ Gleeson, Sklar, Sawyers & Cumpata LLP
Gleeson, Sklar, Sawyers & Cumpata LLP
Elgin, Illinois
February 14, 2000
F2
<PAGE> 14
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,640,923
Marketable securities 1,564,200
Accounts receivable 965,725
Other receivables 57,193
Inventories 843,959
Deferred income taxes 52,362
------------
TOTAL CURRENT ASSETS 8,124,362
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 658,400
Buildings, machinery and equipment 5,966,635
------------
Total 6,625,035
Less accumulated depreciation (2,096,842)
------------
PROPERTY, PLANT AND EQUIPMENT, NET 4,528,193
OTHER ASSETS
INTANGIBLE ASSET, NET 5,000
------------
TOTAL ASSETS $ 12,657,555
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F3
<PAGE> 15
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - CONTINUED
DECEMBER 31, 1999
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable $ 91,920
Accounts payable 480,043
Accrued expenses 192,812
------------
TOTAL CURRENT LIABILITIES 764,775
LONG-TERM LIABILITIES 1,233,865
DEFERRED INCOME TAXES 247,673
STOCKHOLDERS' EQUITY
Common stock 6,509,267
Stock subscription receivable (15,000)
Retained earnings 3,923,766
Accumulated other comprehensive income, net of tax (6,791)
------------
TOTAL STOCKHOLDERS' EQUITY 10,411,242
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,657,555
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F4
<PAGE> 16
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
SALES $ 7,907,571 $ 6,795,099
Cost of goods sold 4,664,987 3,697,080
----------- -----------
GROSS PROFIT 3,242,584 3,098,019
Operating expenses 2,177,637 1,758,588
----------- -----------
INCOME FROM OPERATIONS 1,064,947 1,339,431
Other income (expense):
Interest and dividend income 110,358 38,104
Interest expense (112,144) (106,222)
Gain on sale of marketable securities 6,621 34,624
----------- -----------
Total other income (expense) 4,835 (33,494)
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,069,782 1,305,937
Provision for income taxes 387,324 543,321
----------- -----------
NET INCOME $ 682,458 $ 762,616
=========== ===========
EARNINGS PER SHARE COMMON SHARE $ 0.17 $ 0.20
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,933,005 3,781,355
=========== ===========
COMPREHENSIVE INCOME:
NET INCOME $ 682,458 $ 762,616
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized losses on securities (net of tax benefits of
$3,931 and $9,994) (6,791) (11,637)
Less: reclassification adjustment for losses included
in net income 11,637 --
----------- -----------
COMPREHENSIVE INCOME $ 687,304 $ 750,979
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F5
<PAGE> 17
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK, NO PAR VALUE
10,000,000 SHARES
AUTHORIZED # OF SHARES
---------------------------- OF STOCK
# OF SHARES # OF SHARES TREASURY COMMON SUBSCRIPTION
ISSUED OUTSTANDING STOCK STOCK RECEIVABLE
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1997 3,789,277 3,789,277 10,400 $ 1,396,316 $ --
Stock issued in exchange for
services rendered 6,800 6,800 -- 30,600 --
Other comprehensive income:
Unrealized losses on securities -- -- -- -- --
Net income for the year
ended December 31, 1998 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1998 3,796,077 3,796,077 10,400 $ 1,426,916 $ --
Issuance of common stock 497,767 497,767 -- 4,977,670 --
Cost of issuance of new stock -- -- -- (51,501) --
Stock options exercised 35,000 35,000 -- 175,000 (15,000)
Retirement of treasury stock (10,400) (10,400) (10,400) (18,818) --
Other comprehensive income:
Unrealized losses on securities, net of
reclassification adjustment -- -- -- -- --
Net income for the year
ended December 31, 1999 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1999 4,318,444 4,318,444 -- $ 6,509,267 $ (15,000)
=========== =========== =========== =========== ===========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
TREASURY RETAINED INCOME,
STOCK EARNINGS NET OF TAX
----------- ----------- -------------
<S> <C> <C> <C>
BALANCES AT DECEMBER 31, 1997 $ (18,818) $ 2,478,692 $ --
Stock issued in exchange for
services rendered -- -- --
Other comprehensive income:
Unrealized losses on securities -- -- (11,637)
Net income for the year
ended December 31, 1998 -- 762,616 --
----------- ----------- --------
BALANCES AT DECEMBER 31, 1998 $ (18,818) $ 3,241,308 (11,637)
Issuance of common stock -- -- --
Cost of issuance of new stock -- -- --
Stock options exercised -- -- --
Retirement of treasury stock 18,818 -- --
Other comprehensive income:
Unrealized losses on securities, net of
reclassification adjustment -- -- 4,846
Net income for the year
ended December 31, 1999 -- 682,458 --
----------- ----------- --------
BALANCES AT DECEMBER 31, 1999 $ -- $ 3,923,766 (6,791)
=========== =========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F6
<PAGE> 18
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 682,458 $ 762,616
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 441,214 391,007
Amortization of discounts on securities (6,643) --
Gain on sale of marketable securities (6,621) (34,624)
Issuance of common stock in exchange
for services rendered -- 30,600
Decrease in allowance for doubtful accounts -- (48,000)
Deferred income taxes 54,147 115,217
(Increase) decrease in operating assets:
Accounts receivable (118,456) 18,976
Other receivables (40,993) (1,000)
Inventories 7,558 (237,495)
Prepaid expenses and other assets 11,772 (4,058)
Increase (decrease) in operating liabilities:
Accounts payable (33,628) 119,282
Accrued expenses 25,737 (262,122)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,016,545 850,399
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (1,845,570) (305,490)
Sale of marketable securities 645,968 218,048
Purchase of property, plant and equipment (794,386) (592,877)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,993,988) (680,319)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (96,218) (92,335)
Proceeds from issuance of common stock 5,137,670 --
Stock issuance costs (51,501) --
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,989,951 (92,335)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,012,508 77,745
Cash and cash equivalents at the beginning of the year 628,415 550,670
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,640,923 $ 628,415
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F7
<PAGE> 19
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
1999 1998
---------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 112,144 $106,222
========== ========
Cash paid for income taxes $ 376,250 $623,000
========== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Refinancing of mortgages $ -- $582,696
========== ========
Purchase of automobile by issuing a note payable $ 22,000 $ 18,857
========== ========
Issuance of common stock in exchange for consulting fees $ -- $ 30,600
========== ========
Issuance of common stock in exchange for note receivable $ 15,000 $ --
========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F8
<PAGE> 20
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note 1 - NATURE OF BUSINESS
Lifeway Foods, Inc. (The "Company") commenced operations in February 1986,
and incorporated under the laws of the State of Illinois on May 19, 1986.
The Company's 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 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, LFI
Enterprises, Inc., (LFIE) incorporated in the State of Illinois. LFIE was
formed for the purpose of operating a "Russian" theme restaurant and supper
club on the property acquired by the Company on October 9, 1992. The
restaurant/supper club commenced its operations in late November 1992.
In 1992, the Company formed Lifeway International, Inc. ("LII"), a
wholly-owned subsidiary incorporated in the state of Illinois, to
facilitate the distribution of its products to Eastern Europe. LII was
dissolved in 1998, and its operations were merged into the operations of
the Company to simplify the exporting of its products.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned 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 and cash equivalents
All highly liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents.
F9
<PAGE> 21
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
Balances of amounts reported by financial institutions are categorized
as follows at December 31, 1999:
<TABLE>
<S> <C>
Amounts insured $396,799
Uninsured and uncollateralized amounts 373,059
--------
Total bank balances $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, no allowance for doubtful accounts has been made since all
receivables were considered collectible.
Inventories
Inventories are stated at lower of cost or market, cost being
determined by the first-in, first-out method.
Property, plant and equipment
Property, plant and equipment are stated at the lower of cost or net
realizable value. Depreciation is computed using the straight line
method. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in income for the period. The cost
of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized.
Property, plant and equipment are being depreciated over the following
useful lives:
<TABLE>
<CAPTION>
Category Years
-------- -------
<S> <C>
Buildings and improvements 19 - 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 being amortized over ten years using the straight-line method.
