WWW.EXFILE.COM, INC. -- 888-775-4789 -- LIFEWAY FOODS, INC. -- FORM 10-KSB
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-KSB
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2007
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£
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from: __________ to
__________
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Commission
file number: 0-17363
LIFEWAY
FOODS, INC.
(Name
of small business issuer in its charter)
Illinois
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36-3442829
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(State
or other jurisdiction of
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(IRS
Employer
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incorporation
or organization)
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Identification
No.)
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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:
Common
Stock, No Par Value
Securities
registered under Section 12(g) of the Exchange Act:
None
Check
whether the issuer is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act. £
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 R
No£
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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. o
The
issuer’s revenues for its most recent fiscal year were:
$38,729,156.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates (approximately 4,848,301 shares) computed by reference to the
price at which the stock was sold as of March 3, 2008 ($10.53 per share as
quoted on the National Market System of the Nasdaq Stock Market) was:
$51,052,610.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £
No R
(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)
The
number of shares outstanding of each of the issuer’s classes of common equity,
as of March 3, 2008 is 16,810,326 shares of Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Notice of Annual Meeting and Proxy Statement, to be filed no later than
April 30, 2008, for the Registrant’s 2008 Annual Meeting of Shareholders,
scheduled to be held June 20, 2008, are incorporated by reference in Part
III.
Transitional
Small Business Disclosure Format (check one): Yes £
No R
LIFEWAY
FOODS, INC.
Table
of Contents
PART
I
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Item
1.
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Description
of Business
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Item
2.
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Description
of Property
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Item
3.
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Legal
Proceedings
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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PART
II
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Item
5.
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Market
for Common Equity and Related Stockholder Matters
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Item
6.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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Item
7.
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Financial
Statements
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Item
8
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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Item
8A.
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Disclosure
Controls and Procedures
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Item
8B.
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Other
information
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PART
III
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Item
9.
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Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section
(16a) of the Exchange Act and Code of Ethics
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Item
10.
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Executive
Compensation
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management
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Item
12.
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Certain
Relationships and Related Transactions
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Item
13.
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Exhibits
and Reports on Form 8-K
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Item
14.
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Principal
Accountant Fees and Services
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Signatures
Code
of Ethics
List
of Subsidiaries
Rule
13a-14(a)/15d-14(a) Certification
Rule
13a-14(a)/15d-14(a) Certification
Section
1350 Certification
Section
1350 Certification
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PART
I
CAUTIONARY
STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT
COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO
DIFFER
FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In
connection with the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document and any document
incorporated by reference herein, are advised that this document and documents
incorporated by reference into this document contain both statements of
historical facts and forward looking statements. Forward looking statements are
subject to certain risks and uncertainties, which could cause actual results to
differ materially from 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, earnings or losses per share,
capital expenditures, dividends, capital structure and other financial items,
(ii) statements of Lifeway Foods, Inc.’s plans and objectives, 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 Lifeway Foods,
Inc. 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 or consumers, the actions
of competitors, changes in the pricing of commodities, 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 Lifeway Foods, Inc. (“Lifeway” or the
“Company”) should not be construed as exhaustive or as any admission regarding
the adequacy of disclosures made by Lifeway prior to the effective date of such
act. Forward looking statements are beyond the ability of Lifeway to control and
in many cases we 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. commenced operations in February 1986, and was incorporated under
the laws of the State of Illinois on May 19, 1986. The Company’s principal
business activity is the manufacturing of probiotic, cultured, functional dairy
and non-dairy health food products. Lifeway’s primary products are kefir, a
drinkable dairy beverage similar to but distinct from yogurt, in several flavors
sold under the name “Lifeway Kefir” and “Helios Nutrition Organic Kefir”; a line
of various drinkable yogurts sold under the “La Fruta”, “Tuscan” and
“Lassi” brands; and “BasicsPlus,” a dairy based immune-supporting dietary
supplement beverage. The Company also produces several soy-based kefir beverages
under the “SoyTreat” trademark. In addition to the drinkable products, Lifeway
manufactures “Lifeway Farmer Cheese,” a line of various farmer cheeses; “Sweet
Kiss,” a fruit sugar-flavored spreadable cheese similar in consistency to cream
cheese; and a line of assorted fruit and vegetable flavored cream cheese under
the brand “Cream Cheese Gourmet.” The Company also manufactures and markets a
vegetable-based seasoning under the “Golden Zesta” brand. In the Chicago
metropolitan area, Lifeway distributes its products on its own trucks and via
one distributor. The Company distributes “Cream Cheese Gourmet” branded cream
cheese products in the Philadelphia metropolitan area using its own trucks. Lifeway manufactures all of
its products at Company-owned facilities and distributes its products primarily
throughout the United States.
SUBSIDIARY
ENTITIES
On
September 30, 1992, Lifeway formed a wholly-owned subsidiary, LFI
Enterprises, Inc. (“LFIE”), incorporated in the State of Illinois. Until
August 1, 2001, LFIE operated a “Russian” theme restaurant and supper club
facility. On August 1, 2001, Lifeway ceased operations at the facility
after condemnation proceedings were initiated by the Village of Niles, Illinois,
which sought to control the property for municipal purposes. This property was
sold in January 2003 for a capital gain of approximately
$1.2 million.
On
March 19, 2004, LFIE formed Lifeway Foods Canada, LLC, an Illinois limited
liability company (“LFC”), to serve as a holding company for prospective
operations within Canada. LFIE is the manager and sole member of
LFC.
On
July 26, 2004, Lifeway, by its subsidiary, LFIE, acquired certain assets
and inventory of Ilya’s Farms, Inc., a twelve year old, privately-held gourmet
cream cheese producer based in the Philadelphia metropolitan area. No prior
relationship existed between Ilya’s Farms, Inc. or its principal, Michael
Kofman, and either the Company or LFIE.
The total
cash purchase consideration of $575,600 for the assets and inventory of Ilya’s
Farms, Inc. was paid by LFIE in cash from Company funds without financing.
Additionally, there are certain royalty payments to be made in connection
therewith. The Company provided a guaranty of payment for the transaction. The
acquisition included approximately $64,000 of tangible assets (including certain
manufacturing equipment and a delivery truck) and inventory as well as the brand
name “Ilya’s Farms” and other trademarks and the recipes and manufacturing
processes previously used by Ilya’s Farms, Inc. The equipment acquired by LFIE
from Ilya’s Farms, Inc. was previously used to manufacture cream cheese
products. The inventory which was purchased by LFIE consisted entirely of
different varieties of cream cheese. The founder of Ilya’s Farms, Inc., Michael
Kofman, assisted LFIE over a one-month transition period and is available, if
needed, on a consulting basis going forward. Additionally, LFIE has hired the 10
employees formerly employed by Ilya’s Farms, Inc.
On
August 3, 2006, the Company acquired all of the issued and outstanding
stock of Helios Nutrition, Ltd. (“Helios”) from the stockholders of Helios for a
combination of 202,650 shares of the Company’s common stock, $2,500,000 in
cash, and a promissory note issued by the Company in favor of Amani Holdings,
LLC in the principal amount of $4,200,000.
BUSINESS
OF ISSUER
PRODUCTS
Lifeway’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 product
distinct from yogurt because it incorporates the unique microorganisms of kefir
as the cultures to ferment the milk. Lifeway’s 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. Kefir is also used as the base of Lifeway’s
plain farmer’s cheese, a cheese made without salt, sugar or animal rennet. In
addition, kefir is the primary ingredient of Lifeway’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 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-based
lactose intolerance. A study published in the May 2003 issue of the Journal of
the American Dietetic Association suggests that kefir improves lactose digestion
and tolerance in adults with lactose maldigestion. Studies also indicate that
kefir may 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 practitioners
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
area on which digestive agents may work.
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 than regular yogurt.
Lifeway
currently sells some or all of the products listed below, except as specifically
noted, to various retail establishments including supermarkets, grocery stores,
gourmet shops, delicatessens and convenience stores.
