-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BgvmMBH3Jd+1oxkiclwJ/dmA9NZMpA9OO6jg4OSojObphEEf6iwDUUhyzdxukSNF ffuQUU2illQv4KL3N/moEg== 0000950134-96-003689.txt : 19960726 0000950134-96-003689.hdr.sgml : 19960726 ACCESSION NUMBER: 0000950134-96-003689 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960725 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFEWAY FOODS INC CENTRAL INDEX KEY: 0000814586 STANDARD INDUSTRIAL CLASSIFICATION: DAIRY PRODUCTS [2020] IRS NUMBER: 363442829 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-17363 FILM NUMBER: 96598497 BUSINESS ADDRESS: STREET 1: 7625 NORTH AUSTIN AVENUE CITY: SKOKIE STATE: IL ZIP: 60077 BUSINESS PHONE: 7089671010 MAIL ADDRESS: STREET 1: 7625 NORTH AUSTIN AVENUE CITY: SKOKIE STATE: IL ZIP: 60077 10QSB 1 FORM 10-QSB FOR PERIOD ENDED 6-30-96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to __________ Commission file number: 0-17363 LIFEWAY FOODS, INC. - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in it charter) ILLINOIS 36-3442829 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 7625 NORTH AUSTIN AVENUE, SKOKIE, ILLINOIS 60077 - -------------------------------------------------------------------------------- (Address of principal executive offices) (847) 967-1010 --------------------------- (issuer's telephone number) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the issuer filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: AS OF JULY 23, 1996, THE ISSUER HAD 3,774,977 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] 2 INDEX PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. PAGE ---- Lifeway Foods, Inc. and Subsidiaries June 30, 1996 and 1995 Certified Public Accountants Report on Unaudited Financial Statements F-2 Consolidated Balance Sheets F-3 - F-4 Consolidated Statements of Income F-5 Consolidated Statements of Changes in Stockholders' Equity F-6 Consolidated Statements of Cash Flows F-7 - F-8 Notes to Consolidated Financial Statements F-9 - F-16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS 4 PART II - OTHER INFORMATION 6 SIGNATURES 8
2 3 PART I - FINANCIAL INFORMATION LIFEWAY FOODS, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 [FOLLOWING PAGE IS F-1] 3 4 LIFEWAY FOODS, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 TABLE OF CONTENTS Certified Public Accountants Report on Financial Statements F-2 Consolidated Balance Sheets - June 30, 1996 and June 30, 1995 F-3 - F-4 Consolidated Statements of Income - for the years ended June 30, 1996 and 1995 F-5 Consolidated Statements of Changes in Stockholders' Equity - for the years ended June 30, 1996 and 1995 F-6 Consolidated Statement of Cash Flows - for the years ended June 30, 1996 and 1995 F-7 - F-8 Notes to Consolidated Financial Statements - June 30, 1996 and 1995 F-9 - F16 5 ROBERT L. DELORME CERTIFIED PUBLIC ACCOUNTANT 1010 JORIE BOULEVARD/SUITE 300 OAK BROOK, ILLINOIS 60521 (708) 571-1800 CERTIFIED PUBLIC ACCOUNTANTS REPORT ON FINANCIAL STATEMENTS To the Shareholders and Directors Lifeway Foods, Inc. Skokie, Illinois The accompanying balance sheets of Lifeway Foods, Inc. and Subsidiaries as of June 30, 1996 and 1995 and the related statements of income, changes in stockholders' equity and cash flows for the six months then ended were not audited by me and, accordingly, I do not express an opinion or any other form of assurance on them. The accompanying financial statement of Lifeway Foods, Inc. and subsidiaries as of December 31, 1995 and for the year then ended were audited by other auditors. They expressed an unqualified opinion on them in their report dated February 9, 1996. They have not performed any audit procedures since that date. /s/ Robert L. DeLorme Robert L. DeLorme, C.P.A. Oak Brook, Illinois July 16, 1996 F-2 6 LIFEWAY FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
(UNAUDITED) JUNE 30, DECEMBER 31, --------------------------- ------------ ASSETS 1996 1995 1995 ------------ ------------ ------------ CURRENT ASSETS Cash and cash equivalent $ 542,661 $ 624,565 $ 702,107 Investments 342,000 167,565 329,411 Accounts receivable, net of allowance for doubtful accounts of $24,000 at June 30, 1995 and $48,000 at June 30, 1996 and December 31, 1995 628,380 477,877 604,621 Other receivables 25,000 28,600 26,200 Inventories 365,429 217,000 288,100 Prepaid expenses and other assets 407,929 27,639 21,206 Deferred income taxes 34,480 0 34,480 ------------ ------------ ------------ TOTAL CURRENT ASSET 2,345,879 1,543,246 2,006,125 PROPERTY AND EQUIPMENT Land 369,500 369,500 369,500 Buildings, machinery and equipment 2,191,697 2,143,357 2,175,637 ------------ ------------ ------------ Total property and equipment 2,561,197 2,512,857 2,545,137 Less: accumulated