F10
<PAGE> 22
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income taxes
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax
purposes in different periods. Deferred taxes are classified as current
or noncurrent, depending on the classification of the assets and
liabilities to which they relate. Deferred taxes arising from temporary
differences that are not related to an asset or liability are
classified as current or noncurrent depending on the periods in which
the temporary differences are expected to reverse.
The principal sources of temporary differences are different
depreciation methods for financial statement and tax purposes,
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 1999 and
1998, $491,751 and $240,636, respectively, were expensed.
Earnings per common share
Earnings per common share were computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding during the year. For the years ended December
31, 1999 and 1998, diluted and basic earnings per share were the same,
as the effect of dilutive securities options outstanding was not
significant.
Note 3 - MARKETABLE SECURITIES
The cost and fair value of marketable securities available for sale at
December 31, 1999 follow:
<TABLE>
<CAPTION>
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Equities $ 595,177 $ 35,089 $ 46,896 $ 583,370
Government agency
obligations, maturing
within one year 979,745 1,085 -- 980,830
---------- ---------- ---------- ----------
Total $1,574,922 $ 36,174 $ 46,896 $1,564,200
========== ========== ========== ==========
</TABLE>
Proceeds from the sale of marketable securities were $645,968 and $218,048
in 1999 and 1998, respectively. Gross gains of $6,621 and $34,624 were
realized on those sales.
F11
<PAGE> 23
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
Note 4 - INVENTORIES
Inventories consisted of the following at December 31, 1999:
<TABLE>
<S> <C>
Raw materials $205,348
Production supplies 218,283
Finished goods 420,328
--------
Total $843,959
========
</TABLE>
Note 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
1999:
<TABLE>
<S> <C>
Land $ 658,400
Buildings and improvements 2,538,942
Machinery and equipment 3,133,718
Vehicles 222,443
Office equipment 71,532
----------
Total $6,625,035
==========
</TABLE>
Depreciation charged to income was $436,214 and $377,142 in 1999 and 1998,
respectively. Machinery and equipment with a book value of $444,941 at
December 31, 1999 has not yet been placed in service.
Note 6 - NOTES PAYABLE
<TABLE>
<S> <C>
Mortgage note payable, First National Bank of Morton Grove, payable in
monthly installments of $1,767, including interest at 7.25%, with a balloon
payment of $139,838 due November 2003. Collateralized by real estate. $ 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. 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. 735,721
Note payable, Ford Motor Credit, payable in monthly installments of $540,
including interest at 1.9%, due October 2001. Collateralized by a vehicle. 11,660
Note payable, First Bank of Morton Grove, payable in monthly installments
of $532, including interest at 7.5%, due December 2002. Collateralized by a
vehicle. 17,146
----------
Subtotal 1,325,785
Less current maturities 91,920
----------
Total $1,233,865
==========
</TABLE>
F12
<PAGE> 24
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
Note 6 - NOTES PAYABLE - Continued
Maturities of notes payable are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
2000 $ 91,920
2001 705,923
2002 28,119
2003 499,823
----------
Total $1,325,785
==========
</TABLE>
Note 7 - PROVISION FOR INCOME TAXES
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Current:
Federal $ 274,263 $ 339,750
State 58,914 78,362
--------- ---------
Total current 333,177 418,112
Deferred:
Federal 39,691 104,154
State 14,456 21,055
--------- ---------
Provision for income taxes $ 387,324 $ 543,321
========= =========
</TABLE>
A reconciliation of the provision for income taxes and the income tax
computed at the federal statutory rate is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Federal income tax expense computed at the statutory rate $ 337,635 $ 444,019
State taxes, expense 76,739 69,373
Permanent book/tax differences (27,050) 29,929
--------- ---------
Provision for income taxes $ 387,324 $ 543,321
========= =========
</TABLE>
Amounts for deferred tax assets and liabilities as of December 31, 1999
were are as follows:
<TABLE>
<S> <C>
Non-current deferred tax liabilities arising from:
Temporary differences - principally
Book/tax, accumulated depreciation $247,673
--------
Total deferred tax liabilities 247,673
Current deferred tax assets arising from:
Book/tax, allowance for unrealized losses 3,931
Book/tax, inventories 48,431
--------
Total deferred tax assets 52,362
--------
Net deferred tax liability $195,311
========
</TABLE>
F13
<PAGE> 25
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
Note 8 - CUSTOMERS AND CREDIT CONCENTRATIONS
Concentrations of credit with regard to trade accounts receivable, which
are uncollateralized, and sales are limited due to the fact that the
Company's customers are spread across different geographic areas. The
customers are concentrated in the retail food industry. In 1999, no
customers comprised over 10% of sales. In 1998, two customers respectively
accounted for 10.7% and 8.6% of sales while accounting for 19.4% and 14.6%
of trade accounts receivable as of December 31, 1998.
Note 9 - INTANGIBLE ASSET
As of December 31, 1999, the Company had the following intangible asset:
<TABLE>
<S> <C>
Covenant not to compete $50,000
Less accumulated amortization 45,000
-------
Intangible asset, net $ 5,000
=======
</TABLE>
Total amortization charged against income for the years ended December 31,
1999 and 1998 was $5,000 and $13,865, respectively. For the year ended
December 31, 1998, additional amortization was taken on organization costs
that were fully amortized at that time.
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 1998.
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 were granted to certain consultants and employees
of the Company. The fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighed-average assumptions used for grants: dividend yield of 0%, expected
volatility of 54%, risk-free interest rate of 6.2%, and expected lives of
three years. The weighted-average fair value of these options granted
during 1997 was $1.48 per share.
The Company has chosen to account for stock-based compensation in
accordance with APB Opinion 25. If compensation cost would have been
recognized in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," compensation cost would
not have increased in either 1999 or 1998, and net income would have
remained the same in 1999 and 1998.
F14
<PAGE> 26
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
Note 10 - STOCK OPTION PLANS - Continued
A summary of stock option transactions during the years ended December 31,
1999 and 1998 is shown below:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Number Weighted-Average Number Weighted-Average
of Exercise of Exercise
Shares Price Shares Price
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding and exercisable
at beginning of year 55,000 $ 5.00 55,000 $ 5.00
Granted -- -- -- --
Exercised (35,000) 5.00 -- --
Forfeited (by agreement) (20,000) -- -- --
------- ------- ------- -------
Outstanding and exercisable
at end of year -- $ -- 55,000 $ 5.00
======= ======= ======= =======
</TABLE>
Note 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, none of
which are held for trading purposes, are as follows at December 31, 1999:
<TABLE>
<CAPTION>
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
---------- ----------
Total $7,530,908 $7,498,398
========== ==========
</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 the 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
stockholders' 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.
F15
<PAGE> 27
LIFEWAY FOODS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
Note 12 - COMMON STOCK TRANSACTION - Continued
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 reciprocal stock rights of first refusal and Danone has been
granted anti-dilutive rights relating to future offerings and limited
registration rights.
F16
<PAGE> 28
PART III
Certain information required by Part III is omitted from this report in
that the Company will file a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this Report, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information regarding the Company's directors and certain other
information required by this Item is incorporated by reference to the Company's
Proxy Statement.
(a) Executive Officers. The executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position Officer Since
- ------------------------------- ---------------- -------------------------------------------------- ------------------
<S> <C> <C> <C>
Michael Smolyansky 52 CEO, CFO, President and Treasurer 1986
Valeriy Nikolenko 54 Vice President-Production and Secretary 1993
</TABLE>
MICHAEL SMOLYANSKY has been Chief Executive Officer, Chief Financial
Officer, President and Treasurer of the Company since its inception in February
1986. From 1976 to 1985, he was Project Engineer and Department Manager of E.J.
Littell Machine Co., of Chicago, Illinois, where he had primary responsibility
for design of material handling equipment. Mr. Smolyansky is a graduate of the
Kiev Institute of Technology (M.S., Mechanical Engineering, 1971). Mr.
Smolyansky devotes full time to the business of the Company and is also a
director of the Company. Mr. Smolyansky holds no other directorships in any
other reporting company.