LIFEWAY’S
KEFIR. “Lifeway’s Kefir” is a drinkable kefir product
manufactured in ten regular and low-fat varieties, including plain, pomegranate,
raspberry, blueberry, strawberry, cherry, peach, banana-strawberry, cappuccino
and vanilla, and sold in 32 ounce containers and 8 ounce single serving
containers featuring color-coded caps and labels describing nutritional
information. In March 1996, Lifeway began marketing its non-fat, low cholesterol
kefir in six flavors — plain, raspberry, strawberry, strawberry-banana,
peach and blueberry. The kefir product is currently marketed under the name
“Lifeway’s Kefir,” and is typically sold by retailers from their dairy
sections.
LIFEWAY’S ORGANIC
SOYTREAT. “SoyTreat” is a soy alternative to dairy kefir and
is 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 lactose intolerant or interested in a soy-based alternative to milk.
SoyTreat also provides 7.0g of soy protein per serving, and features the United
States Food and Drug Administration-approved 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.” At present SoyTreat is manufactured in two flavors:
strawberry and peach.
LIFEWAY’S ORGANIC
KEFIR. “Lifeway’s Organic Kefir” meets the organic standards
and specifications of the United States Department of Agriculture for organic
products and is manufactured in five flavors: plain, wildberry, raspberry,
strawberry and peach. Lifeway’s Organic Kefir is sweetened with organic cane
juice.
LIFEWAY’S
SLIM6. “Lifeway’s Slim6” is a line of low-fat kefir beverages
with no added sugar designed for consumers who follow low-carbohydrate diets.
Lifeway’s Slim6 has only 8 grams of carbohydrates and 2.5 grams of fat per
8-ounce serving and is available in five flavors: strawberries n’ cream,
mixed berry, tropical fruit, strawberry-banana and an original, unsweetened
version.
LA FRUTA DRINKABLE
YOGURT. “La Fruta” is a yogurt like drink similar to a
milkshake or smoothie that is specifically formulated to accommodate the
Hispanic market, the fastest growing demographic in the U.S. La Fruta
is manufactured in six flavors: strawberry, mango, pina colada, banana-
strawberry, horchata and tres leches.
LA FRUTA
CHEESE. “La Fruta Cheese” is a cheese product similar to
cream cheese that is specifically formulated to accommodate the Hispanic market,
the fastest growing demographic in the United States. La Fruta Cheese is
manufactured in a tres leches flavor.
TUSCAN BRAND DRINKABLE
YOGURT. “Tuscan Brand Drinkable Yogurt” is a cultured dairy
beverage mainly marketed on the East Coast and manufactured in a variety of
flavors which vary depending upon distributor demand.
FARMER
CHEESE. “Farmer Cheese” is based on a cultured soft cheese and
is intended to be used in a variety of recipes as a low fat, low-cholesterol,
low-calorie substitute for cream cheese or ricotta, and is available in various
styles.
SWEET KISS. “Sweet
Kiss” is a sweet cheese probiotic spread available in five flavors: plain, plain
with raisins, apple, peach and chocolate.
ELITA;
BAMBINO. “Elita” and “Bambino” cheeses are low-fat,
low-cholesterol kefir based cheese spreads which are marketed as an alternative
to cream cheese.
KRESTYANSKI
TWOROG. “Krestyanski Tworog” is a European-style 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 and is marketed to consumers of various Eastern
European ethnicities.
CREAM CHEESE
GOURMET. Lifeway produces a line of over 40 flavors of cream
cheeses under the “Cream Cheese Gourmet” brand name. The different flavors are
manufactured in original and low-fat varieties and include such flavors as
plain, strawberry, cheddar & horseradish, lox & onion, bleu cheese,
pesto, cinnamon & raisin, and vegetable. The Cream Cheese Gourmet line
of cream cheeses was acquired by Lifeway in the acquisition
of substantially all of the assets of Ilya’s Farms, Inc. described
elsewhere in this report and is marketed primarily to smaller and ethnic
grocers, delicatessens and coffee shops.
BASICS
PLUS. “Basics Plus” is a patented kefir-based beverage product
designed to improve gastrointestinal functions, enhancing the immune system.
This product contains certain “passive immunity products” purchased from
GalaGen, Inc. prior to its 2002 bankruptcy as described elsewhere in this
report. Lifeway is currently engaged in discussion with several potential new
suppliers of passive immunity products and is not currently manufacturing this
beverage.
KEFIR
STARTER. “Kefir Starter” is a powdered form of kefir that is
sold in envelope packets and allows a consumer to make his or her own drinkable
kefir at home by adding milk. Lifeway continues to develop sales of the product
internationally and via the internet.
LASSI. “Lassi” is
a cultured drink inspired by the traditions of India. Sold in 8 ounce containers
in two flavors, strawberry and mango.
GOLDEN
ZESTA. “Golden Zesta” is a vegetable-based seasoning, which,
because of its low sodium content, may also be used as a salt substitute and is
marketed to delicatessens, gourmet shops and ethnic grocers.
IT’S
PUDDING. “It’s Pudding!” is the only organic pudding, produced
in the following flavors: rice, chocolate, vanilla, banana and
tapioca.
PROBUGS. “ProBugs”
is a kefir product that contains 10 live and active kefir cultures. Aimed at
children ages 2-9, ProBugs comes in three flavors, “Sublime Slime Limetm,”
“Orange Creamy Crawlertm”
and “Goo-Berry Pietm”
and is packaged in patented no spill spout pouches designed as cartoon bug
characters Peter, Polly and Penelope ProBugtm.
HELIOS NUTRITION ORGANIC
KEFIR. “Helios Nutrition Organic Kefir” is a kefir product
made from organic milk and manufactured with a unique blend of active cultures.
It is sold in 8 and 32 ounce bottles and made in five flavors: peach, plain,
strawberry, vanilla and raspberry.
Lifeway intends to continue to develop new products based on kefir
and Farmer Cheese. There is no assurance that such products or any other new
products can be developed successfully or marketed profitably.
DISTRIBUTION
With its
twelve company-owned trucks, Lifeway distributes its products directly and
extensively in the State of Illinois, primarily in the Chicago metropolitan
area. Lifeway also distributes over 40 different assorted cream cheese products
under the Cream Cheese Gourmet brand name in the Philadelphia and Tri State
metropolitan area.
In
addition to the Chicago and Philadelphia and Tri State metropolitan areas,
Lifeway’s products are distributed to stores throughout the United States.
Lifeway has verbal distribution arrangements with various distributors
throughout the United States. These verbal distribution arrangements, in the
opinion of Lifeway, allow management the necessary latitude to expand into new
areas and markets and establish new relationships with distributors on an
ongoing basis. Lifeway has not offered any exclusive territories to any
distributors.
Distributors
are provided Lifeway products at wholesale prices for distribution to their
retail accounts. Lifeway 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 their retail customers. Each distributor carries a line of
Lifeway’s products on its trucks, checks the retail stores for space allocated
to Lifeway’s products, determines inventory requirements of the store and places
Lifeway products directly into the retailers’ dairy cases. Lifeway believes this
method of distribution best serves the needs of each retail store, and is the
best available means to ensure consistency and quality of product handling,
quality control, flavor selection and favorable 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,
Lifeway has attempted international distribution of certain of its products by
attempting to export to distributors operating in the Canadian provinces of
Ontario and Quebec. Lifeway’s products are subject to strict import quotas
imposed by the Trade Control Policy Division of the Department of Foreign
Affairs and International Trade of Canada. In an attempt to address this
situation, management is exploring various alternatives to permit expansion of
Lifeway’s product line in Canada. Lifeway believes that it currently is in
compliance with all applicable Canadian regulations.
MARKETING
Lifeway
continues to promote the verifiable nutritional characteristics, purity and good
taste of its kefir and kefir-based products. Lifeway primarily advertises its
products through local radio stations, which advertisements are directed to both
users and non-users of cultured milk products of all kinds. In addition, through
newspaper and magazine advertising, Lifeway 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. Lifeway believes that
the potential for healthful benefits as suggested by the educational information
it has obtained properly serves as the basis for such an advertising
strategy.