depreciation 963,231 773,926 868,769 ------------ ------------ ------------ PROPERTY AND EQUIPMENT, NET 1,597,966 1,738,931 1,676,368 OTHER ASSETS Intangible assets 330,343 330,343 330,343 Less; accumulated amortization 238,381 197,558 221,595 ------------ ------------ ------------ TOTAL OTHER ASSETS 91,962 132,785 108,748 ------------ ------------ ------------ TOTAL ASSETS $ 4,035,807 $ 3,414,962 $ 3,791,241 ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-3 7 LIFEWAY FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) JUNE 30, DECEMBER 31, --------------------------- ------------ 1996 1995 1995 ------------ ------------ ------------ CURRENT LIABILITIES Current maturities of notes payable $ 43,588 $ 39,349 $ 41,651 Accounts Payable 214,979 204,769 245,224 Accrued expenses 217,251 116,717 263,603 ------------ ------------ ------------ TOTAL CURRENT LIABILITIES 475,818 360,835 550,478 LONG-TERM LIABILITIES Notes payable 639,209 684,723 660,007 DEFERRED INCOME TAXES 45,395 47,259 45,395 MINORITY INTEREST 0 172 0 STOCKHOLDERS' EQUITY Common Stock 1,355,935 1,369,254 1,374,754 Retained Earnings 1,519,450 952,719 1,160,607 TOTAL STOCKHOLDERS' EQUITY 2,875,385 2,321,973 2,535,361 ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,035,807 $ 3,414,962 $ 3,791,241 ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-4 8 LIFEWAY FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED ---------------------------- DECEMBER 31, 1996 1995 1995 ------------ ------------ ------------ SALES $ 2,611,528 $ 2,089,859 $ 4,497,560 COST OF GOODS SOLD 1,154,720 976,456 2,244,628 ------------ ------------ ------------ GROSS PROFIT 1,456,808 1,113,403 2,252,932 OPERATING EXPENSES 873,381 721,543 1,560,967 ------------ ------------ ------------ INCOME FROM OPERATIONS 583,427 391,860 691,965 OTHER INCOME (EXPENSE) Interest income 23,245 16,162 41,326 Interest expense (21,680) (44,038) (67,164) Gain on sale of assets 689 16,011 16,001 ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) 2,254 (11,865) (9,827) ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 585,681 379,995 682,138 PROVISION FOR INCOME TAXES 226,838 147,158 241,413 ------------ ------------ ------------ NET INCOME $ 358,843 $ 232,837 $ 440,725 ============ ============ ============ Earnings per share $ .10 $ .06 $ .12 ============ ============ ============ SHARES OUTSTANDING 3,774,977 3,782,977 3,785,377 ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-5 9 LIFEWAY FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK, NO PAR VALUE 10,000,000 SHARES AUTHORIZED ------------------------------ SHARES ISSUED RETAINED AND OUTSTANDING AMOUNT EARNINGS --------------- ------------ ------------ BALANCES AT DECEMBER 31, 1994 3,729,777 $ 1,302,754 $ 719,882 Shares exchanged in no-cash transaction 55,600 72,000 0 Net income for the year ended December 31, 1995 0 0 440,725 ------------ ------------ ------------ BALANCES AT DECEMBER 31, 1995 3,785,377 1,374,754 1,160,607 Purchase of stock (10,400) (18,819) 0 Net income for the six months ended June 30, 1996 0 0 358,843 ------------ ------------ ------------ BALANCES AT JUNE 30, 1996 3,774,977 $ 1,355,935 $ 1,519,450 ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-6 10 LIFEWAY FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED ---------------------------- DECEMBER 31, 1996 1995 1995 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 358,843 $ 232,837 $ 440,725 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 111,248 111,686 230,565 Issuance of common stock in exchange for services rendered and interest expense 0 42,000 42,000 Increase in allowance for doubtful accounts 0 0 24,000 Deferred income taxes 0 0 (36,344) Gain on sale of asset (689) (16,011) (16,011) (Increase) decrease in operating assets: Accounts receivable (23,759) 48,834 (101,910) Other receivable 1,200 2,300 4,700 Inventories (77,329) (108,691) (179,791) Prepaid expenses and other assets (386,723) (1,872) 4,561 Increase (decrease) in operating liabilities: Accounts payable (30,245) (102,408) (57,125) Accrued expenses (46,352) (56,920) 89,964 ------------ ------------ ------------ NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (93,806) 151,755 445,334 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments (112,000) 0 (167,315) Sale of investments 100,100 101,745 107,214 Purchase of property and equipment (16,060) (15,813) (48,194) Proceeds from sales of assets 0 0 51,323 ------------ ------------ ------------ NET CASH PROVIDED BY (USED) IN INVESTING ACTIVITIES (27,960) 85,932 (56,972) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes payable (18,861) (18,120) (91,753) Purchase of treasury stock (18,819) 0 0 Payments to minority shareholders 0 (90,500) (90,000) ------------ ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES (37,680) (108,620) (181,753) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (159,446) 129,067 206,609 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 702,107 495,498 495,498 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 542,661 $ 624,565 $ 702,107 ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-7 11 LIFEWAY FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED ---------------------------- DECEMBER 31, 1996 1995 1995 ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 21,680 $ 44,038 $ 67,164 ============ ============ ============ Cash paid for income taxes $ 164,900 $ 185,000 $ 190,760 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Issuance of common stock in exchange for: Consulting fees $ 0 $ 27,500 $ 27,500 Minority shareholders - interest expense 0 14,500 14,500 ------------ ------------ ------------ Sub-total 0 42,000 42,000 Minority shareholders - stock 0 30,000 30,000 ------------ ------------ ------------ Total common stock issued $ 0 $ 72,000 $ 72,000 ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-8 12 LIFEWAY FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 AND DECEMBER 31, 1995 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 produces Kefir, a drinkable product which is similar to but distinct from yogurt in several flavors sold under the name "Lifeway's Kefir"; a line of drinkable yogurt; a plain farmer's cheese sold under the name "Lifeway's Farmer's Cheese"; and a fruit sugar-flavored product similar in consistency to cream cheese sold under the name of "Sweet Kiss." The Company currently distributes its products throughout the Chicago metropolitan area through local food stores. In addition, the products are sold in the states of California, Colorado, Connecticut, Florida, Illinois, Indiana, Iowa, Michigan, Minnesota, New Hampshire, New York, Ohio, Texas and Wisconsin. The Company has also expanded the distribution of its products internationally by exporting to Eastern Europe through its wholly-owned subsidiary Lifeway International, Inc. On September 30, 1992, the Company formed a wholly-owned subsidiary corporation, LFI Enterprises, Inc., (LFIE) incorporated in the state of Illinois. LFI Enterprises, Inc. 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. Approximately 88.2% of Consolidated revenues and 156.8% of consolidated net income for the year ended December 31, 1995 were derived from the manufacturing of liquid yogurt and cheese 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 and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated, including $120,000 of rent paid by LFIE to the Company in 1995 for use of the restaurant which is owned by the Company. The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 94., "Consolidation of all Majority-owed Subsidiaries", which requires the consolidation of all majority-owned subsidiaries unless control is temporary or does not rest with the majority owners. F-9 13 LIFEWAY FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 AND DECEMBER 31, 1995 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. Investments Effective December 31, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No 115 " Accounting for certain Debt and Equity Securities" (SFAS 115). In accordance with this Statement, securities are classified as held-to-maturity, available-for-sale or trading. The Company's investments include certificates of deposit with maturity dates greater than three months and US Treasury Bonds which are all short term and held-to-maturity. Securities classified as held-to-maturity are stated at cost adjusted for amortization of premiums and accretion of discounts. At December 31, 1995, cost approximated market value. The Company does not currently have any trading or available-for-sale securities. Inventory Inventories are stated at lower of cost or market, cost being determined by the first-in, first-out method. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Property and equipment are being depreciated over the following useful lives: Category Years -------- ----- Buildings and improvements 31 Machinery and equipment 5-12 Office equipment 5-7
F-10 14 LIFEWAY FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 AND DECEMBER 31, 1995 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Intangible Assets Intangible Assets are stated at cost. Organization costs are amortized over five years using the straight-line method. Other intangible assets are amortized over the estimated useful lives of the assets using the straight- line method as follows: Covenant not to compete 10 years Trademark license 2.5 years U.P.C. Codes 7 years Customer lists 5 years
