-----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, SyrbMCLWom+qH9POw/n6iIabNYFBLWGF3jBU/4jfnjEl9vQXEGAoeYJqoPmjWzaB LrERSOdfo28toW/MFKN2CA== 0001035704-01-000287.txt : 20010402 0001035704-01-000287.hdr.sgml : 20010402 ACCESSION NUMBER: 0001035704-01-000287 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-17363 FILM NUMBER: 1586116 BUSINESS ADDRESS: STREET 1: 6431 W OAKTON CITY: MORTON GROVE STATE: IL ZIP: 60053 BUSINESS PHONE: 7089671010 MAIL ADDRESS: STREET 1: 6431 W OAKTON CITY: MORTON GROVE STATE: IL ZIP: 60053 10KSB 1 d85557e10ksb.txt FORM 10KSB FOR FISCAL YEAR END DECEMBER 31, 2000 1 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, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from: ______________ to ______________ Commission file number: 0-17363 ------- LIFEWAY FOODS, INC. - -------------------------------------------------------------------------------- (Name of small business issuer as specified in its charter) ILLINOIS 36-3442829 - -------------------------------------------------------------- --------------------------------- (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 6431 WEST OAKTON, MORTON GROVE, ILLINOIS 60053 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (847) 967-1010 -------------- Securities registered under Section 12(b) of the Exchange Act: None ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, No Par Value --------------------------
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. $9,176,739 ---------- State the aggregate market value of the common stock held by non-affiliates, approximately 1,247,216 shares, computed by reference to the price at which the stock was sold as of a specified date within the past 60 days. $8,730,512 as of March 23, 2001, based on the closing price of $7.00 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 23, 2001. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Notice of Annual Meeting and Proxy Statement for the Registrant's 2001 Annual Meeting of Shareholders, scheduled to be held June 16, 2001, are incorporated by reference in Part III. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] 2 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. 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 Kefir"; a plain farmer's cheese sold under the name "Lifeway Farmer's Cheese"; fruit sugar-flavored product similar in consistency to cream cheese sold under the name of "Sweet Kiss;" a dairy based immune-supporting dietary supplement beverage called Basics Plus and other kefir-based products. The Company also produces several soy-based products under the name "Soy Treat" 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 and Canada. 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 East European ethnic communities. 1 3 Business of Issuer 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 KEFIR. "Lifeway 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 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 patented 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. 2 4 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. Distribution With its nine 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, Treasure Island Food Marts, Whole Foods and Butera Food Stores. In addition to the State of Illinois, the Company's products are distributed to over 8,000 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. 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 claims, the Company believes that the potential for healthful benefits as suggested by such studies can serve as the basis for an advertising strategy. 3 5 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. 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. 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. 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 2000, no customer comprised over 10% of sales. 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 mark as shown on the Principal Register. Although the Company has developed the product under this trademark, it is not currently marketing it. 4 6 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 a line of 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 June 25, 2000, the Company received trademark approval from the U.S. Patent and Trademark office for the trademark "Bazarniy", for cheese products. On December 12, 2000, the Company received trademark approval from the U.S. Patent and Trademark office for the trademark "SoyTreat", for its soy-based kefir. 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. 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. 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 2000, the amount the Company expended for research and new product development was not material to the financial position of the Company. 5 7 Employees The Company and its subsidiary, LFI Enterprises, Inc., currently employ approximately 60 employees, 5 of whom are part-time employees. Approximately 55 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. 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, 2000, the loan had a balance of $165,830. 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, 2000, the loan had a balance of $377,713. 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 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, 2000, the loan had a balance of $674,413. 