In
addition to local radio stations, newspapers and magazines, Lifeway promotes
further exposure of its products through the internet, catalog advertising and
promotion, store demonstrations throughout the United States, and
participation in various trade shows. Lifeway also sponsors several different
sporting events in the Chicago metropolitan area as an additional marketing
tool.
Lifeway
does not promote products manufactured under the LaFruta and Tuscan brand names
with any marketing or advertising.
COMPETITION
Although
Lifeway faces a small amount of direct competition in the United States and
Canadian markets for kefir products, Lifeway’s kefir-based products compete with
all other yogurt and other dairy products. Many producers of yogurt and other
dairy products are well-established and have significantly greater financial
resources than Lifeway to promote their products.
In
connection with the certain Stockholders’ Agreement, as amended, between
Lifeway, Danone Foods, Inc. and other parties, as well as certain other
transactions between these two foregoing companies described elsewhere in this
report, the parties agreed that they would not compete with each other during
the term of the Stockholders’ Agreement, as extended, with respect to certain
yogurt, cheese and kefir products. Specifically, Lifeway agreed not to produce
or sell in the United States or Western Europe any type of yogurt, fromage
frais, Italian style cheese, chilled desserts or any soy-based products, other
than those that are kefir-based or those that were already being produced and
sold by Lifeway as of December 24, 1999; and Danone agreed not to produce
or sell any type of kefir-based products in the United States. On
December 31, 2007, the term of the Stockholders’ Agreement was extended to
December 31, 2008.
SUPPLIERS
Lifeway
purchases its raw materials, such as milk, sugar and fruit from unaffiliated
suppliers, and is not limited or contractually bound to any supplier. Lifeway
has ready access to multiple suppliers for all of its raw materials and
packaging requirements. Prior to making any purchase, Lifeway determines which
supplier can offer the lowest price for the highest quality of product. The raw
and packaging materials purchased by Lifeway are considered commodity items and
are widely available on the open market with the exception of the licensed
ingredient in BasicsPlus. Lifeway owns and operates the means of production of
all of its products.
MAJOR
CUSTOMERS
Lifeway
distributes its products to numerous accounts throughout the United States.
Concentrations of credit with regard to trade accounts receivable and sales are
limited due to the fact that Lifeway’s customers are spread across different
geographic areas. The customers are concentrated in the retail food industry. In
2007, Lifeway’s largest customer represented approximately 9% of sales and
reflected sales in various regions of the United States outside the Chicago,
Illinois metropolitan area.
TRANSACTIONS
WITH GROUPE DANONE SA
All share
amounts and prices in this subsection are historical and have not been adjusted
for the stock split which occurred in the first quarter of 2004 or in the second
quarter of 2006. On October 1, 1999, Lifeway and certain members of the
Smolyansky family sold shares of restricted common stock to Danone at
$10.00 per share. Later in 1999, Danone purchased additional shares of
common stock from certain individuals, including shares purchased in
transactions with certain Company affiliates, including Lifeway’s founder
Michael Smolyansky, Val Nikolenko, Vice President of Production and Pol Sikar, a
director, and his affiliates. As a result of these transactions, Danone became
the beneficial owner of 20% of the outstanding common stock of Lifeway. Pursuant
to the terms and conditions of the transaction, Lifeway 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. In
addition, as described above, Lifeway and Danone are parties to a Stockholders’
Agreement dated October 1, 1999, pursuant to which the parties agreed that
they would not compete with each other through December 30, 2007 with
respect to certain yogurt, cheese and kefir products. The Stockholders’
Agreement also provides that Danone may not own more than 20% of the outstanding
common stock of Lifeway as a result of direct or indirect acquisition of shares.
Danone’s interest as of December 31, 2007 was approximately 20.1% due to
reductions in Lifeway’s shares outstanding, primarily due to share repurchases
by Lifeway. On December 31, 2007, the term of the Stockholders’ Agreement
was extended to December 31, 2008. The ability of Danone to sell such a
large stake in Lifeway could have a negative effect on the Company’s stock
price.
PATENTS,
TRADEMARKS, LICENSES, ROYALTY AGREEMENTS
All
trademark registrations have been granted by the United States Patent and
Trademark Office (“USPTO”), unless otherwise noted below. Each trademark
registration may be renewed upon expiration. Lifeway intends to make all timely
filings as required for all trademarks listed.
Mark
|
Use
|
Date of Registration
|
Expiration
of
Registration
|
Comments
|
Lifeway
|
Cheese
and kefir
|
December
12, 1989
|
December
12, 2009
|
Registration
was timely renewed for a 10 year period on December 12, 1999. Registration
is renewable between the 19th and 20th anniversaries of the registration
date or the six-month grace period following the registration expiration
date.
|
Sweet
Kiss
|
Cheese,
cottage cheese
and
other milk
products,
excluding
ice
cream, ice milk
and
frozen yogurt
|
February
10, 1998
|
February
10, 2008
|
An
Affidavit of Continued Use was timely filed between the 5th and 6th
anniversaries of the registration date. Registration is
renewable between the 9th and 10th
anniversaries of the registration date or the six-month grace period
following the registration expiration date.
|
Kwashenka
|
Kefir,
yogurt, cheeses, cottage cheeses and other milk products, excluding ice
cream, ice milk and frozen yogurt
|
February
10, 1998
|
February
10, 2008
|
An
Affidavit of Continued Use was timely filed between the 5th and 6th
anniversaries of the registration date. Registration is renewable between
the 9th and 10th anniversaries of the registration date or the six-month
grace period following the registration expiration
date.
|
Bambino
|
Cheeses,
cottage cheeses and other milk products
|
October
7, 2003
|
October
7, 2013
|
Registration
is renewable at the time of expiration provided mandatory documents are
filed with the USPTO between the 5th and 6th anniversaries of the
registration date or the six-month grace period following the sixth
anniversary date.
|
Mark
|
Use
|
Date of
Registration
|
Expiration
of
Registration
|
Comments
|
KPECTBRHCKNN
(A stylized presentation of “Krestyanskiy” in Cyrillac
characters)
|
Cheeses,
cottage cheeses and other milk products excluding ice cream, ice milk and
frozen yogurt
|
September
8, 1998
|
September
8, 2008
|
An
Affidavit of Continued Use was timely filed between the 5th and 6th
anniversaries of the registration date. Registration is renewable between
the 9th and 10th anniversaries of the registration date or the six-month
grace period following the registration expiration
date.
|
BasicsPlus
|
Dairy-based
food beverages for use as a dietary supplement
|
September
7, 1999
|
September
7, 2009
|
In
May 1998, GalaGen, Inc., assigned the entire interest, including the
goodwill, of this mark to Lifeway. An Affidavit of Continued Use was
timely filed between the 5th and 6th anniversaries of the registration
date. Registration is renewable between the 9th and 10th anniversaries of
the registration date or the six-month grace period following the
registration expiration date.
|
BA3APHBIII
(A stylized presentation of “Bazarniy” in Cyrillic
characters)
|
Pressed
unripened cheese
|
July
25, 2000
|
July
25, 2010
|
Registration
is renewable at the time of expiration provided mandatory documents are
filed with the USPTO between the 5th and 6th anniversaries of the
registration date or the six-month grace period following the sixth
anniversary date.
|
SoyTreat
|
Soy-based
food beverage intended for use as cultured milk substitute
|
December
19, 2000
|
December
19, 2010
|
Registration
is renewable at the time of expiration provided mandatory documents are
filed with the USPTO between the 5th and 6th anniversaries of the
registration date or the six-month grace period following the sixth
anniversary date.
|
Korovka
|
Dairy-based
spread
|
November
6, 2001
|
November
6, 2011
|
Registration
is renewable at the time of expiration provided mandatory documents are
filed with the USPTO between the 5th and 6th anniversaries of the
registration date or the six-month grace period following the sixth
anniversary date.