Income Taxes Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or noncurrent, depending on the classification of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or noncurrent depending on the periods in which the temporary differences are expected to reverse. The principal sources of temporary differences are different depreciation methods for financial statement and tax purposes, capitalization of indirect costs for tax purposes, use of allowance method for book purposes verses the direct method for tax purposes as to bad debts and amortization of customer list. Earning Per Common Share Earnings per common share were computed by dividing net income by weighted average number of shares of common stock outstanding during the year. For the year ended December 31, 1995, fully diluted and primary earnings per share were the same as there were no potentially dilutive common stock equivalents outstanding. See Note 11 for fully diluted earnings per share for the year ended December 31, 1994. NOTE 3 - INVENTORIES Inventories consisted of the following:
(UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED ---------------------------- DECEMBER 31, 1996 1995 1995 ------------ ------------ ------------ Finished goods $ 226,229 $ 118,000 $ 199,600 Production supplies 69,000 45,000 42,500 Raw materials 70,200 54,000 46,000 ------------ ------------ ------------ $ 365,429 $ 217,000 $ 288,100 ============ ============ ============
F-11 15 LIFEWAY FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 AND DECEMBER 31, 1995 NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
(UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED ---------------------------- DECEMBER 31, 1996 1995 1995 ------------ ------------ ------------ Building and improvements $ 796,752 $ 796,752 $ 796,752 Machinery and equipment 1,233,899 1,208,091 1,218,213 Vehicles 109,877 89,906 109,877 Office equipment 51,169 48,195 50,795 ------------ ------------ ------------ $ 2,191,697 $ 2,143,357 $ 2,175,637 ============ ============ ============
Depreciation charged to income for the six months ended June 30, 1996 and 1995 was $94,462 and $92,082 respectively, and $186,925 for the year ended December 31, 1995. NOTE 5 - NOTES PAYABLE
(UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED ---------------------------- DECEMBER 31, 1996 1995 1995 ------------ ------------ ------------ Mortgage note payable, 1st National Bank of Morton Grove, payable in monthly installments of $2,548, including interest at 7.5%, with a balloon payment of $184,900 due November 1998 Collateralized by real estate $ 221,324 $ 234,079 $ 227,464 Mortgage note payable, American National Bank and Trust Company of Chicago, payable in monthly installments of $4,498 including interest at 6.75%, with a balloon payment of $394,000 due August 1998. Collaterlized by real estate 452,345 476,085 462,638 Note payable, Glenview State Bank, payable in monthly installments of $460, including interest at 6.25%, due March, 1998. Collateralized by automobile 9,128 13,908 11,556 ------------ ------------ ------------ Total 682,797 724,072 701,658 Less current maturities 43,588 39,349 41,651 ------------ ------------ ------------ Total $ 639,209 $ 684,723 $ 660,007 ============ ============ ============
Maturities of notes payable for the years ended December 31,are as follows: 1996 $ 41,651 1997 44,621 1998 615,386 --------- $ 701,658 =========
F-12 16 LIFEWAY FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 AND DECEMBER 31, 1995 NOTE 6 - PROVISION FOR INCOME TAXES The provision for income taxes consists of the following:
(UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED --------------------------- DECEMBER 31, 1996 1995 1995 ------------ ------------ ------------ Current Federal $ 184,858 $ 119,946 $ 225,897 State 41,980 27,212 51,860 ------------ ------------ ------------ Total current 226,838 147,158 277,757 Deferred 0 0 (36,344) ------------ ------------ ------------ Provision for income taxes $ 226,838 $ 147,158 $ 241,413 ============ ============ ============
A reconciliation of the provision for income taxes and the income tax computed at the statutory rate is as follows:
(UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED --------------------------- DECEMBER 31, 1996 1995 1995 ------------ ------------ ------------ Federal income tax expense computed at the statutory rate $ 184,858 $ 119,946 $ 215,228 State taxes, expense 41,980 27,212 49,796 Book/tax, accumulated depreciation adjusted 0 0 (4,886) Book/tax, inventory adjustment 0 0 (16,319) Permanent book/tax difference 0 0 (2,406) ------------ ------------ ------------ Provision for income taxes $ 226,838 $ 147,158 $ 241,413 ============ ============ ============