VALERIY NIKOLENKO has been Secretary of the Company since 1993 and Vice
President-Production since January 1996. From 1992 to 1993, he was employed as
an electronic technician in the United States. From 1982 to 1992, Mr. Nikolenko
was a Department Manager for a government controlled design bureau in Kiev. He
is a graduate of the Kiev Institute of Civil Aviation (M.S., Electronic
Engineering, 1969). Mr. Nikolenko devotes full time to the business of the
Company.
(b) Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors, and greater than 10% shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on its review of copies of such reports received or
written representations from certain reporting persons, the Company believes
that, during the year ended December 31, 1999, all Section 16(a) filing
requirements applicable to its officers, directors and ten percent shareholders
were complied with except for the late filing of reports of six indirect
transactions by the spouse of Michael Smolyansky, and five direct transactions
by Lorenzo Bernardi (a director), all of which were reported on Form 5.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
the Registrant's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
the Registrant's Proxy Statement.
12
<PAGE> 29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
the Registrant's Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a)(1)(2) Financial Statements and Schedules
A list of the Financial Statements and Financial Statement Schedules
filed as part of this Report is set forth in Item 7, and appears at page F-1 of
this Report, which list is incorporated herein by reference.
(a)(3) Exhibits
Exhibit Number and Brief Description
3.1 Articles of Incorporation, as amended. (Filed herewith.)
3.4 Bylaws, as amended. (Filed herewith.)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan,
dated June 5, 1995. (Incorporated by reference to the
Company's Registration Statement on Form S-8, File No.
33-93306).
10.10 Stock Purchase Agreement with Danone Foods, Inc., dated
October 1, 1999. (Incorporated by reference to Exhibit 10.10
of the Registrant'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
Registrant'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
Registrant'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
Registrant's Current Report on Form 8-K dated December 24,
1999 and filed January 11, 2000.)
21.2 List of Subsidiaries of the Registrant. (Incorporated by
reference to Exhibit 21.2 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998).
27 Financial Data Schedule. (Filed herewith.)
(b) Reports on Form 8-K
A. On October 12, 1999, The Company filed a current report on Form 8-K to report
that on October 1, 1999, the Company issued and sold 497,767 shares of
restricted common stock to Danone Foods, Inc. ("Danone"), a subsidiary of Groupe
Danone based in Paris, France. The purchase price paid to the Registrant was
$10.00 per share, for gross proceeds of $4,977,670.
Pursuant to the terms and conditions of a Stock Purchase Agreement and
a Stockholders' Agreement, the Company granted certain limited rights to Danone,
which include a right to nominate one director, anti-dilutive rights relating to
future offerings, and limited registration rights. Also, the parties agreed that
for a period of five
13
<PAGE> 30
years, Danone may increase its ownership interest up to, but not more than, 20%
of the outstanding common stock of the Company. The Company and Danone also
agreed that they would not compete with each other for a period of five years
with respect to certain yogurt, cheese and kefir products.
B. 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. The Company also announced the
appointment of Thomas Kunz, the nominee of Danone, to the board of directors of
the Company.
14
<PAGE> 31
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunder duly authorized.
LIFEWAY FOODS, INC.
By /s/ Michael Smolyansky
--------------------------------------------
Michael Smolyansky, Chief Executive Officer,
Chief Financial and Accounting Officer,
President, Treasurer and Director
Date: March 28, 2000
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By /s/ Michael Smolyansky
--------------------------------------------
Michael Smolyansky, Chief Executive Officer,
Chief Financial and Accounting Officer,
President, Treasurer and Director
Date: March 28, 2000
By /s/ Pol Sikar
--------------------------------------------
Pol Sikar, Director
Date: March 28, 2000
By /s/ Rick D. Salm
--------------------------------------------
Rick D. Salm, Director
Date: March 28, 2000
By /s/ Lorenzo Bernardi
--------------------------------------------
Lorenzo Bernardi, Director
Date: March 28, 2000
By /s/ Thomas Kunz
--------------------------------------------
Thomas Kunz, Director
Date: March 28, 2000
15
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number and Brief Description
- ------------------------------------
<S> <C>
3.1 Articles of Incorporation, as amended. (Filed herewith.)
3.4 Bylaws, as amended. (Filed herewith.)
10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan,
dated June 5, 1995. (Incorporated by reference to the
Company's Registration Statement on Form S-8, File No.
33-93306).
10.10 Stock Purchase Agreement with Danone Foods, Inc., dated
October 1, 1999. (Incorporated by reference to Exhibit 10.10
of the Registrant'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
Registrant'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
Registrant'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
Registrant's Current Report on Form 8-K dated December 24,
1999 and filed January 11, 2000.)
21.2 List of Subsidiaries of the Registrant. (Incorporated by
reference to Exhibit 21.2 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998).
27 Financial Data Schedule. (Filed herewith.)
</TABLE>
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
Pursuant to the provisions of "The Business Corporation Act of 1983", the
undersigned incorporator(s) hereby adopt the following Articles of
Incorporation.
ARTICLE ONE The name of the corporation is LIFEWAY FOODS, INC.
--------------------------------
ARTICLE TWO The name and address of the initial registered agent and its
registered office are:
Registered Agent: LAWRENCE H. BINDEROW
-------------------------------------
Registered Office: 105 WEST MADISON STREET, SUITE 1204
--------------------------------------------
CHICAGO, IL 60602 COOK COUNTY
--------------------------------------------
ARTICLE THREE The purpose or purposes for which the corporation is organized
are:
THE TRANSACTION OF ANY AND ALL LAWFUL BUSINESSES FOR WHICH
CORPORATIONS MAY BE INCORPORATED UNDER THE ILLINOIS BUSINESS
CORPORATION ACT.
ARTICLE FOUR Paragraph 1: The authorized shares shall be:
<TABLE>
<CAPTION>
CLASS PAR VALUE PER SHARE NUMBER OF SHARES AUTHORIZED
----------------------------------------------------------------------------------------------
<S> <C> <C>
Common NPV 5,000,000
</TABLE>
Paragraph 2: The preferences, qualifications, limitations,
restrictions and the special or relative rights in respect of
the shares of each class are:
NONE
ARTICLE FIVE The number of shares to be issued initially, and the
consideration to be received by the corporation therefor, are:
<TABLE>
<CAPTION>
PAR VALUE NUMBER OF SHARES CONSIDERATION TO BE
CLASS PER SHARE PROPOSED TO BE ISSUED RECEIVED THEREFOR
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common NPV 1,000 $1,000.00
------------------------------------------------------------------------------------------------
TOTAL $1,000.00
</TABLE>
<PAGE> 2
ARTICLE SIX OPTIONAL
The number of directors constituting the initial board of
directors of the corporation is TWO and the names and
addresses of the persons who are to serve as directors until
the first annual meeting of shareholders or until their
successors be elected and qualify are:
NAME RESIDENTIAL ADDRESS
--------------------------------------------------------------
Michael Smolyansky 5246 Foster Avenue, Skokie, IL 60077
--------------------------------------------------------------
Edward Pucossi 1607 West Thome, Chicago, IL 60645
ARTICLE SEVEN OPTIONAL
<TABLE>
<S> <C> <C>
(a) It is estimated that the value of all property to be
owned by the corporation for the following year
wherever located will be: $
---------
(b) It is estimated that the value of the property to be
located within the State of Illinois during the
following year will be: $
--------
(c) It is estimated that the gross amount of business
which will be transacted by the corporation during
the following year will be: $
--------
(d) It is estimated that the gross amount of business
which will be transacted from places of business in
the State of Illinois during the following year will
be: $
--------
</TABLE>
ARTICLE EIGHT OTHER PROVISIONS
Attach a separate sheet of this size for any other provision
to be included in the Articles of Incorporation, e.g.,
authorizing pre-emptive rights; denying cumulative voting;
regulating internal affairs; voting majority requirements;
fixing a duration other than perpetual; etc.
NAMES & ADDRESSES OF INCORPORATORS
The undersigned incorporator(s) hereby declare(s), under penalties of
perjury, that the statements made in the foregoing Articles of Incorporation are
true.