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. On June 22, 2000, the Niles Park District of Illinois filed a lawsuit in the Circuit Court of Cook County, Illinois, naming the Company as a defendant. The Park District, through the lawsuit, is attempting to exercise its rights of eminent domain to acquire and take possession of the Company's property situated at 7800 Caldwell Avenue, Niles, Illinois, where the Moscow Nights Restaurant currently operates. The Company is vigorously defending the lawsuit. 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, 2000, to a vote of security holders through the solicitation of proxies or otherwise. 6 8 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information The Company's Common Stock, no par value, the only class of common equity of the Company, is traded on the NASDAQ National Market 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 by NASDAQ, is set forth in the following table:
Low Bid High Bid -------- -------- 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 1st Qtr 2000 $ 5.00 $ 7.75 2nd Qtr 2000 $ 5.00 $ 8.00 3rd Qtr 2000 $ 4.25 $ 6.5625 4th Qtr 2000 $ 4.25 $ 6.25
Holders As of March 23, 2001, there were approximately 116 holders of record of the Company's Common Stock (not including beneficial owners holding in "street-name"). 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. Sales of Unregistered Securities There were no sales of unregistered securities in 2000. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Results of Operations The year ended December 31, 2000 was another record year for the Company, with all-time highs for Sales, Net Income, and Earnings Per Share. The relevant details of the Company's Results of Operations are as follows: For the year ended December 31, 2000, Sales were $9,176,739, which is a $1,269,168 (or 16%) increase from $7,907,571 in 1999. This increase is primarily attributable to increased sales of existing products. Cost of Goods Sold as a percentage of Sales was 58% in 2000, compared to 59% in 1999. Operating Expenses for 2000 were $2,706,955, which is a $529,318 (or 24%) increase from $2,177,637 in 1999. This increase is due in part to increased operations in the current year. Additionally, during 2000, the Company paid non-recurring expenses in excess of $300,000 for: 1) initial filing fees and legal fees in connection 7 9 with the listing of the Company's common stock on the NASDAQ National Market System (NMS) stock exchange, and 2) legal fees and costs in connection with the Company's successful efforts to protect one of its trademarks and the defense of a pending lawsuit relating to its restaurant property. Also, depreciation expenses (a non-cash expense) incurred during 2000 were approximately $168,000 more than in 1999. Net Income for 2000 was $927,100, which is a $244,642 increase (or 36%) from $682,458 in 1999. This increase is attributable to a $258,629 increase in interest and dividend income in 2000 compared to 1999. Earnings per share in 2000 was $.21, which is a $.04 per share (or 24%) increase from 1999. Liquidity and Capital Resources As of December 31, 2000, the Company had working capital in the amount of $7,025,285, cash and cash equivalents in the amount of $1,437,101, and marketable securities of $4,850,357. The Company expects all cash requirements can be met internally for the next 12-month period. Net cash provided by operating activities increased by $572,145 (or 56%), to $1,588,690 in 2000, from $1,016,545 in 1999. This substantial increase is primarily due to increased sales. Net cash used in investing activities increased by $2,707,916 (or 136%), to $4,701,904 in 2000, from $1,993,988 in 1999. This substantial increase is primarily due to increased purchases (net of sales) of marketable securities in 2000 to invest almost $5 million received in late 1999 as an equity investment from Groupe Danone (described below). Net cash used in financing activities was $90,608 in 2000, compared to net cash provided by investing activities of $4,989,951 in 1999. This substantial difference 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) in 1999. 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. 8 10 On November 15, 1999, Mr. Thomas Kunz, as the nominee of Danone, joined the Board of Directors. Mr. Kunz is President, CEO and a director of both Danone and its subsidiary, The Dannon Company, Inc. In these positions, 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. 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-17, which pages follow this page. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTANT AND FINANCIAL DISCLOSURE. None. 9 11 LIFEWAY FOODS, INC. AND SUBSIDIARY ANNUAL REPORT DECEMBER 31, 2000 AND 1999 TABLE OF CONTENTS Independent Auditors' Report.............................................................................. F-2 Consolidated Balance Sheet................................................................................ F-3-F-4 Consolidated Statements of Income and Comprehensive 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-17