|
La
Fruta
|
Cultured
milk products, excluding ice cream, ice milk and frozen
yogurt
|
March
29, 2005
|
March
29, 2015
|
Registration
is renewable at the time of expiration provided mandatory documents are
filed with the USPTO between the 5th and 6th anniversaries of the
registration date or the six-month grace period following the sixth
anniversary date.
|
Mark
|
Use
|
Date of Registration
|
Expiration
of
Registration
|
Comments
|
PTICHYE
MOLOKO (a stylized presentation of “Ptichye Moloko” in Cyrillic
characters)
|
Kefir,
yogurt, cheeses, cottage cheeses and other milk products, excluding ice
cream, ice milk and frozen yogurt
|
October
18, 2005
|
October
18, 2015
|
Registration
is renewable at the time of expiration provided mandatory documents are
filed with the USPTO between the 5th and 6th anniversaries of the
registration date or the six-month grace period following the sixth
anniversary date.
|
BIOKEFIR
|
yogurt,
cheeses, cottage cheeses and other milk products, excluding ice cream, ice
milk and frozen yogurt
|
|
|
Application
filed September 23, 2004 on an intent-to-use basis.
|
SUBLIME
SLIME LIME
|
Dairy-based
beverages; dairy-based food beverages; kefir; soy- based food beverage
used as milk substitute
|
|
|
Application
filed February 3, 2006 on an intent-to-use basis.
|
PROBUGS
|
Dairy-based
beverages; dairy-based food beverages; kefir; soy- based food beverage
used as milk substitute
|
|
|
Application
filed February 3, 2006 on an intent-to-use basis.
|
ORANGE
CREAMY CRAWLER
|
Dairy-based
beverages; dairy-based food beverages; kefir; soy- based food beverage
used as milk substitute
|
|
|
Application
filed February 3, 2006 on an intent-to-use basis.
|
(LOGO)
|
Dairy-based
beverages; dairy-based food beverages; kefir; soy- based food beverage
used as milk substitute
|
|
|
Application
filed February 3, 2006 on an intent-to-use basis.
|
(LOGO)
|
Dairy-based
beverages; dairy-based food beverages; kefir; soy- based food beverage
used as milk substitute
|
|
|
Application
filed February 3, 2006 on an intent-to-use basis.
|
PRIDE
OF MAIN STREET
|
Dairy
Product
|
November
9, 1987
|
November
9, 2007
|
Only
for the State of MN, not in US
|
HELIOS
NUTRITION
|
Dairy
products and functional foods
|
October
5, 1999
|
October
5, 2009
|
|
STARFRUIT
|
Franchise
services, namely, offering technical and business management assistance in
the establishment and operation of restaurants
|
|
|
Application
was filed on February 23, 2007, on an intent to use basis. A
Notice of Allowance was issued on March 11, 2008. A Statement of Use is
due on September 11, 2008, or within the 3 year extension period following
the Notice of Allowance date. After acceptance of the Statement of Use,
registration will precede in due course.
|
GOO-BERRY
PIE
|
Dairy-based
beverages; dairy-based food beverages; kefir; soy-based food beverage used
as a milk substitute
|
|
|
Application
was filed on August 1, 2007, based on actual use. The
application is pending registration.
|
PATENTS,
TRADEMARKS, LICENSES, ROYALTY AGREEMENTS
Lifeway
also uses the following unregistered trademarks, and claims common law rights
to: “Elita,” “Healthy Foods Today for a Better Life Tomorrow,” “Milkshake
Smoothie,” “Toplenka,” “White Cheese,” “Drink It to Be Beautiful Inside and
Out,” “Cream Cheese Gourmet,” “Golden Zesta” and “Pride of Main
Street.”
On
December 27, 1990, Lifeway purchased the Tuscan brand-name liquid drinkable
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.
In
October 1998 Lifeway entered into a sublicense agreement with GalaGen, Inc. and
Metagenics, Inc. with an effective date of May 1, 1998 (“Lifeway
sublicense”), wherein GalaGen sublicensed patent rights of Metagenics for
kefir-based products containing natural immune components exclusively to
Lifeway. Under the rights granted to it by the Lifeway sublicense, Lifeway
manufactures and sells products using the Basics Plus trademark. GalaGen had
acquired the primary license for such patent rights in an agreement executed
with Metagenics in April 1998. The terms of the Lifeway sublicense provide that
Metagenics will permit Lifeway to continue to have the exclusive patent rights
to produce or sell kefir-based products containing natural immune components in
the event the original license between GalaGen and Metagenics is terminated, and
such termination was not caused by Lifeway. On February 25, 2002, GalaGen
filed a petition for bankruptcy in the Unites States Bankruptcy Court, District
of Minnesota, which terminated both its primary license with Metagenics and its
participation in the Lifeway sublicense. The license and sublicense were
excluded from the sale of assets of GalaGen pursuant to an order of the
Bankruptcy Court. Lifeway has not received any indication that Metagenics will
not permit Lifeway to continue to have the exclusive patent rights to produce or
sell kefir-based products containing natural immune components. Thus, Lifeway
believes that it continues to have the exclusive patent rights licensed directly
from Metagenics. Either party may terminate the license agreement for cause. The
term of the license agreement expires when the last valid claim of the patent
rights expires, which currently is July 2, 2013, however, this term can be
extended in accordance with the terms of the license
agreement.
In
connection with the purchase of Ilya’s Farm, Inc., the Company has undertaken a
royalty obligation of 5% of all sale of Ilya’s Farm, Inc.’s products, which is
paid quarterly, in arrears.
REGULATION
Lifeway
is subject to regulation by federal, state and local governmental authorities
regarding the distribution and sale of food products. Although Lifeway believes
that it currently has all material government permits, licenses, qualifications
and approvals for its operations, there can be no assurance that Lifeway 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 Lifeway’s business.
Lifeway
believes that it is currently in compliance with all applicable environmental
laws and that the cost of such compliance was not material to the financial
position of Lifeway.
In
addition, any Lifeway products exported to Canada would be subject to strict
quotas imposed by the Trade Control Policy Division of the Department of Foreign
Affairs and International Trade of Canada. Lifeway believes that it currently is
in compliance with all applicable Canadian regulations. The Company exported
$5,000 in products to Canada in 2007.
RESEARCH
AND DEVELOPMENT
Lifeway
continues its program of new product development, centered around the
nutritional and “low calorie” features of its proprietary kefir
formulas.
Lifeway
conducts primarily all of its research internally, but at times will employ the
services of an outside testing facility. During 2006 and 2007, the amount
Lifeway expended for research and new product development was not material to
the financial position of Lifeway.
EMPLOYEES
Lifeway
currently employs approximately 120 employees, all of whom are full-time
employees. Substantially all of these employees are engaged in the manufacturing
of the Company’s products. None of Lifeway’s employees are covered by collective
bargaining agreements.
ITEM
2. DESCRIPTION OF
PROPERTY.
On
May 16, 1988, Lifeway purchased an approximately 26,000 square foot
parcel of real property, including an approximately 8,500 square foot
one-story brick building in good condition, located at 7625 N. Austin
Avenue, Skokie, Illinois. Lifeway uses this facility for manufacturing and
storage and has no plans to improve or renovate this property. The acquisition
loan to Lifeway from 1st National Bank of Morton Grove, collateralized by
the real estate, was refinanced in 1998 by Lifeway and paid off in full on
February 21, 2002. Lifeway is the only occupant of this property and
presently holds fee simple title free and clear of all encumbrances thereto. The
value of this property may be subject to real estate market forces that
typically affect industrial real estate in the area immediately surrounding the
property. The Company’s book value for this property is approximately
$529,172.
On
October 16, 1996, Lifeway purchased a 110,000 square foot
commercially-zoned parcel of real property, including a 46,000 square foot
one-story brick building in good condition, located at 6431 Oakton Avenue,
Morton Grove, Illinois. This property is used as Lifeway’s corporate
headquarters and main manufacturing facility. This property has been improved
every year since the time of purchase by the addition of custom-built
refrigerated storage space and the addition of various machinery and equipment
used to manufacture, package and store Lifeway’s products. Lifeway is the only
occupant of this property and presently holds fee simple title subject to a
mortgage which secures the property as collateral for the acquisition loan to
Lifeway from MB Financial Bank of Morton Grove. The acquisition loan was
refinanced in September 2006 at a rate of 7% and is payable in monthly principal
and interest installments of $3,273, with a balloon payment of $416,825 due in
September 2011. At December 31, 2006, the loan had a balance of $453,355.