DATED May 13, 1986.
<TABLE>
<CAPTION>
SIGNATURES AND NAMES POST OFFICE ADDRESS
<S> <C>
1. /s/ Michael Smolyansky 1. 5246 FOSTER AVENUE
------------------------------------------ -------------------------------------
Signature Street
MICHAEL SMOLYANSKY SKOKIE, ILLINOIS 60077
------------------------------------------ -------------------------------------
Name City/Town Date Zip
2. /s/ Ed Pucossi 2. 1607 WEST THOME
------------------------------------------ -------------------------------------
Signature Street
EDWARD PUCOSSI CHICAGO, ILLINOIS 60645
------------------------------------------ -------------------------------------
Name City/Town Date Zip
</TABLE>
<PAGE> 3
ARTICLES OF AMENDMENT
Pursuant to the provisions of "The Business Corporation Act of 1983", the
undersigned corporation hereby adopts these Articles of Amendment to its
Articles of Incorporation.
ARTICLE ONE The name of the corporation is LIFEWAY FOODS, INC.
--------------------------------
ARTICLE TWO The following amendment of the Articles of Incorporation
was adopted on May 8 , 1987 in the manner indicated below.
By a majority of the incorporators, provided no directors were
named in the articles of incorporation and no directors have
been elected; or by a majority of the board of directors, in
accordance with Section 10.10, the corporation having issued
no shares as of the time of adoption of this amendment;
By a majority of the board of directors, in accordance with
Section 10.15, shares having been issued but shareholder
action not being required for the adoption of the amendment;
By the shareholders, in accordance with Section 10.20, a
resolution of the board of directors having been duly adopted
and submitted to the shareholders. At a meeting of
shareholders, not less than the minimum number of votes
required by statute and by the articles of incorporation were
voted in favor of the amendment;
X By the shareholders, in accordance with Sections 10.20 and
7.10, a resolution of the board of directors having been duly
adopted and submitted to the shareholders. A consent in
writing has been signed by shareholders having not less than
the minimum number of votes required by statute and by the
articles of incorporation. Shareholders who have not consented
in writing have been given notice in accordance with Section
7.10;
By the shareholders, in accordance with Sections 10.20 and
7.10, a resolution of the board of directors have been duly
adopted and submitted to the shareholders. A consent in
writing has been signed by all the shareholders entitled to
vote on this amendment.
<PAGE> 4
Page 2
Resolution
RESOLVED: THAT BY RESOLUTION OF THE BOARD OF DIRECTORS, AFFIRMED BY A UNANIMOUS
VOTE BY THE SHAREHOLDERES OF THE CORPORATION, THE CORPORATE OFFICERS, DIRECTORS,
AND SHAREHOLDERS HEREBY AGREE THAT THE NUMBER OF SHARES OF CORPORATE STOCK,
AUTHORIZED TO BE ISSUED, SHALL BE INCREASED TO 10,000,000 SHARES.
ADDITIONALLY, IT IS RESOLVED THAT THE COMPANY'S AUTHORIZED CAPITAL IS TO INCLUDE
2,500,000 SHARES OF PREFERRED STOCK, WITH NO PAR VALUE. THE BOARD OF DIRECTORS
IS GRANTED DISCRETION UNDER THE ARTICLES OF INCORPORATION OF THE COMPANY TO
ASSIGN RIGHTS AND PRIVILEGES TO THE SHARES OF PREFERRED STOCK.
ADDITIONALLY, IT IS RESOLVED THAT THE CORPORATION MAY DIVIDE AND ISSUE THE
PREFERRED SHARES IN SERIES. PREFERRED SHARES OF EACH SERIES WHEN ISSUED SHALL BE
DESIGNATED TO DISTINGUISH THEM FROM THE SHARES OF ALL OTHER SERIES. THE BOARD OF
DIRECTORS IS HEREBY EXPRESSLY VESTED WITH AUTHORITY TO DIVIDE THE CLASS OF
PREFERRED SHARES INTO SERIES AND TO FIX AND DETERMINE THE RELATIVE RIGHTS AND
PREFERENCES OF THE SHARES OF ANY SUCH SERIES SO ESTABLISHED TO THE FULL EXTENT
PERMITTED BY THE ARTICLES OF INCORPORATION AND ALL AMENDMENTS MADE THERETO, AND
THE LAWS OF THE STATE OF ILLINOIS IN RESPECT OF THE FOLLOWING:
(A) THE NUMBER OF SHARES TO CONSTITUTE SUCH SERIES, AND THE DISTINCTIVE
DESIGNATIONS THEREOF;
(B) THE RATE AND PREFERENCE OF DIVIDENDS, IF ANY, THE TIME OF PAYMENT
OF DIVIDENDS ARE CUMULATIVE AND THE DATE FROM WHICH ANY DIVIDEND SHALL
ACCRUE;
(C) WHETHER SHARES MAY BE REDEEMED AND, IF REDEEMED TO BE RETIRED AS
CANCELLED SHARES OF THE CORPORATION OR SUCH SHARES MAY CONSTITUTE
AUTHORIZED BUT UNISSUED SHARES;
(D) THE AMOUNT PAYABLE UPON SHARES IN EVENT OF INVOLUNTARY LIQUIDATION;
(E) THE AMOUNT PAYABLE UPON SHARES IN EVENT OF VOLUNTARY LIQUIDATION;
(F) SINKING FUND OR OTHER PROVISIONS, IF ANY FOR THE REDEMPTION OR
PURCHASE OF SHARES;
(G) THE TERMS AND CONDITIONS ON WHICH SHARES MAY BE CONVERTED, IF THE
SHARES OF ANY SERIES ARE ISSUED WITH THE PRIVILEGE OF CONVERSION;
(H) VOTING POWERS, IF ANY; AND,
(I) ANY OTHER RELATIVE RIGHTS AND PREFERENCES OF SHARES OF SUCH SERIES
INCLUDING, WITHOUT LIMITATION, ANY RESTRICTION ON AN INCREASE IN THE
NUMBER OF SHARES OF ANY SERIES THERETOFORE AUTHORIZED AND ANY
LIMITATION OR RESTRICTION OF RIGHTS OR POWERS TO WHICH SHARES OF ANY
FUTURE SERIES SHALL BE SUBJECT.
ADDITIONALLY RESOLVED THAT CUMULATIVE VOTING IN THE ELECTION OF DIRECTORS SHALL
NOT BE PERMITTED BY THE CORPORATION.
ADDITIONALLY RESOLVED THAT A SHAREHOLDER OF THE CORPORATION SHALL NOT BE
ENTITLED TO A PREEMPTIVE RIGHT TO PURCHASE, SUBSCRIBE FOR, OR OTHERWISE ACQUIRE
ANY UNISSUED SHARES OF STOCK OF THE CORPORATION, OR ANY OPTIONS OR WARRANTS TO
PURCHASE, SUBSCRIBE FOR OR OTHERWISE ACQUIRE ANY SUCH UNISSUED SHARES OR ANY
SHARES, BONDS, NOTES, DEBENTURES, OR OTHER SECURITIES CONVERTIBLE INTO OR
CARRYING OPTIONS OR WARRANTS TO PURCHASE, SUBSCRIBE FOR OR OTHERWISE ACQUIRE ANY
SUCH UNISSUED SHARES.
THE AFOREMENTIONED RESOLUTIONS HAVE BEEN ADOPTED BY THE DIRECTORS OF THE
CORPORATION, BY UNANIMOUS VOTE HELD THE 8TH DAY OF MAY, 1987.
<PAGE> 5
Page 3
ARTICLE THREE The manner in which any exchange, reclassification or
cancellation of issued shares, or a reduction of the number of
authorized shares of any class below the number of issued
shares of that class, provided for or effected by this
amendment, is as follows: (If not applicable, insert "No
change")
NO CHANGE
ARTICLE FOUR (a) The manner in which said amendment effects a change
in the amount of paid-in capital (Paid-in capital replaces the
terms Stated Capital and Paid in Surplus and is equal to the
total of these accounts) is as follows: (If not applicable,
insert "No change")
NO CHANGE
(b) The amount of paid-in capital (Paid-in capital replaces
the terms Stated Capital and Paid in Surplus and is equal to
the total of these accounts) as changed by this amendment is
as follows: (If not applicable, insert "No change")
NO CHANGE
<TABLE>
<S> <C> <C>
Before Amendment After Amendment
Paid-in Capital $1,000.00 $1,000.00
--------- ---------
</TABLE>
(1) The undersigned corporation has caused these articles to be signed by
its duly authorized officers, each of whom affirm, under penalties of
perjury, that the facts stated herein are true.
