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Non-Tech : LIFEWAY FOODS (LWAY) -- Ignore unavailable to you. Want to Upgrade?

To: mark cox who wrote (211)	3/31/1998 11:15:00 PM
From: mark cox	Read Replies (2) \| Respond to of 352

Hi, I have been browsing thru the 10K a bit. I will put out a few things. First some reasons for the earnings being as low as they were. 1) Cost of goods rose by + 15.4% and it said that this was primarily due to higher costs of raw materials, last year when milk, etc. prices rose, LWAY increased their prices to cover it. 2) Interest expense increased by + 100% or $62,050 up to $124,218 because of the loan on the new facility. 3) The supper club that LWAY runs, lost $38,400 in 1997 vs: net income of $65,080 last year. This is not their primary business and personally I hope that one day he sells the restuarant and devotes all of his resources towards the main business. The growth prospects for the supper club are limited and the Return on Assets is below the primary business. 4) They now have 43 full time employees vs: 35 last year. This is also because of the new facility. 5) LWAY's net profit margin for just the 4th quarter was only 4.6% vs: 7.6% last year. I have been saying for quite some time that their net profit margin would be the lowest at the begining of production in the new facility and begin to increase as the critical mass of the new facility grows. For some reason the 4th quarter has the lowest profit margin of the year as well. Overall for the year it was 11.75%, about 3 times the industry average. Although earnings were lower than I expected, the most important item in my opinion and what I was looking for was revenue growth for just the 4th quarter. With the 4th quarter revenue growth at + 19.8% which is double the growth rate of the previous 9 months it tells me that they are selling more product again with the added production capacity. As revenues continue to rise so should the profit margins and earnings. Cash flows from operations, increased by $217,239, up to $942,631 so LWAY continues to generate good cash flow from their business. They still have $550,670 in cash after spending $1,272,760 on the new facility this year and building inventories by + 48%. Revenues for the year increased + 12.6% while accounts receivable rose +31.9% so I'll be keeping an eye on that, and the next time I call the CEO I will be asking him about that. They mentioned that they launched a new product last year called, Kwashenka, which is a spoonable kefir. I never heard of a spoonable type and didn't even know that it was possible so hopefully it is the first of its kind. I will be doing an indepth analysis of the 10K over the next couple of days. When you look at LWAY's annual results keep a few things in mind. 1) They had a 7,750 square foot facility at the begining of last year, they now have that one plus another that is 46,000 square feet. 2) They purchased $1,272,760 worth of new equipment for the facility with cash. 3) The new facility didn't go online till late Oct. allowing only 9 weeks of production, and with those 9 weeks increased the revenue growth rate by 100% over the previous 9 months of near maxed out capacity. This is the single best indication we have of the future for LWAY now that they have the new facility. I am expecting an acceleration of growth thru the year. 4) None of these results reflect Basics Plus which is supposed to be a big product or the other medical foods in development with GalaGen. Personally I look at the future potential for a company to value it. The revenue increase in the 4th says alot to me. The fundamentals and most of the ratios for LWAY have been affected because of the new facility. All in all I think it was quite an accomplishment for LWAY to have made a record amount of money last year, while bringing on the new facility and all of the overhead it brought with it. I'm interested in what everyone else thinks of the numbers. Of course the stock price will reflect some of those opinions tomorrow. Mark