The value of this property may be subject to real estate market forces that
typically affect industrial real estate in the area immediately surrounding the
property. The Company’s book value for this property is approximately
$1,229,054.
In June,
2005 the Company purchased a 100,000-square-foot distribution and warehousing
facility that is equipped with 40,000 square feet of refrigeration. The
facility, located at 6101 Gross Point Road in Niles, Illinois, will be used to
store raw materials and finished goods in order to relieve space pressures at
the Company’s existing 50,000-square foot building, less than a mile away. The
additional space at the Company’s main plant will be used to expand production
capacity for the Company’s kefir and other probiotic products. Lifeway is the
only occupant of this property and presently holds fee simple title subject to a
mortgage which secures the property as collateral for the acquisition loan to
Lifeway from Harris Bank at a rate of 5.6% and is payable in monthly principal
and interest installments of $19,513 with a balloon payment of $2,652,142.70 due
July 14, 2010. At December 31, 2006, the loan had a balance of
$2,905,288. The value of this property may be subject to real estate market
forces that typically affect industrial real estate in the area immediately
surrounding the property. The Company’s book value for this property is
approximately $4,324,309.
Included
in the purchase of Pride of Main Street Dairy on August 3, 2006, Lifeway
acquired an approximately 35,000 square foot commercially zoned parcel of
real estate located at 214 Main Street S. Sauk Centre, MN, including a
16,000 square foot two-story brick building used for production, and a
5,600 square foot storage facility. This property is used as the main
headquarters and main production facility for Pride of Main Street Dairy. The
building was built in the 1920’s with an addition in 1990. The facility is being
used to produce all of the Pride of Main Street Dairy products, and
approximately 70% of the Helios Nutrition Organic Kefir, with the remaining 30%
being produced in Lifeway’s main production facility in Morton Grove, Illinois.
Pride of Main Street is the only occupier of this property and presently holds
fee simple title free and clear of all encumbrances thereto. The value of this
property may
be
subject to real estate market forces that typically affect industrial real
estate in the area immediately surrounding the property. The Company’s book
value for this property is approximately $98,932.
For
financial statement and tax purposes, Lifeway depreciates its buildings and
improvements on a straight line basis over 31 and
39 years.
Management
believes that Lifeway has adequate insurance coverage for all its
properties.
ITEM
3. LEGAL
PROCEEDINGS.
Lifeway
is from time to time engaged in litigation matters arising in the ordinary
course of business none of which presently is expected to have a material
adverse effect on its business results or operations.
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,
2007, to a vote of security holders through the solicitation of proxies or
otherwise.
PART
II
ITEM
5. MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET
INFORMATION
Lifeway’s
Common Stock, no par value, the only class of common equity of Lifeway, is
traded on The Nasdaq Stock Market National Market System under the symbol
“LWAY.” Trading commenced on March 29, 1988.
The range
of high and low bid quotations for Lifeway’s Common Stock for the quarterly
periods within the two most recent fiscal years, as reported by The Nasdaq Stock
Market National Market System, is set forth in the following table:
|
Low Bid
|
|
High Bid
|
1st
Qtr. 2006
|
5.47
|
|
6.65
|
2nd
Qtr. 2006
|
5.06
|
|
6.60
|
3rd
Qtr. 2006
|
6.08
|
|
7.79
|
4th
Qtr. 2006
|
6.53
|
|
10.85
|
1st
Qtr. 2007
|
8.51
|
|
10.24
|
2nd
Qtr. 2007
|
8.55
|
|
11.59
|
3rd
Qtr. 2007
|
11.09
|
|
17.75
|
4th
Qtr. 2007
|
9.62
|
|
20.75
|
Note: The
foregoing quotations have been adjusted for the August 14, 2006 two-for-one
company stock split.
As of
March 3, 2008, there were approximately 87 holders of record of Lifeway’s Common
Stock. The Company has no information regarding beneficial owners whose shares
are held in street name.
DIVIDENDS
Lifeway
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 2007, 2006 or 2005 other the than
issuance of 202,650 shares of Common Stock
in
payment of a portion of the purchase price for the acquisition by the Company on
August 3, 2006 of all of the issued and outstanding stock of Helios Nutrition,
Ltd. These shares were issued in reliance upon applicable exemptions
from registration under Section 4(2) of the Securities Act of 1933, as
amended.
PURCHASES
OF THE COMPANY’S SECURITIES
SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES*
Period
|
|
(a)
Total
Numbers
of
Shares
(or Units)
Purchased
|
|
(b)
Average Price Paid per Share (or Unit)
|
|
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs
|
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May
Yet Be Purchased Under the Plans or Programs
|
March
1, 2007 to March 31, 2007
|
|
8,589
|
|
$ |
8.95 |
|
8,589
|
|
700,000
|
June
1, 2007 to June 30, 2007
|
|
66,411
|
|
$ |
10.17 |
|
66,411
|
|
0
|
Total
|
|
|
|
$ |
10.03 |
|
|
|
0
|
*Pursuant
to the approved share repurchase program December 15, 2006 for 75,000 split
adjusted shares with a plan expiration date of one
year. Lifeway completed the December 15, 2006 repurchase
for 75,000 shares of the Companys securities in 2007 at a total cost of
$752,603.
EQUITY
COMPENSATION PLAN INFORMATION
Plan Category
|
|
Number
of Securities to be
Issued
Upon Exercise of
Outstanding
Options, Warrants
and Rights
(a)
|
|
|
Weighted-Average
Exercise
Price
of Outstanding
Options,
Warrants and
Rights
(b)
|
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities Warrants and Rights Reflected in Column (a))
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
0 |
|
|
$ |
0.00 |
|
|
|
468,000 |
|
Equity
compensation plans not approved by security holders*
|
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
Total
|
|
|
0 |
|
|
|
0 |
|
|
|
468,000 |
|
____________
*
|
All
of Lifeway’s equity compensation plans have been approved by
shareholders.
|
ITEM
6. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION.
RESULTS
OF OPERATIONS
The
following analysis should be read in conjunction with the audited financial
statements of the Company and related notes included elsewhere in this annual
report and the unaudited financial statements and Management’s Discussion and
Analysis contained in our Form 10-QSB, for the fiscal quarters ended March 31,
2007, June 30, 2007, and September 30, 2007.
Comparison
of Quarter Ended December 31, 2007 to Quarter Ended December 31,
2006
Sales
increased by $2,280,528, (approximately 29%) to $10,174,172 during the three
month period ended December 31, 2007 from $7,893,644 during the same three month
period in 2006. This increase is primarily attributable to increased sales and
awareness of Lifeway’s flagship product, Kefir.
Cost of
goods sold as a percentage of sales was approximately 77% during the fourth
quarter 2007, compared to about 70% during the same period in 2006. This
increase is primarily attributable to the record increase in the cost of milk,
which is Lifeway’s largest cost of goods sold component. The cost of
milk was approximately 110% higher in the fourth quarter 2007 when compared to
the fourth quarter 2006. We expect the price of milk to decline in
2008 from the record high levels experienced in the fourth quarter
2007.
Operating
expenses as a percentage of sales was approximately 20% during the fourth
quarter 2007, compared to about 20% during the same period in
2006. Included in operating expenses during the fourth quarter 2007
was a charge of $100,000 related to Sarbanes-Oxley 404 compliance
work. There will be a $90,000 charge also related to Sarbanes-Oxley
404 compliance work expensed in the first quarter 2008. These charges
are one time fees as the compliance work has been completed as of March 31,
2008. Even
though there are expenses related to this regulatory compliance which are
recurring, much of the compliance work has been completed as of March 31, 2008,
and we expect these fees to substantially be reduced going forward.