Dated May 8, 1987 LIFEWAY FOODS, INC.
------------ -------------------
Attested by /s/ Ed Pucossi by /s/ Michael Smolyansky
------------------------------- ------------------------
Ed Pucossi, Secretary Michael Smolyansky, President
<PAGE> 6
ARTICLES OF AMENDMENT
Pursuant to the provisions of "The Business Corporation Act of 1983", the
undersigned corporation hereby adopts these Articles of Amendment to its
Articles of Incorporation.
ARTICLE ONE The name of the corporation is LIFEWAY FOODS, INC.
-------------------------------
ARTICLE TWO The following amendment of the Articles of Incorporation
was adopted on May 8, 1987 in the manner indicated below.
By a majority of the incorporators, provided no directors were
named in the articles of incorporation and no directors have
been elected; or by a majority of the board of directors, in
accordance with Section 10.10, the corporation having issued
no shares as of the time of adoption of this amendment;
By a majority of the board of directors, in accordance with
Section 10.15, shares having been issued but shareholder
action not being required for the adoption of the amendment;
X By the shareholders, in accordance with Section 10.20, a
resolution of the board of directors having been duly adopted
and submitted to the shareholders. At a meeting of
shareholders, not less than the minimum number of votes
required by statute and by the articles of incorporation were
voted in favor of the amendment;
By the shareholders, in accordance with Sections 10.20 and
7.10, a resolution of the board of directors having been duly
adopted and submitted to the shareholders. A consent in
writing has been signed by shareholders having not less than
the minimum number of votes required by statute and by the
articles of incorporation. Shareholders who have not consented
in writing have been given notice in accordance with Section
7.10;
By the shareholders, in accordance with Sections 10.20 and
7.10, a resolution of the board of directors have been duly
adopted and submitted to the shareholders. A consent in
writing has been signed by all the shareholders entitled to
vote on this amendment.
<PAGE> 7
Page 2
Resolution
RESOLVED, that the Articles of Incorporation be amended to read as
follows:
ARTICLE FOUR Paragraph 1: The authorization shares shall be:
<TABLE>
<CAPTION>
CLASS PAR VALUE NUMBER OF SHARES AUTHORIZED
- ----- --------- ---------------------------
<S> <C> <C>
COMMON NPV 10,000,000
PREFERRED NPV 2,500,000
</TABLE>
<PAGE> 8
Page 3
ARTICLE THREE The manner in which any exchange, reclassification or
cancellation of issued shares, or a reduction of the number of
authorized shares of any class below the number of issued
shares of that class, provided for or effected by this
amendment, is as follows: (If not applicable, insert "No
change")
NO CHANGE
ARTICLE FOUR (a) The manner in which said amendment effects a change
in the amount of paid-in capital (Paid-in capital replaces the
terms Stated Capital and Paid in Surplus and is equal to the
total of these accounts) is as follows: (If not applicable,
insert "No change")
NO CHANGE
(b) The amount of paid-in capital (Paid-in capital replaces
the terms Stated Capital and Paid in Surplus and is equal to
the total of these accounts) as changed by this amendment is
as follows: (If not applicable, insert "No change")
NO CHANGE
<TABLE>
<S> <C> <C>
Before Amendment After Amendment
Paid-in Capital ---------------- ---------------
</TABLE>
(1) The undersigned corporation has caused these articles to be signed by its
duly authorized officers, each of whom affirm, under penalties of perjury, that
the facts stated herein are true.
Dated June 26, 1989 LIFEWAY FOODS, INC.
-------------- -------------------
Attested by /s/ George Allen by /s/ Michael Smolyansky
------------------------------- ------------------------
George Allen, Secretary Michael Smolyansky, President
<PAGE> 9
STATEMENT OF CHANGE OF REGISTERED AGENT AND/OR REGISTERED OFFICE
1. CORPORATE NAME: LIFEWAY FOODS, INC.
-------------------
2. STATE OR COUNTRY OF INCORPORATION: ILLINOIS
--------
3. Name and address of the registered agent and registered office as they
appear on the records of the office of the Secretary of State (before
change):
Registered Agent Mitchell D. Pawlan
-----------------------------------------
First Name Middle Name Last Name
Registered Office 211 Waukegan Road, Suite 300
-----------------------------------------
Number Street Suite No.
Northfield 60093 Cook
-----------------------------------------
City Zip Code County
4. Name and address of the registered agent and registered office shall be
(after all changes herein reported):
Registered Agent Yuri A. Pinsker
-----------------------------------------
First Name Middle Name Last Name
Registered Office 6431 West Oakton, Suite D
-----------------------------------------
Number Street Suite No.
Morton Grove 60053 Cook
-----------------------------------------
City Zip Code County
5. The address of the registered office and the address of the business
office of the registered agent, as changed, will be identical.
6. The above change was authorized by: ("X" one box only)
a. X By resolution duly adopted by the board of directors.
b. By action of the registered agent.
NOTE: When the registered agent changes, the signatures of both president and
secretary are required.
7. (If authorized by the board of directors, sign here.)
The undersigned corporation has caused this statement to be signed by
its duly authorized officers, each of whom affirms, under penalties of
perjury, that the facts stated herein are true.
DATED May 17, 1999. LIFEWAY FOODS, INC.
--------------- ---------------------------------
Attested by /s/ VALERIY NIKOLENKO by /s/ MICHAEL SMOLYANSKY
------------------------- -----------------------------
VALERIY NIKOLENKO, SEC'Y MICHAEL SMOLYANSKY, PRESIDENT
<PAGE> 1
EXHIBIT 3.4
BY-LAWS
OF
ARTICLE I
OFFICES
The corporation shall continuously maintain in the State of Illinois a
registered office and a registered agent whose business office is identical with
such registered office, and may have other offices within or without the state.
ARTICLE II
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. An annual meeting of the
shareholders shall be held on the FIRST MONDAY in JUNE of each year or at such
time as the board of directors may designate for the purpose of electing
directors and for the transaction of such other business as may come before the
meeting. If the day fixed for the annual meeting shall be a legal holiday, such
meeting shall be held on the next succeeding business day.
SECTION 2. SPECIAL MEETINGS. Special meetings of the
shareholders may be called either by the president, by the board of directors or
by the holders of not less than one-fifth of all the outstanding shares of the
corporation entitled to vote, for the purpose or purposes stated in the call of
the meeting.
SECTION 3. PLACE OF MEETING. The board of directors may
designate any place, as the place of meeting for any annual meeting or for any
special meeting called by the board of directors. If no designation is made, or
if a special meeting be otherwise called, the place of meeting shall be at
_____________________________.
SECTION 4. NOTICE OF MEETINGS. Written notice stating the
place, date, and hour of the meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than 10 nor more than 60 days before the date of the meeting, or in the case of
a merger, consolidation, share exchange, dissolution or sale, lease or exchange
of assets not less than 20 nor more than 60 days before the date of the meeting,
either personally or by mail, by or at the direction of the president, or the
secretary, or the officer or persons calling the meeting, to each shareholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail addressed to the
shareholder at his or her address as it appears on the records of the
corporation, with
<PAGE> 2
postage thereon prepaid. When a meeting is adjourned to anther time or place,
notice need not be given of the adjourned meeting if the time and place thereof
are announced at the meeting at which the adjournment is taken.