Amounts for deferred tax assets and liabilities as of December 31, 1995 are as follows: Long-term deferred tax liabilities arising from: Temporary differences - principally Book/tax, accumulated depreciation $ 48,873 Book/tax, accumulated amortization (3,478) ------------ Total deferred tax liabilities 45,395 Short-term deferred tax assets arising from: Book/tax, allowance for doubtful accounts $ (22,176) Book/tax, inventory (12,304) ------------ Total deferred tax assets (34,480) ------------ Net deferred tax liability $ 10,915 ============
F-13 17 LIFEWAY FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 AND DECEMBER 31, 1995 NOTE 7 - CUSTOMER AND CREDIT CONCENTRATIONS Concentrations of credit with regard to trade accounts receivable and sales are limited due to the fact the Company's customers are spread across different geographic areas. The customers are concentrated in the retail food industry. Two customers accounted for 5% and 3% of 1995 sales and 18% and 22% of trade accounts receivable as of December 31, 1995. NOTE 8 - ACQUISITION OF BUSINESS LINE 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 UPC codes from a third party. In addition, the third party signed a Covenant Not to Compete which states that, for a period of ten (10) years from the date of the agreement, they shall not sell, produce, market or broker liquid yogurt products in the United States. The final purchase price of the assets was determined to be $286,000, which was allocated accordingly: Covenant Not to Compete $ 50,000 Customer List 6,000 Trademark 30,000 UPC Codes 200,000 --------- $ 286,000 =========
Total amortization charged against income for the years ended December 31, 1995 and 1994 was $43,640 and $47,241, respectively. NOTE 9 - FORMATION OF SUBSIDIARIES In 1992, the Company formed Lifeway International, Inc.("LLI") as a majority-owned subsidiary. In exchange for 98% of the issued and outstanding common stock, 2,320,000 shares, the Company transferred $108,000 in cash. The remaining 2% of the issued and outstanding common stock, 46,000 shares, was transferred to other shareholders ("Minority Shareholders") under a qualifying Rule 144 restricted stock issue in exchange for $145,000 in cash. In 1993, LII executed an Investment Agreement with the Svyatoshino Milk Plant Ukrainian Joint-Stock Company (Kiev, Ukraine) in which LII was to acquire a majority-ownership interest in Svyatoshino. Due to the political situation in the Ukraine, acquisition of the controlling interest is not anticipated in the near future. In lieu of this acquisition, LII has commenced exporting Kefir to Eastern Europe. In light of this change in business plan, the Company extended an exchange offer to the Minority Shareholders. See Note 11 for additional information. For the years ending December 31, 1995, LII had export sales totaling $141,708. On September 30, 1992, the Company formed LFI Enterprises, Inc. (LFIE) as a wholly-owned subsidiary. In exchange for all of the issued and outstanding common stock of LFIE, the Company transferred to LFIE $1,000 in cash. F-14 18 LIFEWAY FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 AND DECEMBER 31, 1995 NOTE 10 - BUSINESS SEGMENT INFORMATION The Company's significant business segments include the sale of dairy products and the operations of a restaurant. "Corporate and other" includes revenues and expenses of the company's export subsidiary, general corporate expenses, interest expense, and interest income. The Company's operations, by business segment for 1995 are as follows:
Dairy Corporate 1995 Products Restaurant & Other Consolidated ------ ----------- ----------- ----------- ------------ Sales $ 3,965,707 $ 390,145 $ 141,708 $ 4,497,560 Net Income $ 691,055 $ 18,729 $ (269,059) $ 440,725 Identifiable Assets $ 3,033,742 $ 654,413 $ 103,086 $ 3,791,241 Depreciation and Amortization $ 209,567 $ 12,129 $ 8,869 $ 230,565 Capital Additions $ 45,494 $ 2,700 $ 0 $ 48,194
NOTE 11 - EXCHANGE OFFER TO MINORITY SHAREHOLDERS During 1994, the Company determined that it would not be able to implement its original business plan for LII at this time (see Note 9). As a result, the Company conducted an exchange offer to the Minority Shareholders of LII, whereby each Minority Shareholder could alternatively exchange their shares for: 1) restricted common shares in the Company (including shares for interest on their investment) or, 2) receive a return of their original investment in cash plus interest on their investment paid in restricted common shares in the Company. During 1994, Minority Shareholders owning 8,000 shares in LII elected to cash out and were paid $25,000. During 1995, Minority Shareholders owning 28,800 shares in LII elected to cash out and were