Total
other expenses for the three months ended December 31, 2007 was $91,373,
compared with total other income of $47,808 during the same period in 2006. This
decrease is primarily attributable to the loss on the sale of marketable
securities of $124,153 as we rebalanced portions of our
portfolio. Marketable securities are discussed in Note 4 of the notes
to the financial statements.
Total net
income for the group was $153,109, or $.01 per split adjusted share for the
fourth quarter, 2007, compared with $511,163 or $.03 per split adjusted share in
the same period in 2006.
Comparison
of Year Ended December 31, 2007 to Year Ended December 31, 2006
Sales
increased by $11,008,443, (approximately 40%) to $38,729,156 during the twelve
month period ended December 31, 2007 from $27,720,713 during the same twelve
month period in 2006. This increase is primarily attributable to increased sales
and awareness of Lifeway’s flagship line, Kefir, as well as the acquisition of
the Helios Organic Kefir line and the Pride of Main Street milk line. Helios
Nutrition and its subsidiary, Pride of Main Street Dairy, which were acquired
August 3, 2006, accounted for total sales in 2006 of $2,173,998, with the Helios
kefir brand accounting for $1,856,237 in sales, and the Pride of Main Street
line accounting for $317,761. In 2007, the Helios kefir brand
generated revenues of $4,563,026, while the Pride of Main Street line generated
revenues of $1,065,766.
Sales for
the existing Lifeway Foods line increased by $7,553,648 (approximately 30%) to
$33,100,364 during the twelve-month period ended December 31, 2007 from
$25,546,715 during the same twelve-month period in 2006. This
increase is primarily attributable to increased sales and awareness of Lifeway’s
existing s flagship line, Kefir, as well as Lifeway’s new kids kefir drink,
Probugsä.
Cost of
goods sold as a percentage of sales excluding depreciation was approximately 66%
in 2007, compared to about 60% in 2006. This increase is primarily
attributable to the record increase in the cost of milk, which is Lifeway’s
largest cost of goods sold component. The cost of milk was
approximately 60% higher in 2007 when compared to 2006. We expect the
price of milk to decline in 2008 from the record high levels experienced in
2007.
Operating
expenses as a percentage of sales in was approximately 20% in 2007, compared to
about 23% in 2006. Included in operating expenses during 2007 was a
charge of $100,000 related to Sarbanes-Oxley 404 compliance work as well as
various one time legal and regulatory expenses related the August 2006 Helios
acquisition. Even though we incurred these one-time expenses in 2007,
we were able to lower the overall operating expenses as a percentage of sales
compared to that in 2006.
Amortization
expense during the years ended 2007 and 2006 was $323,266 and $186,278,
respectively. This increase is attributable to the amortization of
the intangible assets acquired from Helios Nutrition and its subsidiary, Pride
of Main Street on August 3, 2006.
Total
other income for 2007 was $528,150, compared with $410,733 during the same
period in 2006. This increase is primarily attributable to the gains on the sale
of marketable securities, which was $537,856 in 2007 compared to $355,767 in
2006. Marketable securities are discussed in Note 4 of the notes to
the financial statements.
Provision
for income taxes was $1,812,539, or a 37% tax rate in 2007 compared with
$1,745,075 or a 37.6% tax rate in 2006. Income taxes are discussed in Note 9 of
the Notes to Consolidated Financial Statements.
Total net
income for the group was $3,152,660, or $.19 per split adjusted share for the
twelve months ended December 31, 2007, compared with $2,895,824 or $.17 per
split adjusted share in the same period in 2006. This represents a
12% year over year increase.
SOURCES
AND USES OF CASH IN 2007
Net cash
used in investing activities was $901,330 during the twelve months ended
December 31, 2007, which is a decrease of $2,555,144 compared to the same period
in 2006. This decrease is primarily due to the Company’s purchase of
Helios Nutrition in 2006. The company used $2,551,679 net of cash
acquired to purchase Helios Nutrition. The acquisition is discussed
in Note 1 of the Notes to Consolidated Financial Statements. The
company also used $1,824,879 to purchase machinery and equipment in 2007
compared with using $680,174 to purchase machinery and equipment in
2006.
Net cash
used in financing activities was $2,397,734 during the twelve months ended
December 31, 2007, which is an increase of $890,436 compared to $1,507,298
of net cash used in financing activities during the same period in
2006. This increase is primarily attributable to the Company’s
repayment of $1,945,131 of long-term debt in the form of notes
payable. Notes payable are discussed in Note 8 of the notes to the
financial statements.
A
significant portion of our assets are held in marketable securities. All of our
marketable securities are classified as available-for-sale on our balance sheet,
while the mortgage-backed securities are classified as trading. All of these
securities are stated thereon at market value as of the end of the applicable
period. Gains and losses on the portfolio are determined by the specific
identification method.
We
anticipate being able to fund the Company’s foreseeable liquidity requirements
internally. We continue to explore potential acquisition opportunities in our
industry in order to boost sales while leveraging our distribution system to
consolidate and lower costs.
Other
Developments
On May
18, 2007, Lifeway’s Board of Directors approved awards of an aggregate amount of
8,400 shares to be awarded under its Employee and Consulting Services and
Compensation Plan to certain employees and consultants for services rendered to
the Company. The stock awards were made on June 1, 2007 and have vesting periods
of one year. The expense for the awards is measured as of June 1, 2007 at $9.90
per share for 8,400 shares, or a total stock award expense of $83,160. This
expense will be recognized as the stock awards vest in 12 equal portions of
$6,930, or 700 shares per month for one year.
Off-Balance
Sheet Arrangements
We have
never entered into any off-balance sheet financing arrangements and have never
established any special purpose entities. We have not guaranteed any debt or
commitments of other entities or entered into any options on non-financial
assets.
Critical
Accounting Policies
Lifeway’s
analysis and discussion of its financial condition and results of operations are
based upon its consolidated financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“US GAAP”). The preparation of financial statements in accordance with
US GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. US GAAP provides
the framework from which to make these estimates, assumptions and disclosures.
Lifeway chooses accounting policies within US GAAP that management believes are
appropriate to accurately and fairly report Lifeway’s operating results and
financial position in a consistent manner. Management regularly assesses these
policies in light of current and forecasted economic conditions and has
discussed the
development
and selection of critical accounting policies with its audit committee of the
Board of Directors. For further information concerning accounting policies,
refer to Note 2 — Nature of Business and Significant Accounting Policies in the
notes to the consolidated financial statements.
Forward
Looking Statements
In this
report, in reports subsequently filed by Lifeway with the SEC on Form 10-QSB and
filed or furnished on Form 8-K, and in related comments by management, our use
of the words “believe,” “expect,” “anticipate,” “estimate,” “forecast,”
“objective,” “plan,” “goal,” “project,” “explore,” “priorities/targets,” and
similar expressions is intended to identify forward-looking statements. While
these statements represent our current judgment on what the future may hold, and
we believe these judgments are reasonable, actual results may differ materially
due to numerous important factors that are described in this report and other
factors that may be described in subsequent reports which Lifeway may file with
the SEC on Form 10-QSB and filed or furnished on Form 8-K, including but not
limited to:
|
•
|
Changes
in economic conditions, commodity
prices;
|
|
•
|
Shortages
of and price increase for fuel, labor strikes or work stoppages, market
acceptance of the Company’s new
products;
|
|
•
|
Significant
changes in the competitive
environment;
|
|
•
|
Changes
in laws, regulations, and tax rates;
and
|
|
•
|
Management’s
ability to achieve reductions in cost and employment levels, to realize
production efficiencies and to implement capital expenditures, all at of
the levels and times planned by
management.
|
—
The
annotated consolidated financial statements of the Company that constitute
Item 7 of this report commence on the pages that follow this
page.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders of
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
We have
audited the accompanying consolidated balance sheets of LIFEWAY FOODS, INC. AND
SUBSIDIARIES (the “Company”) as of December 31, 2007 and 2006, and the related
consolidated statements of income and comprehensive income, changes in
stockholders’ equity, and cash flows for each of the two years in the period
ended December 31, 2007. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of LIFEWAY FOODS, INC. AND
SUBSIDIARIES as of December 31, 2007 and 2006, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
2007 in conformity with accounting principles generally accepted in the United
States of America.