SECTION 5. FIXING OF RECORD DATE. For the purpose of
determining the shareholders entitled to notice of or to vote at any meeting of
shareholders, or shareholders entitled to receive payment of any dividend, or in
order to make a determination of shareholders for any other proper purpose, the
board of directors of the corporation may fix in advance a date as the record
date for any such determination of shareholders, such date in any case to be not
more than 60 days and for a meeting of shareholders, not less than 10 days, or
in the case of a merger, consolidation, share exchange, dissolution or sale,
lease or exchange of assets, not less than 20 days before the date of such
meeting. If no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the board of directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of shareholders. A determination of shareholders shall
apply to any adjournment of the meeting.
SECTION 6. VOTING LISTS. The officer or agent having charge of
the transfer book for shares of the corporation shall make, within 20 days after
the record date for a meeting of shareholders or 10 days before such meeting,
whichever is earlier, a complete list of the shareholders entitled to vote at
such meeting, arranged in alphabetical order, with the address of and the number
of shares held by each, which list, for a period of 10 days prior to such
meeting, shall be kept on file at the registered office of the corporation and
shall be subject to inspection by any shareholder, and to copying at the
shareholder's expense, at any time during usual business hours. Such list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any shareholder during the whole time of the
meeting. The original share ledger or transfer book, or a duplicate thereof kept
in this State, shall be prima facie evidence as to who are the shareholders
entitled to examine such list or share ledger or transfer book or to vote at any
meeting of shareholders.
SECTION 7. QUORUM. The holders of a majority of the
outstanding shares of the corporation entitled to vote on a matter, represented
in person or by proxy, shall constitute a quorum for consideration of such
matter at any meeting of shareholders, but in no event shall a quorum consist of
less than one-third of the outstanding shares entitled so to vote; provided that
if less than a majority of the outstanding shares are represented at said
meeting, a majority of the shares so represented may adjourn the meeting at any
time without further notice. If a quorum is present, the affirmative vote of the
majority of the shares represented at the meeting shall be the act of the
shareholders, unless the vote of a greater number or voting by classes is
required by the Business Corporation Act, the articles of incorporation or these
by-laws. At any adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the original
meeting. Withdrawal of shareholders from any meeting shall not cause failure of
a duly constituted quorum at that meeting.
<PAGE> 3
SECTION 8. PROXIES. Each shareholder may appoint a proxy to
vote or otherwise act for him or her by signing an appointment form and
delivering it to the person so appointed, but no such proxy shall be valid after
11 months from the date of its execution, unless otherwise provided in the
proxy.
SECTION 9. VOTING OF SHARES. Each outstanding share,
regardless of class, shall be entitled to one vote in each matter submitted to
vote at a meeting of shareholders, and in all elections for directors every
shareholder shall have the right to vote the number of shares owned by such
shareholder for as many persons as there are directors multiplied by the number
of such shares or to distribute such cumulative votes in any proportion among
any number of candidates. Each shareholder may vote either in person or by proxy
as provided in SECTION 8 hereof.
SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS.
Shares held by the corporation in a fiduciary capacity may be voted and shall be
counted in determining the total number of outstanding shares entitled to vote
at any given time.
Shares registered in the name of another corporation, domestic
or foreign, may be voted by any officer, agent, proxy or other legal
representative authorized to vote such shares under the law of incorporation or
such corporation.
Shares registered in the name of a deceased person, a minor
ward or a person under legal disability, may be voted by his or her
administrator, executor, or court appointed guardian, either in person or by
proxy without a transfer of such shares into the name of such administrator,
executor or court appointed guardian. Shares registered in the name of a trustee
may be voted by him or her, either in person or by proxy.
Shares registered in the name of a receiver may be voted by
such receiver, and shares held by or under the control of a receiver may be
voted by such receiver without the transfer thereof into his or her name if
authority to do so is contained in an appropriate order of the court by which
such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to
vote such shares until the shares have been transferred into the name of the
pledgee, and thereafter the pledgee shall be entitled to vote the shares so
transferred.
Any number of shareholders may create a voting trust for the
purpose of conferring upon a trustee or trustees the right to vote or otherwise
represent their shares, for a period not to exceed 10 years, by entering into a
written voting trust agreement specifying the terms and conditions of the voting
trust, and by transferring their shares to such trustee or trustees for the
purpose of the agreement. Any such trust agreement shall not become effective
until a counterpart of the agreement is deposited with the corporation at its
registered office. The counterpart of the voting trust agreement so deposited
with the corporation shall be subject to the same right of examination by a
shareholder of the corporation, in person or by agent or attorney, as are the
books and
<PAGE> 4
records of the corporation, and shall be subject to examination by any holder of
a beneficial interest in the voting trust, either in person or by agent or
attorney, at any reasonable time for any proper purpose.
Shares of its own stock belonging to this corporation shall
not be voted, directly or indirectly, at any meeting and shall not be counted in
determining the total number of outstanding shares at any given time, but shares
of its own stock held by it in a fiduciary capacity may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
SECTION 11. CUMULATIVE VOTING.
In all elections for directors there shall be no right of
cumulative voting.
SECTION 12. INSPECTORS. At any meeting of shareholders, the
presiding officer may, or upon the request of any shareholder, shall appoint one
or more persons as inspector for such meeting.
Such inspectors shall ascertain and report the number of
shares represented at the meeting, based upon their determination of the
validity and effect of proxies; count all votes and report the results; and do
such other acts as are proper to conduct the election and voting with
impartiality and fairness to all the shareholders.
Each report of an inspector shall be in writing and signed by
him or her or by a majority of them if there be more than one inspector acting
at such meeting. If there is more than one inspector, the report of a majority
shall be the report of the inspectors. The report of the inspector or inspectors
on the number of shares represented at the meeting and the results of the voting
shall be prima facie evidence thereof.
SECTION 13. INFORMAL ACTION BY SHAREHOLDERS. Any action
required to be taken at a meeting of the shareholders, or any other action which
may be taken at a meeting of the shareholders, may be taken without a meeting
and without a vote, if a consent in writing, setting forth the action so taken
shall be signed (a) if 5 days prior notice of the proposed action is given in
writing to all of the shareholders entitled to vote with respect to the subject
matter hereof, by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at meeting at which all shares entitled to vote thereon were present and voting
or (b) by all of the shareholders entitled to vote with respect to the subject
matter thereof.
Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given in writing to
those shareholders who have not consented in writing. In the event that the
action which is consented to is such as would have required the filing of a
certificate under any section of the Business Corporation Act if such action had
been voted on by the shareholders at a meeting thereof, the certificate filed
under such section shall state, in lieu of any statement required by such
section concerning any vote of shareholders, that written consent has
<PAGE> 5
been given in accordance with the provisions of SECTION 7.10 of the Business
Corporation Act and that written notice has been given as provided in such
SECTION 7.10.
SECTION 14. VOTING BY BALLOT. Voting on any question or in any
election may be by voice unless the presiding officer shall order or any
shareholder shall demand that voting be by ballot.
ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS. The business of the corporation
shall be managed by or under the direction of its board of directors. A majority
of the board of directors may establish reasonable compensation for their
services and the services of other officers, irrespective of any personal
interest.
SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. The number of
directors of the corporation shall be 2. Each director shall hold office until
the next annual meeting of shareholders; or until his successor shall have been
elected and qualified. Directors need not be residents of Illinois or
shareholders of the corporation. The number of directors may be increased or
decreased from time to time by the amendment of this section. No decrease shall
have the effect of shortening the term of any incumbent director.
SECTION 3. REGULAR MEETINGS. A regular meeting of the board of
directors shall be held without other notice than this by-law, immediately after
the annual meeting of shareholders. The board of directors may provide, by
resolution, the time and place for holding of additional regular meetings
without other notice than such resolution.
SECTION 4. SPECIAL MEETINGS. Special meetings of the board of
directors may be called by or at the request of the president or any two
directors. The person or persons authorized to call special meetings of the
board of directors may fix any place as the place for holding any special
meeting of the board of directors called by them.
SECTION 5. NOTICE. Notice of any special meeting shall be
given at least _____ days previous thereto by written notice to each director at
his business address. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail so addressed, with postage thereon
prepaid. If notice be given by telegram, such notice shall be deemed to be
delivered when the telegram is delivered to the telegram company. The attendance
of a director at any meeting shall constitute waiver of notice of such meeting,
except where a director attends a meeting for the
<PAGE> 6
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the board
of directors need be specified in the notice or waiver of notice of such
meeting.