paid $90,000. In addition, these Minority Shareholders were entitled to 9,200 restricted common shares in the Company as payment of interest on their investment in LII. During 1995, Minority Shareholders owning 9,600 shares in LII elected to exchange their shares and were issued 26,400 restricted common shares of the Company, including 2,400 shares as payment of interest on their investment in LII. The total issue of 35,600 restricted common shares in the Company resulted in a .9% dilution of the current Company shareholder's interests. As of December 31, 1995, all minority interests in LII have been exchanged or cashed out under the terms of the exchange offer. Had the shares been issued in 1994, earnings per share for the year ended December 31, 1994 would have decreased $.0005. NOTE 12 - COMMON STOCK ISSUE During 1995, the Company received consulting services valued at $27,500. In lieu of cash, the Company issued 20,000 shares of common stock as payment for these services, which resulted in a .5% dilution of the current Company shareholder's interest. F-15 19 LIFEWAY FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 AND DECEMBER 31, 1995 NOTE 13 - CONCENTRATION OF RISK The Company maintains cash deposits at several banks located in the greater Chicago, Illinois metropolitan area. Deposits at each bank are insured by the Federal Deposit Insurance Corporation up to $100,000. Bank balances of amounts reported by financial institutions which are categorized as follows at December 31, 1995: Amounts insured by FDIC $ 231,589 Uninsured and uncollateralized amounts 788,158 ---------- Total bank balance $1,019,747 ==========
NOTE 14 - INVESTMENTS The amortized cost and fair value of investments at December 31, 1995 were:
Amortized Fair Cost Value ---------- ---------- Certificates of Deposit $ 230,000 $ 230,000 U.S. Treasury Bond 99,411 99,411 ---------- ---------- Total Investment $ 329,411 $ 329,411 ========== ==========
NOTE 15 - REAL ESTATE PURCHASE AGREEMENT On May 3, 1996, the Company entered into a Real Estate Sales Contract ( the "Contract") to purchase 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 for $1,325,000. The purchase enables the Company to further expand its production facilities and capacity. Under the terms, upon execution of the Contract, (1) the Company would be allowed a period of 45 days to inspect the property (the "inspection period"); and (2) the Company would place initial earnest monies totaling $10,000 in escrow. On June 20, 1996, the Company placed additional earnest monies of $290,000 in the interest bearing escrow account at Chicago Title and Trust Company. As of June 30, 1996, earnest monies totaling $300,000 are held in escrow at Chicago Title and Trust Company, the direction to control is held by the Seller. The Company shall be entitled to the interest accruing thereunder unless they are in default of the Contract, in which case the Seller shall be entitled to the interest. The Contract is expressly contingent upon entering into a mutually acceptable agreement with the current tenant of the building to terminate its lease. If the Seller is unable to enter into a termination agreement with the Tenant prior to the negotiation period set forth in the Contract, the Company shall have either (a) the option to extend the negotiation period or (b) the right to terminate the Contract. In the event of termination, the Contract shall be null and void with all earnest monies plus interest earned thereon to be refunded to the Company together with the sum of $1,000 for cost reimbursements. F-16 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (1) Material Changes in Results of Operations Net income increased by $126,006, up to $358,843 for the six month period ending June 30, 1996, from $232,837 during the same six month period in 1995. The components of this increase are detailed as follows: Sales and cost of goods sold increased by $521,669 and $178,264, respectively, up to $2,611,528 and $1,154,720 during the six month period ending June 30, 1996 from $2,089,859 and $976,456 during the same six month period in 1995, respectively. The increase is primarily attributable to increased sales of Kefir, Farmer's Cheese and the introduction of Golden Zesta. Costs of sales and gross margins of the Company increased proportionately with sales. Operating expenses increased by $151,838, up to $873,381 during the six month period ending June 30, 1996 from $721,543 during the same six month period in 1995. The increase is primarily attributable to (i) an increase in advertising expenses due to the Company's aggressive marketing campaign commencing in 1995; and (ii) an increase in salaries and payroll taxes incurred as additional