Plante
& Moran, PLLC
Grand
Rapids, MI
March 31,
2008
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Consolidated
Statements of Financial Condition
December 31, 2007 and
2006
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
595,885 |
|
|
$ |
1,547,812 |
|
Marketable
securities
|
|
|
6,989,474 |
|
|
|
8,491,363 |
|
Inventories
|
|
|
3,506,554 |
|
|
|
2,522,196 |
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
of $39,460 and $80,000 at December
31, 2007 and 2006
|
|
|
4,209,662 |
|
|
|
3,942,717 |
|
Prepaid expenses and other current
assets
|
|
|
21,253 |
|
|
|
11,983 |
|
Other
receivables
|
|
|
43,111 |
|
|
|
71,050 |
|
Deferred income
taxes
|
|
|
311,960 |
|
|
|
32,234 |
|
Refundable income
taxes
|
|
|
240,880 |
|
|
|
267,771 |
|
Total current
assets
|
|
|
15,918,779 |
|
|
|
16,887,126 |
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
|
9,678,948 |
|
|
|
8,580,716 |
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,414,858 |
|
|
|
3,952,425 |
|
Other intangible assets, net of
accumulated amortization
|
|
|
|
|
|
|
|
|
of $601,976 and $278,710 at
December 31, 2007 and 2006
|
|
|
3,255,662 |
|
|
|
3,578,928 |
|
Total intangible
assets
|
|
|
8,670,520 |
|
|
|
7,531,353 |
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
500,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
34,768,247 |
|
|
$ |
32,999,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current maturities of notes
payable
|
|
$ |
1,136,126 |
|
|
$ |
1,131,336 |
|
Accounts
payable
|
|
|
1,594,330 |
|
|
|
1,463,014 |
|
Accrued
expenses
|
|
|
414,039 |
|
|
|
480,101 |
|
Total current
liabilities
|
|
|
3,144,495 |
|
|
|
3,074,451 |
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
4,096,797 |
|
|
|
5,746,718 |
|
|
|
|
|
|
|
|
|
|
Deferred income
taxes
|
|
|
1,712,795 |
|
|
|
449,619 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common stock, no par value;
20,000,000 shares authorized; 17,273,776 shares issued; 16,827,726 shares
outstanding at December 31, 2007; 17,273,776 shares issued; 16,897,826
shares outstanding at December 31, 2006
|
|
|
6,509,267 |
|
|
|
6,509,267 |
|
Paid-in-capital
|
|
|
1,120,669 |
|
|
|
1,080,911 |
|
Treasury stock, at
cost
|
|
|
( 2,078,165 |
)
|
|
|
( 1,334,313 |
)
|
Retained
earnings
|
|
|
20,471,432 |
|
|
|
17,318,772 |
|
Accumulated other comprehensive
income (loss), net of taxes
|
|
|
( 209,043 |
)
|
|
|
153,770 |
|
Total stockholders’
equity
|
|
|
25,814,160 |
|
|
|
23,728,407 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders’ equity
|
|
$ |
34,768,247 |
|
|
$ |
32,999,195 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
financial statements
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Consolidated
Statements of Income and Comprehensive Income
For the Years
Ended December 31, 2007 and 2006
|
|
Years Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
38,729,156 |
|
|
$ |
27,720,713 |
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold
|
|
|
25,582,981 |
|
|
|
16,509,516 |
|
Depreciation
expense
|
|
|
726,647 |
|
|
|
572,476 |
|
|
|
|
|
|
|
|
|
|
Total cost of goods
sold
|
|
|
26,309,628 |
|
|
|
17,081,992 |
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
12,419,528 |
|
|
|
10,638,721 |
|
|
|
|
|
|
|
|
|
|
Selling
Expenses
|
|
|
3,744,388 |
|
|
|
3,065,254 |
|
General and
Administrative
|
|
|
3,914,825 |
|
|
|
3,157,063 |
|
Amortization
expense
|
|
|
323,266 |
|
|
|
186,278 |
|
|
|
|
|
|
|
|
|
|
Total Operating
Expenses
|
|
|
7,982,479 |
|
|
|
6,408,595 |
|
|
|
|
|
|
|
|
|
|
Income from
operations
|
|
|
4,437,049 |
|
|
|
4,230,126 |
|
|
|
|
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
Interest and dividend
income
|
|
|
350,286 |
|
|
|
388,339 |
|
Rental
Income
|
|
|
48,305 |
|
|
|
11,401 |
|
Interest
expense
|
|
|
(410,180 |
)
|
|
|
(345,525 |
)
|
Gain (loss) on sale of
marketable
|
|
|
|
|
|
|
|
|
securities,
net
|
|
|
539,739 |
|
|
|
356,558 |
|
Total other income
(Expense)
|
|
|
528,150 |
|
|
|
410,773 |
|
|
|
|
|
|
|
|
|
|
Income before provision
for
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
4,965,199 |
|
|
|
4,640,899 |
|
|
|
|
|
|
|
|
|
|
Provision for income
taxes
|
|
|
1,812,539 |
|
|
|
1,745,075 |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,152,660 |
|
|
$ |
2,895,824 |
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings
per
|
|
|
|
|
|
|
|
|
common
share
|
|
|
0.19 |
|
|
|
0.17 |
|
|
|
|
|
|
|
|
|
|
Weighted average number
of
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
16,855,611 |
|
|
|
16,829,601 |
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,152,660 |
|
|
$ |
2,895,824 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss),
|
|
|
|
|
|
|
|
|
net of tax:
|
|
|
|
|
|
|
|
|
Unrealized gains (losses)
on
|
|
|
|
|
|
|
|
|
marketable
securities
|
|
|
|
|
|
|
|
|
(net of tax
benefits)
|
|
|
(47,091 |
)
|
|
|
45,081 |
|
Less reclassification
adjustment
|
|
|
|
|
|
|
|
|
for gains
(losses)
|
|
|
|
|
|
|
|
|
included in net income (net of
taxes)
|
|
|
(315,721 |
)
|
|
|
208,203 |
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
2,789,848 |
|
|
$ |
3,149,108 |
|
See
accompanying notes to financial statements
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in
Stockholders Equity
For the Years Ended December 31, 2007 and
2006
|
|
Common
Stock, No Par Value 20,000,000
Shares
|
|
|
#
of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
#
of Shares
|
|
|
#
of Shares
|
|
|
Treasury
|
|
|
Common
|
|
|
Paid
In
|
|
|
Treasury
|
|
|
Retained
|
|
|
Income
(Loss),
|
|
|
|
|
|
|
Issued
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Net
of Tax
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2005
|
|
|
17,273,776 |
|
|
|
16,790,510 |
|
|
|
483,266 |
|
|
$ |
6,509,267 |
|
|
$ |
90,725 |
|
|
$ |
(1,024,659 |
)
|
|
$ |
14,422,948 |
|
|
$ |
(99,514 |
)
|
|
$ |
19,898,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of treasury stock for
compensation
|
|
|
— |
|
|
|
4,666 |
|
|
|
( 4,666 |
)
|
|
|
— |
|
|
|
13,311 |
|
|
|
15,855 |
|
|
|
— |
|
|
|
— |
|
|
|
29,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of treasury stock for
acquisition of Helios
|
|
|
— |
|
|
|
202,650 |
|
|
|
( 202,650 |
)
|
|
|
— |
|
|
|
976,875 |
|
|
|
323,125 |
|
|
|
— |
|
|
|
— |
|
|
|
1,300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of
stock
|
|
|
— |
|
|
|
( 100,000 |
)
|
|
|
100,000 |
|
|
|
— |
|
|
|
— |
|
|
|
( 648,634 |
)
|
|
|
— |
|
|
|
— |
|
|
|
( 648,634 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities,
net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes and reclassification
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
253,284 |
|
|
|
253,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the
year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended December 31,
2006
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,895,824 |
|
|
|
— |
|
|
|
2,895,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2006
|
|
|
17,273,776 |
|
|
|
16,897,826 |
|
|
|
375,950 |
|
|
|
6,509,267 |
|
|
|
1,080,911 |
|
|
|
(1,334,313 |
)
|
|
|
17,318,772 |
|
|
|
153,770 |
|
|
|
23,728,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of
stock
|
|
|
— |
|
|
|
( 75,000 |
)
|
|
|
75,000 |
|
|
|
— |
|
|
|
— |
|
|
|
( 752,603 |
)
|
|
|
— |
|
|
|
— |
|
|
|
(752,603 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of treasury stock for