SECTION 6. QUORUM. A majority of the number of directors fixed
by these by-laws shall constitute a quorum for transaction of business at any
meeting of the board of directors, provided that if less than a majority of such
number of directors are present at said meeting, a majority of the directors
present may adjourn the meeting at any time without further notice.
SECTION 7. MANNER OF ACTING. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the board of directors, unless the act of a greater number is required by
statute, these by-laws, or the articles of incorporation.
SECTION 8. VACANCIES. Any vacancy on the board of directors
may be filled by election at the next annual or special meeting of shareholders.
A majority of the board of directors may fill any vacancy prior to such annual
or special meeting of shareholders.
SECTION 9. RESIGNATION AND REMOVAL OF DIRECTORS. A director
may resign at any time upon written notice to the board of directors. A director
may be removed with or without cause, by a majority of shareholders if the
notice of the meeting names the director or directors to be removed at said
meeting.
SECTION 10. INFORMAL ACTION BY DIRECTORS. The authority of the
board of directors may be exercised without a meeting if a consent in writing,
setting forth the action taken, is signed by all of the directors entitled to
vote.
SECTION 11. COMPENSATION. The board of directors, by the
affirmative vote of a majority of directors then in office, and irrespective of
any personal interest of any of its members, shall have authority to establish
reasonable compensation of all directors for services to the corporation as
directors, officers or otherwise notwithstanding any director conflict of
interest. By resolution of the board of directors, the directors may be paid
their expenses, if any, of attendance at each meeting of the board. No such
payment previously mentioned in this section shall preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
SECTION 12. PRESUMPTION OF ASSENT. A director of the
corporation who is present at a meeting of the board of directors at which
action on any corporate matter is taken shall be conclusively presumed to have
assented to the action taken unless his or her dissent shall be entered in the
minutes of the meeting or unless he or she shall file his or her written dissent
to such action with the person acting as the secretary of the meeting before the
adjournment thereof or shall forward such dissent by
<PAGE> 7
registered or certified mail to the secretary of the corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
SECTION 13. COMMITTEES. A majority of the board of directors
may create one or more committees of two or more members to exercise appropriate
authority of the board of directors. A majority of such committee shall
constitute a quorum for transaction of business. A committee may transact
business without a meeting by unanimous written consent.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER. The officers of the corporation shall be a
president, one or more vice-presidents, a treasurer, a secretary, and such other
officers as many be elected or appointed by the board of directors. Any two or
more offices may be held by the same person.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the
corporation shall be elected annually by the board of directors at the first
meeting of the board of directors held after each annual meeting of
shareholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as conveniently may be. Vacancies
may be filled or new offices created and filled at any meeting of the board of
directors. Each officer shall hold office until his successor shall have been
duly elected and shall have qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided. Election
of an officer shall not of itself create contract rights.
SECTION 3. REMOVAL. Any officer elected or appointed by the
board of directors may be removed by the board of directors whenever in its
judgment the best interest of the corporation would be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.
SECTION 4. PRESIDENT. The president shall be the principal
executive officer of the corporation. Subject to the direction and control of
the board of directors, he/she shall be in charge of the business of the
corporation; he shall see that the resolutions and directions of the board of
directors are carried into effect except in those instances in which that
responsibility is specifically assigned to some other person by the board of
directors; and, in general, he/she shall discharge all duties incident to the
office of president and such other duties as may be prescribed by the board of
directors from time to time. He shall preside at all meetings of the
shareholders and of the board of directors. Except in those instances in which
the authority to execute is expressly delegated to another officer or agent of
the corporation or a different mode of execution is expressly prescribed by the
board of directors or these by-laws, he may execute for the corporation
certificates for its shares, and any contracts, deeds, mortgages, bonds, or
<PAGE> 8
other instruments which the board of directors has authorized to be executed,
and he may accomplish such execution either under or without the seal of the
corporation and either individually or with the secretary, any assistant
secretary, or any other officer thereunto authorized by the board of directors,
according to the requirements of the form of the instrument. He may vote all
securities which the corporation is entitled to vote except as and to the extent
such authority shall be vested in a different officer or agent of the
corporation by the board of directors.
SECTION 5. THE VICE-PRESIDENTS. The vice-president (or in the
event there be more than one vice-president, each of the vice-presidents) shall
assist the president in the discharge of his/her duties as the president may
direct and shall perform such other duties as from time to time may be assigned
to him/her by the president or by the board of directors. In the absence of the
president or in the event of his/her inability or refusal to act, the
vice-president (or in the event there be more than one vice-president, the
vice-presidents in the order designated by the board of directors, or by the
president if the board of directors has not made such a designation, or in the
absence of any designation, then in the order of seniority of tenure as vice
president) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. Except in those instances in which the authority to execute is
expressly delegated to another officer or agent of the corporation of a
different mode of execution it expressly prescribed by the board of directors or
these by-laws, the vice-president (or each of them if there are more than one)
may execute for the corporation certificates for its shares and any contracts,
deeds, mortgages, bonds or other instruments which the board of directors has
authorized to be executed, and he/she may accomplish such execution either under
or without the seal of the corporation and either individually or with the
secretary, any assistant secretary, or any other officer thereunto authorized by
the board of directors. According to the requirements of the form of the
instrument.
SECTION 6. THE TREASURER. The treasurer shall be the principal
accounting and financial officer of the corporation. He shall: (a) have charge
of and be responsible for the maintenance of adequate books of account for the
corporation; (b) have charge and custody of all funds and securities of the
corporation, and be responsible therefor and for the receipt and disbursement
thereof; and (c) perform all the duties incident to the office of treasurer and
such other duties as from time to time may be assigned to him by the president
or by the board of directors. If required by the board of directors, the
treasurer shall give a bond for the faithful discharge of his duties in such sum
and with such surety or sureties as the board of directors may determine.
SECTION 7. THE SECRETARY. The secretary shall: (a) record the
minutes of the shareholders' and of the board of directors' meetings in one or
more books provided for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these by-laws or as required by law; (c) be
custodian of the corporate records and of the seal of the corporation; (d) keep
a register of the post-office address of each shareholder which shall be
furnished to the secretary by such shareholder; (e) sign with the president, or
a vice-president, or any other officer thereunto authorized by the
<PAGE> 9
board of directors, certificates for shares of the corporation, the issue of
which shall have been authorized by the board of directors, and any contracts,
deeds, mortgages, bonds or other instruments which the board of directors has
authorized to be executed, according to the requirements of the form of the
instrument, except when a different mode of execution is expressly prescribed by
the board of directors or these by-laws; (f) have general charge of the stock
transfer books of the corporation; (g) have authority to certify the by-laws,
resolutions of the shareholders and board of directors and committees thereof,
and other documents of the corporation as true and correct copies thereof, and
(h) perform all duties incident to the office of secretary and such other duties
as from time to time may be assigned to him/her by the president or by the board
of directors.
SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The
assistant treasurers and assistant secretaries shall perform such duties as
shall be assigned to them by the treasurer or the secretary, respectively, or by
the president or the board of directors. The assistant secretaries may sign with
the president, or a vice-president, or any other officer thereunto authorized by
the board of directors, certificates for shares of the corporation, the issue of
which shall have been authorized by the board of directors, and any contracts,
deeds, mortgages, bonds, or other instruments which the board of directors has
authorized to be executed, according to the requirements of the form of the
instrument, except when a different mode of execution is expressly prescribed by
the board of directors or these by-laws. The assistant treasurers shall
respectively, if required by the board of directors, give bonds for the faithful
discharge of their duties in such sums and with such sureties as the board of
directors shall determine.
SECTION 9. SALARIES. The salaries of the officers shall be
fixed from time to time by the board of directors and no officer shall be
prevented from receiving such salary by reason of the fact that he is also a
director of the corporation.