F-1 12 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders LIFEWAY FOODS, INC. AND SUBSIDIARY Skokie, Illinois We have audited the accompanying consolidated balance sheet of LIFEWAY FOODS, INC. AND SUBSIDIARY as of December 31, 2000, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity, and cash flows for the years ended December 31, 2000 and 1999. 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 auditing standards generally accepted in the United States of America. 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, 2000, and the results of their operations and their cash flows for the years ended December 31, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America. Gleeson, Sklar, Sawyers & Cumpata LLP Elgin, Illinois February 14, 2001 F-2 13 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 2000 ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,437,101 Marketable securities 4,850,357 Accounts receivable 1,181,660 Inventories 920,011 Deferred income taxes 166,660 ------------ TOTAL CURRENT ASSETS 8,555,789 PROPERTY, PLANT, AND EQUIPMENT Land 658,400 Buildings, machinery, and equipment 7,062,577 ------------ Total 7,720,977 Less accumulated depreciation 2,701,362 ------------ PROPERTY, PLANT, AND EQUIPMENT, NET 5,019,615 OTHER ASSETS Intangible asset, net -- ------------ TOTAL ASSETS $ 13,575,404 ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-3 14 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET - CONTINUED DECEMBER 31, 2000 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of notes payable $ 705,855 Accounts payable 517,625 Accrued expenses 242,470 Taxes payable 64,554 ------------ TOTAL CURRENT LIABILITIES 1,530,504 LONG-TERM LIABILITIES 529,322 DEFERRED INCOME TAXES 375,558 STOCKHOLDERS' EQUITY Common stock 6,509,267 Stock subscription receivable (15,000) Retained earnings 4,850,866 Accumulated other comprehensive income, net of tax (205,113) ------------ TOTAL STOCKHOLDERS' EQUITY 11,140,020 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,575,404 ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-4 15 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 ------------ ------------ SALES $ 9,176,739 $ 7,907,571 Cost of goods sold 5,307,681 4,664,987 ------------ ------------ GROSS PROFIT 3,869,058 3,242,584 Operating expenses 2,706,955 2,177,637 ------------ ------------ INCOME FROM OPERATIONS 1,162,103 1,064,947 Other income (expense): Interest and dividend income 368,987 110,358 Interest expense (92,500) (112,144) Gain on sale of marketable securities, net 14,800 6,621 ------------ ------------ Total other income 291,287 4,835 ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 1,453,390 1,069,782 Provision for income taxes 526,290 387,324 ------------ ------------ NET INCOME $ 927,100 $ 682,458 ============ ============ EARNINGS PER SHARE COMMON SHARE $ 0.21 $ 0.17 ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 4,318,444 3,933,005 ============ ============ COMPREHENSIVE INCOME: NET INCOME $ 927,100 $ 682,458 Other comprehensive income, net of tax: Unrealized losses on securities (net of tax benefits of $129,492 and $3,931) (205,113) (6,791) Less reclassification adjustment for losses included in net income 6,791 11,637 ------------ ------------ COMPREHENSIVE INCOME $ 728,778 $ 687,304 ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-5 16 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
COMMON STOCK, NO PAR VALUE 10,000,000 SHARES AUTHORIZED ------------------------------ # OF SHARES # OF SHARES # OF SHARES TREASURY COMMON ISSUED OUTSTANDING STOCK STOCK ------------ ------------ ------------ ------------ 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 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 Other comprehensive income: Unrealized losses on securities, net of reclassification adjustment -- -- -- -- Net income for the year ended December 31, 2000 -- -- -- -- ------------ ------------ ------------ ------------ BALANCES AT DECEMBER 31, 2000 4,318,444 4,318,444 -- $ 6,509,267 ============ ============ ============ ============ ACCUMULATED OTHER STOCK COMPREHENSIVE SUBSCRIPTION TREASURY RETAINED INCOME, RECEIVABLE STOCK EARNINGS NET OF TAX ------------ ------------ ------------ ------------- 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 (15,000) -- -- -- 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 $ (15,000) $ -- $ 3,923,766 $ (6,791) Other comprehensive income: Unrealized losses on securities, net of reclassification adjustment -- -- -- (198,322) Net income for the year ended December 31, 2000 -- -- 927,100 -- ------------ ------------ ------------ ------------ BALANCES AT DECEMBER 31, 2000 $ (15,000) $ -- $ 4,850,866 $ (205,113) ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-6 17 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 927,100 $ 682,458 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 609,520 441,214 Amortization of discounts on securities -- (6,643) Gain on sale of marketable securities, net (14,800) (6,621) Deferred income taxes 149,870 54,147 (Increase) decrease in operating assets: Accounts receivable (215,935) (118,456) Other receivables 57,193 (40,993) Inventories (76,052) 7,558 Prepaid expenses and other assets -- 11,772 Increase (decrease) in operating liabilities: Accounts payable 37,582 (33,628) Accrued expenses 49,658 25,737 Taxes payable 64,554 -- ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 1,588,690 1,016,545 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (8,807,854) (1,845,570) Sales of marketable securities 5,201,892 645,968 Purchase of property, plant and equipment (1,095,942) (794,386) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (4,701,904) (1,993,988) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable (90,608) (96,218) Proceeds from issuance of common stock -- 5,137,670 Stock issuance costs -- (51,501) ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (90,608) 4,989,951 