employees were hired to support the Company's growth in production. The Company's balance in inventory increased by $102,100, up to $365,429 during the three-month period ending June 30, 1996, as compared to $217,000 during the three-month period ending June 30, 1995. The increase is primarily due to an increase in production and sales. Interest income increased slightly, up to $23,245 during the six month period ending June 30, 1996 from $16,162 during the same six month period in 1995. The increase is due to an increase in funds available for investments. Provision for income taxes increased by $79,680, up to $226,838 during the six month period ending June 30, 1996 from $147,158 during the same six month period in 1995. The increase is proportionate to the net income increase. (2) Material Changes in Financial Condition As of the six month period ending June 30, 1996 as compared to the six month period ending June 30, 1995, the Company had working capital in the amount of $1,870,061 as compared to $1,182,411, respectively; and cash on hand in the amounts of $542,661 as compared to $624,565, respectively. Cash flow from operations was generated by the primary business activity of the Company. As a result of its strong working capital position, the Company expects all cash requirements can be met internally for the remaining fiscal year. The decrease in cash on hand is primarily attributable to the $300,000 in earnest money that is being held in escrow pending closing of the purchase of real property to enable the Company to further expand its production facilities and capacity. The earnest money on deposit is categorized on the balance sheet under the heading entitled "Prepaid Expenses and Other Assets." On April 24, 1996, the Company entered into a Real Estate Sales Contract with a non-affiliated third party to purchase a 110,000 square foot parcel of real property, zoned industrial, including a 46,000 square foot one-story building, in Morton Grove, Illinois, for $1,325,000. The purchase will enable the Company to further expand its production facilities and capacity. The Company anticipates a move in date of December 1996. The Company has obtained preliminary approval of financing with the American National Bank in Chicago. It is proposed that the loan in the approximate amount of $1,000,000, the specified terms of which have not yet been determined, will be secured by the real estate and be payable in monthly installments. The Company has made earnest money deposits totaling $300,000, and will not need to raise additional funds to meet its cash requirements for, among others, building upgrades, additional employees, equipment and inventory. Thereafter, the Company, on a gradual basis, will implement its three-year plan to increase production resulting in increased sales. Once full production capability is reached, the Company expects that its annual product sales will increase significantly. The Company 4 21 expects to employ up to 40 more persons to operate this new production facility, on an as-needed basis, over the next three years. On January 26, 1996, the Board of Directors of the Company voted to repurchase up to 100,000 shares of the Company's Common Stock on the open market. The decision reflects the Board's belief that the Company's Common Stock is significantly undervalued. The resolution of the Board of Directors gave the Company one year to repurchase the shares to be held as treasury stock for general corporate purposes. As of June 30, 1996, the Company has repurchased a total of 10,400 of its Common Shares. The Company is not aware of any circumstances or trends which would have a negative impact upon future sales or earnings. The Company believes it has sufficient funds available during the next fiscal year for any Common Stock repurchases as discussed above. There have been no material fluctuations in the standard seasonal variations of the Company's business. 5 22 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The Company held its Annual Meeting of Stockholders on June 15, 1996. Proxies were solicited pursuant to Regulation 14A under the Exchange Act, and the election of directors was uncontested. The matters voted upon and the results thereof were as follows: 1. Election of Directors to serve until the next meeting and until their successors are duly elected and qualified:
For Withhold --------- -------- Michael Smolyansky 3,560,157 500 Pol Sikar 3,560,657 Rick D. Salm 3,560,657 Renzo Berenardi 3,560,657
2. Ratification of Gleeson, Sklar, Sawyers & Cumpata LLP as independent auditors for the next fiscal year:
For Against Abstain --- ------- ------- 3,553,957 2,300 4,400
ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Number and Brief Description - ------------------------------------ 3.1 Articles of Incorporation of issuer, with Certificate, and Amendments. (1) 3.2 Bylaws of issuer. (1) 3.3 Corrected Amendment to the Bylaws of issuer. (1)
6 23 10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated June 5, 1995. (2) 10.2 Employment Agreement between issuer and Michael Smolyansky. (3) 10.4 Industrial Building Lease between Lifeway Foods, Inc. and Michael Smolyansky, and Addendum to Building Lease. (3) 10.5 Stock Option Agreements. (3) 10.6 Noncompetition, Nondisclosure, and Inventions Agreement. (3) 10.7 Restricted Stock Plan. (3) 10.8 Definitive Purchase Agreement between Lifeway Foods, Inc. and Johanna Farms, Inc., dated December 27, 1990. (3) 10.9 Real Estate Sales Contract, dated April 24, 1996, to purchase a 110,000 square foot parcel of real property, zoned industrial, in Morton Grove, Illinois.(4) 15.1 Letter on unaudited interim financial information. (5) 16.1 Letter of Robert L. DeLorme, C.P.A., dated March 3, 1995, stating its concurrence with the disclosure contained in the Company's Current Report on Form 8-K dated February 28, 1995. (3) 16.2 Letter of Gleeson, Sklar, Sawyers & Cumpata, L.L.P., Certified Public Accountants and Management Consultants, dated March 3, 1995, stating its concurrence with the disclosure contained in the Company's Current Report on Form 8-K dated February 28, 1995. (3) 27 Financial Data Schedule for 2nd Quarter Report on form 10-QSB
- -------------- (1) Incorporated by reference to the issuer's registration statement on Form S-18 (File No. 33-14329-C), and Post-Effective Amendments thereto. (2) Incorporated by reference to the issuer's registration statement on Form S-8 (File No. 33-93306). (3) Incorporated by reference to the issuer's Current Reports filed under cover of Form 8-K and amendments thereto. (4) Incorporated by reference to the issuers quarterly report on form 10-QSB for the period ended March 31, 1996. (5) Filed herewith at page F-2 of Item 1. Financial Statements. (b) Reports on Form 8-K None. 7 24 SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIFEWAY FOODS, INC. By: /s/ Michael Smolyansky ----------------------------------- Michael Smolyansky, Chief Executive Officer, Chief Financial and Accounting Officer, President, Treasurer and Director Date: July 23, 1996 8 25 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Articles of Incorporation of issuer, with Certificate, and Amendments. (1) 3.2 Bylaws of issuer. (1) 3.3 Corrected Amendment to the Bylaws of issuer. (1) 10.1 Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated June 5, 1995. (2) 10.2 Employment Agreement between issuer and Michael Smolyansky. (3) 10.4 Industrial Building Lease between Lifeway Foods, Inc. and Michael Smolyansky, and Addendum to Building Lease. (3) 10.5 Stock Option Agreements. (3) 10.6 Noncompetition, Nondisclosure, and Inventions Agreement. (3) 10.7 Restricted Stock Plan. (3) 10.8 Definitive Purchase Agreement between Lifeway Foods, Inc. and Johanna Farms, Inc., dated December 27, 1990. (3) 10.9 Real Estate Sales Contract, dated April 24, 1996, to purchase a 110,000 square foot parcel of real property, zoned industrial, in Morton Grove, Illinois. (4) 15.1 Letter on unaudited interim financial information. (5) 16.1 Letter of Robert L. DeLorme, C.P.A., dated March 3, 1995, stating its concurrence with the disclosure contained in the Company's Current Report on Form 8-K dated February 28, 1995. (3) 16.2 Letter of Gleeson, Sklar, Sawyers & Cumpata, L.L.P., Certified Public Accountants and Management Consultants, dated March 3, 1995, stating its concurrence with the disclosure contained in the Company's Current Report on Form 8-K dated February 28, 1995. (3) 27 Financial Data Schedule for 2nd Quarter Report on form 10-QSB
- -------------- (1) Incorporated by reference to the issuer's registration statement on Form S-18 (File No. 33-14329-C), and Post-Effective Amendments thereto. (2) Incorporated by reference to the issuer's registration statement on Form S-8 (File No. 33-93306). (3) Incorporated by reference to the issuer's Current Reports filed under cover of Form 8-K and amendments thereto. (4) Incorporated by reference to the issuers quarterly report on form 10-QSB for the period ended March 31, 1996. (5) Filed herewith at page F-2 of Item 1. Financial Statements. EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB. 6-MOS DEC-31-1995 JAN-01-1996 JUN-30-1996 542,661 342,000 701,380 48,000 365,429 2,345,879 2,561,197 963,231 4,035,807 475,818 639,209 1,355,935 0 0 1,519,450 4,035,807 2,611,528 2,635,462 1,154,720 873,381 0 0 21,680 585,681 226,838 358,843 0 0 0 358,843 .10 .10
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