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS. The board of directors may authorize
any officer or officers, agent or agents, to enter into any contract or execute
and deliver any instrument in the name or an on behalf of the corporation, and
such authority may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of
the corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the board of directors.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other
orders for the payment of money, notes or other evidences of indebtedness is
issued in the name of the corporation, shall be signed by such officer or
officers, agent or agents of the corporation and in such manner as shall from
time to time be determined by resolution of the board of directors.
<PAGE> 10
SECTION 4. DEPOSITS. All funds of the corporation not
otherwise employed shall be deposited from time to time to the credit of the
corporation in such banks, trust companies or other depositaries as the board of
directors may select.
ARTICLE VI
SHARES AND THEIR TRANSFER
SECTION 1. SHARES REPRESENTED BY CERTIFICATES AND
UNCERTIFICATED SHARES. Shares either shall be represented by certificates or
shall be uncertificated shares.
Certificates representing shares of the corporation shall be
signed by the appropriate officers and may be sealed with the seal or a
facsimile of the seal of the corporation. If a certificate is countersigned by a
transfer agent or registrar, other than the corporation or its employee, any
other signatures may be facsimile. Each certificate representing shares shall be
consecutively numbered or otherwise identified, and shall also state the name of
the person to whom issued, the number and class of shares (with designation of
series, if any), the date of issue, and that the corporation is organized under
Illinois law. If the corporation is authorized to issue shares of more than one
class or of series within a class, the certificate shall also contain such
information or statement as may be required by law.
Unless prohibited by the articles of incorporation, the board
of directors may provide by resolution that some or all of any class or series
of shares shall be uncertificated shares. Any such resolution shall not apply to
share represented by a certificate until the certificate has been surrendered to
the corporation. Within a reasonable time after the issuance or transfer of
uncertificated shares, the corporation shall send the registered owner thereof a
written notice of all information that would appear on a certificate. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of uncertificated shares shall be identical to those of the holders of
certificates representing shares of the same class and series.
The name and address of each shareholder, the number and class
of shares held and the date on which the shares were issued shall be entered on
the books of the corporation. The person in whose name shares stand on the books
of the corporation shall be deemed the owner thereof for all purposes as regards
the corporation.
SECTION 2. LOST CERTIFICATES. If a certificate representing
shares has allegedly been lost or destroyed the board of directors may in its
discretion, except as may be required by law, direct that a new certificate be
issued upon such indemnification and other reasonable requirements as it may
impose.
<PAGE> 11
SECTION 3. TRANSFERS OF SHARES. Transfer of shares of the
corporation shall be recorded on the books of the corporation. Transfer of
shares represented by a certificate, except in the case of a lost or destroyed
certificate, shall be made on surrender for cancellation of the certificate for
such shares. A certificate presented for transfer must be duly endorsed and
accompanied by proper guaranty of signature and other appropriate assurances
that the endorsement is effective. Transfer of an uncertificated share shall be
made on receipt by the corporation of an instruction from the registered owner
or other appropriate person. The instruction shall be in writing or a
communication in such form as may be agreed upon in writing by the corporation.
ARTICLE VII
FISCAL YEAR
The fiscal year of the corporation shall be fixed by
resolution of the board of directors.
ARTICLE VIII
DISTRIBUTIONS
The board of directors may authorize, and the corporation may
make, distributions to it's shareholders, subject to any restrictions in its
articles of incorporation or provided by law.
ARTICLE IX
SEAL
The corporate seal shall have inscribed thereon the name of
the corporation and the words "Corporate Seal, Illinois." The seal may be used
by causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced, provided that the affixing of the corporate seal to an
instrument shall not give the instrument additional force or effect, or change
the construction thereof, and the use of the corporate seal is not mandatory.
ARTICLE X
WAIVER OF NOTICE
Whenever any notice is required to be given under the
provisions of these by-laws or under the provisions of the articles of
incorporation or under the provisions of The Business Corporation Act of the
State of Illinois, a waiver thereof in writing, signed
<PAGE> 12
by the person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of such notice.
Attendance at any meeting shall constitute waiver of notice thereof unless the
person at the meeting objects to the holding of the meeting because proper
notice was not given.
ARTICLE XI
INDEMNIFICATION OF OFFICERS,
DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1. The corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgement or settlement, conviction or upon a
plea or nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interest of the
corporation, and with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
SECTION 2. The corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if he or she acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the corporation and expect that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
<PAGE> 13
SECTION 3. To the extent that a director, officer, employee or
agent of a corporation has been successful, on the merits or otherwise, in the
defense of any action, suit or proceeding referred to in sections 1 and 2, or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses actually and reasonably incurred by such person in connection
therewith.
SECTION 4. Any indemnification under sections 1 and 2 shall be
made by the corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he or she has met the applicable standard
of conduct set forth in sections 1 and 2. Such determination shall be made (a)
by the board of directors by a majority vote of a quorum consisting of directors
who were not parties to such action, suit or proceeding, or (b) if such a quorum
is not obtainable, or, even if obtainable, a quorum of disinterested directors
so directs, by independent legal counsel in a written opinion, or (c) by the
shareholders.
SECTION 5. Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding, as authorized by the board
of directors in the specific case, upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount, unless
it shall ultimately be determined that he or she is entitled to be indemnified
by the corporation as authorized in this article.
SECTION 6. The indemnification provided by this article shall
not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any by-law, agreement vote of shareholders
or disinterested directors or otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 7. The corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of other enterprise
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of his or her status as such, whether or
not the corporation would have the power to indemnify such person against such
liability under the provisions of these sections.
SECTION 8. If the corporation has paid indemnity or had
advance expenses to a director, officer, employee or agent, the corporation
shall report the indemnification or advance in writing to the shareholders with
or before the notice of the next shareholders' meeting.
SECTION 9. References to "the corporation" shall include, in
addition to the surviving corporation, any merging corporation, including any
corporation having merged with a merging corporation, absorbed in a merger which
otherwise would
<PAGE> 14
have lawfully been entitled to indemnify its directors, officers, and employees
or agents.
ARTICLE XII
AMENDMENTS
Unless the power to make, alter, amend or repeal the by-laws
is reserved to the shareholders by the articles of incorporation, the by-laws of
the corporation may be made, altered, amended or repealed by the shareholders or
the board of directors, but no by-law adopted by the shareholders may be
altered, amended or repealed by the board of directors if the by-laws so
provide. The by-laws may contain any provisions for the regulation and
management of the affairs of the corporation not inconsistent with the law or
the articles of incorporation.
<PAGE> 15
AMENDMENT TO
BY-LAWS
OF
LIFEWAY FOODS, INC.
ARTICLE III, DIRECTORS, SECTION 2, of the By-Laws of Lifeway Foods, Inc. is
hereby amended in its entirety to read as follows:
SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. The number of
directors of the corporation shall be five (5). Each director shall
hold office until the next annual meeting of shareholders; or until his
successor shall have been elected and qualified. Directors need not be
residents of Illinois or shareholders of the corporation. The number of
directors may be increased or decreased from time to time by the
amendment of this section. No decrease shall have the effect of
shortening the term of any incumbent director.
Adopted by the Board of Directors on May 8, 1987.
/s/ Michael Smolyansky
-------------------------------
Michael Smolyansky
/s/ Ed Pucossi
-------------------------------
Edward Pucossi
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,640,923
<SECURITIES> 1,564,200
<RECEIVABLES> 965,725
<ALLOWANCES> 0
<INVENTORY> 843,959
<CURRENT-ASSETS> 8,124,362
<PP&E> 6,625,035
<DEPRECIATION> 2,096,842
<TOTAL-ASSETS> 12,657,555
<CURRENT-LIABILITIES> 764,775
<BONDS> 1,233,865
0
0
<COMMON> 6,509,267
<OTHER-SE> 3,901,975
<TOTAL-LIABILITY-AND-EQUITY> 12,657,555
<SALES> 7,907,571
<TOTAL-REVENUES> 7,907,571
<CGS> 4,664,987
<TOTAL-COSTS> 2,177,637
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,144
<INCOME-PRETAX> 1,069,782
<INCOME-TAX> 387,324
<INCOME-CONTINUING> 682,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 682,458
<EPS-BASIC> .17
<EPS-DILUTED> .17
</TABLE>