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,203,822) 4,012,508 Cash and cash equivalents at the beginning of the year 4,640,923 628,415 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,437,101 $ 4,640,923 ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-7 18 LIFEWAY FOODS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 92,500 $ 112,144 ============ ============ Cash paid for income taxes $ 319,000 $ 376,250 ============ ============ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchase of automobile by issuing a note payable $ -- $ 22,000 ============ ============ Issuance of common stock in exchange for note receivable $ -- $ 15,000 ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-8 19 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 Note 1 - NATURE OF BUSINESS Lifeway Foods, Inc. (The "Company") commenced operations in February 1986, and incorporated under the laws of the state of Illinois on May 19, 1986. The Company's principal business activity is the production of dairy products. Specifically, the Company produces Kefir, a drinkable product which is similar to but distinct from yogurt in several flavors sold under the name "Lifeway's Kefir;" a plain farmer's cheese sold under the name "Lifeway's Farmer's Cheese;" a fruit sugar-flavored product similar in consistency to cream cheese sold under the name of "Sweet Kiss;" and a 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, 2000 and 1999, export sales of the Company were approximately $154,000 and $162,000, 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. The majority of the Company's revenues are derived from the sale of the Company's principal 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. F-9 20 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2000 AND 1999 Cash and cash equivalents All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. F-10 21 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2000 AND 1999 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, 2000: Amounts insured $ 403,780 Uninsured and uncollateralized amounts 1,037,102 ------------ Total bank balances $ 1,440,882 ============
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, 2000, no allowance for doubtful accounts has been made since all receivables were considered collectible. Inventories Inventories are stated at lower of cost or market, cost being determined by the first-in, first-out method. Property, 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:
Category Years -------- ------- Buildings and improvements 19 - 31 Machinery and equipment 5 - 12 Office equipment 5 - 7 Vehicles 5
F-11 22 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2000 AND 1999 Intangible asset Lifeway Foods had a covenant not to compete, which was fully amortized as of December 31, 2000. This intangible asset was stated at cost and was amortized over ten years using the straight-line method. F-12 23 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2000 AND 1999 Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Income taxes Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or noncurrent, depending on the classification of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or noncurrent depending on the periods in which the temporary differences are expected to reverse. The principal sources of temporary differences are different depreciation methods for financial statement and tax purposes, unrealized gains or losses related to marketable securities and capitalization of indirect costs for tax purposes. Revenue recognition Revenue from the sale of products is generally recognized at time of shipment to the customer. Advertising costs The Company expenses advertising costs as incurred. During 2000 and 1999, $538,472 and $491,751, 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, 2000 and 1999, diluted and basic earnings per share were the same. Newly issued accounting standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires the recognition of the fair value of derivatives as either assets or liabilities. The statement is effective for fiscal years beginning after June 15, 2000. It is anticipated that the adoption of the provisions of this statement will not have a material effect on the financial statements of the Company. Note 3 - MARKETABLE SECURITIES The cost and fair value of marketable securities available for sale at December 31, 2000 follow:
Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ Equities $ 2,685,816 $ 43,503 $ (406,417) $ 2,322,902 Government agency obligations, maturing within one year 2,499,146 37,049 (8,740) 2,527,455 ------------ ------------ ------------ ------------ Total $ 5,184,962 $ 80,552 $ (415,157) $ 4,850,357 ============ ============ ============ ============
F-13 24 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2000 AND 1999 Note 3 - MARKETABLE SECURITIES - Continued Proceeds from the sale of marketable securities were $5,201,892 and $645,968 in 2000 and 1999, respectively. Net gains of $14,800 and $6,621 were realized on those sales. Note 4 - INVENTORIES Inventories consisted of the following at December 31, 2000: Raw materials $ 175,247 Production supplies 253,066 Finished goods 491,698 ---------- Total $ 920,011 ==========
Note 5 - PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consisted of the following at December 31, 2000: Land $ 658,400 Buildings and improvements 2,637,044 Machinery and equipment 4,080,381 Vehicles 273,580 Office equipment 71,572 ---------- Total $7,720,977 ==========
Depreciation charged to income was $604,520 and $436,214 in 2000 and 1999, respectively. Note 6 - NOTES PAYABLE 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. $ 165,830 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. 377,713 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. 674,413 Note payable, Ford Motor Credit, payable in monthly installments of $540, including interest at 1.9%, due October 2001. Collateralized by a vehicle. 5,350 Note payable, First National Bank of Morton Grove, payable in monthly installments of $532, including interest at 7.5%, due December 2002. Collateralized by a vehicle. 11,871 ------------ Subtotal 1,235,177 Less current maturities 705,855 ------------ Total $ 529,322 ============
F-14 25 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2000 AND 1999 Note 6 - NOTES PAYABLE - Continued Maturities of notes payable are as follows: Year ending December 31, 2001 $ 705,855 2002 28,121 2003 501,201 ------------ Total $ 1,235,177 ============
Note 7 - PROVISION FOR INCOME TAXES The provision for income taxes consisted of:
2000 1999 ------------ ------------ Current: Federal $ 297,416 $ 274,263 State 79,004 58,914 ------------ ------------ Total current 376,420 333,177 Deferred: Federal 121,987 39,691 State 27,883 14,456 ------------ ------------ Provision for income taxes $ 526,290 $ 387,324 ============ ============
A reconciliation of the provision for income taxes and the income tax computed at the federal statutory rate is as follows:
2000 1999 ------------ ------------ Federal income tax expense computed at the statutory rate $ 494,153 $ 337,635 State taxes, expense 104,354 76,739 Permanent book/tax differences (72,217) (27,050) ------------ ------------ Provision for income taxes $ 526,290 $ 387,324 ============ ============
Amounts for deferred tax assets and liabilities as of December 31, 2000 were are as follows: Non-current deferred tax liabilities arising from: Temporary differences - principally Book/tax, accumulated depreciation $ 375,558 Current deferred tax assets arising from: Book/tax, allowance for unrealized losses 111,550 Book/tax, inventories 55,110 ------------ Total deferred tax assets 166,660 ------------ Net deferred tax liability $ 208,898 ============
F-15 26 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2000 AND 1999 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 2000 and 1999, no customers comprised over 10% of sales. Note 9 - INTANGIBLE ASSET As of December 31, 2000, the Company had the following intangible asset: Covenant not to compete $ 50,000 Less accumulated amortization 50,000 ------------ Intangible asset, net $ -- ============
Total amortization charged against income for both of the years ended December 31, 2000 and 1999 was $5,000. 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, 2000 and 1999. The option price, number of shares, grant date, and vesting terms are determined at the discretion of the Company's Board of Directors. As of December 31, 2000 and 1999, there were no stock options outstanding or exercisable. 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, 2000:
Carrying Fair Amount Value ------------ ------------ Cash and cash equivalents $ 1,437,101 $ 1,437,101 ============ ============ Marketable securities $ 4,850,357 $ 4,850,357 ============ ============ Notes payable $ 1,235,177 $ 1,194,754 ============ ============
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. F-16 27 LIFEWAY FOODS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2000 AND 1999 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. 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. F-17 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. Directors. 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. Executive Officers. The executive officers of the Company are as follows:
Name Age Position Officer Since - ---- --- -------- ------------- Michael Smolyansky 53 CEO, CFO, President and Treasurer 1986 Valeriy Nikolenko 55 Vice President-Production and Secretary 1993
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. Compliance With Section 16(a) of the Securities Exchange Act of 1934 The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the Registrant's Proxy Statement. 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. 10 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. 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. Exhibits Exhibit Number Description 3.4 Bylaws, as amended. (Incorporated by reference to Exhibit No. 3.4 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, and filed on March 29, 2000.) 3.5 Articles of Incorporation, as amended and currently in effect. (Incorporated by reference to Exhibit 3.5 of the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000 and filed on August 8, 2000.) 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 and filed on March 31, 1999.) Reports on Form 8-K The Company did not file any Current Reports on Form 8-K during the quarter ended December 31, 2000. 11 30 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, 2001 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, 2001 By /s/ Pol Sikar --------------------------------------------- Pol Sikar, Director Date: March 28, 2001 By /s/ Rick D. Salm --------------------------------------------- Rick D. Salm, Director Date: March 28, 2001 12 -----END PRIVACY-ENHANCED MESSAGE-----