compensation
|
|
|
— |
|
|
|
4,900 |
|
|
|
( 4,900 |
)
|
|
|
— |
|
|
|
39,758 |
|
|
|
8,751 |
|
|
|
— |
|
|
|
— |
|
|
|
48,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities,
net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes and reclassification
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( 362,813 |
)
|
|
|
(362,813 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the
year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended December 31,
2007
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,152,660 |
|
|
|
— |
|
|
|
3,152,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2007
|
|
|
17,273,776 |
|
|
|
16,827,726 |
|
|
|
446,050 |
|
|
$ |
6,509,267 |
|
|
$ |
1,120,669 |
|
|
$ |
(2,078,165 |
)
|
|
$ |
20,471,432 |
|
|
$ |
(209,043 |
)
|
|
$ |
25,814,160 |
|
See
accompanying notes to financial statements
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2007 and
2006
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$ |
3,152,660 |
|
|
$ |
2,895,824 |
|
Adjustments to reconcile net
income to net
|
|
|
|
|
|
|
|
|
cash flows from operating
activities, net of acquisition:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
1,049,913 |
|
|
|
758,754 |
|
(Gain)Loss on sale of marketable
securities, net
|
|
|
(539,739 |
)
|
|
|
(356,558 |
)
|
Deferred income
taxes
|
|
|
(223,717 |
)
|
|
|
33,031 |
|
Treasury stock issued for
compensation
|
|
|
48,509 |
|
|
|
29,166 |
|
Increase (decrease) in allowance
for doubtful accounts
|
|
|
(40,540 |
)
|
|
|
45,000 |
|
(Increase) decrease in operating
assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(226,405 |
)
|
|
|
(1,190,448 |
)
|
Other
receivables
|
|
|
27,939 |
|
|
|
(14,615 |
)
|
Inventories
|
|
|
(984,358 |
)
|
|
|
(585,563 |
)
|
Refundable income
taxes
|
|
|
26,891 |
|
|
|
(256,209 |
)
|
Prepaid expenses and other current
assets
|
|
|
(9,270 |
)
|
|
|
35,032 |
|
Increase (decrease) in operating
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
131,316 |
|
|
|
638,999 |
|
Accrued
expenses
|
|
|
(66,062 |
)
|
|
|
125,090 |
|
Net cash provided by operating
activities
|
|
|
2,347,137 |
|
|
|
2,157,503 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment in cost method
securities
|
|
|
(500,000 |
)
|
|
|
— |
|
Purchases of marketable
securities
|
|
|
(5,744,697 |
)
|
|
|
(7,509,692 |
)
|
Sale of marketable
securities
|
|
|
7,168,246 |
|
|
|
7,285,071 |
|
Purchases of property and
equipment
|
|
|
(1,824,879 |
)
|
|
|
(680,174 |
)
|
Acquisition of Helios, net of cash
acquired
|
|
|
— |
|
|
|
(2,551,679 |
)
|
Net cash used in investing
activities
|
|
|
(901,330 |
)
|
|
|
( 3,456,474 |
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds of note
payable
|
|
|
300,000 |
|
|
|
— |
|
Purchases of treasury stock,
net
|
|
|
(752,603 |
)
|
|
|
(648,634 |
)
|
Repayment of notes
payable
|
|
|
(1,945,131 |
)
|
|
|
(858,664 |
)
|
Net cash used in financing
activities
|
|
|
(2,397,734 |
)
|
|
|
(1,507,298 |
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(951,927 |
)
|
|
|
(2,806,269 |
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the
beginning of the period
|
|
|
1,547,812 |
|
|
|
4,354,081 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the
end of the period
|
|
$ |
595,885 |
|
|
$ |
1,547,812 |
|
See
accompanying notes to financial statements
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
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 under the name “Soy Treat” and a
vegetable-based seasoning under the name “Golden Zesta.” The Company currently
distributes its products throughout the Chicago Metropolitan area and various
cities in the East Coast through local food stores. In addition, the
products are sold throughout the United States and Ontario, Canada by
distributors. The Company also distributes some of its products to Eastern
Europe.
On August
3, 2006 the Company executed a Stock Purchase Agreement with George Economy,
Amani Holdings, LLC and other shareholders (“the
stockholders”) of the capital
stock of Helios Nutrition, Ltd. (“Helios”) and Pride Main Street Dairy, L.L.C.
pursuant to which the Company purchased all of the issued and outstanding stock
of Helios from the Stockholders for a combination of an aggregate amount of
202,650 in shares of the Company’s common stock, no par value, $2,563,000 in
cash, and a promissory note issued by the Company in favor of the Stockholders
in the principal amount of $4,200,000.
The final
net purchase price for the assets was $8,063,000 including professional fees
related to the acquisition. The following table summarizes the fair
values of the assets acquired and the liabilities assumed at the date of
acquisition.
Cash
|
|
$ |
11,321 |
|
Accounts Receivable
Assumed
|
|
|
279,654 |
|
Inventories
|
|
|
219,634 |
|
Equipment,
Building and Land
|
|
|
721,572 |
|
Prepaid
Items
|
|
|
37,871 |
|
Trade
Name - Intangible Asset
|
|
|
1,980,000 |
|
Formula
- Intangible Asset
|
|
|
438,000 |
|
Contractual
Backlog - Intangible Asset
|
|
|
12,000 |
|
Customer
Relationships - Intangible Asset
|
|
|
985,000 |
|
Goodwill
|
|
|
3,876,625 |
|
Total
Assets Acquired
|
|
|
8,561,677 |
|
Note
Payable and Accounts Payable Assumed
|
|
|
(498,677 |
) |
Net
Assets Acquired
|
|
$ |
8,063,000 |
|
At
closing, $2,563,000 was paid of the total purchase, $1,300,000 was paid in
stock, with the balance due as a $4,200,000 note to be paid in sixteen equal
installments over sixteen quarters.
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note 1 – NATURE OF BUSINESS -
Continued
During December 31, 2007, management re-evaluated its estimate
of the tax basis of the intangible assets acquired. As a result,
goodwill was increased by $1,462,433.
The following unaudited proforma
information presents the results of operations of the Company as if the
acquisition had taken place at the beginning of 2006:
|
|
Year ended
|
|
|
|
December 31,
2006
|
|
Net Sales
|
|
$ |
30,804,309 |
|
Net Income
|
|
$ |
2,621,228 |
|
EPS
|
|
$ |
0.16 |
|
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 subsidiaries, LFI
Enterprises, Inc., Helios Nutrition, Ltd., Pride of Main Street, L.L.C. and
Starfruit, L.L.C. All significant intercompany accounts and
transactions have been eliminated.
Use of
estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America 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. Significant estimates made in preparing the consolidated
financial statements include investments in marketable securities, the allowance
for doubtful accounts, the valuation of Goodwill and intangible assets and
deferred taxes.
Revenue
Recognition
Sales represent sales of Company
produced dairy products that are recorded at the time of shipment and the
following four criteria have been met: (i) The product has been
shipped and the Company has no significant remaining obligations;
(ii) Persuasive evidence of an agreement exists; (iii) The
price to the buyer is fixed or determinable and (iv) Collection is
probable. In addition, shipping costs invoiced to the customers are
included in net sales and the related cost in cost of sales.
Cash and
cash equivalents
All highly liquid investments purchased
with an original maturity of three months or less are considered to be cash
equivalents.
The Company maintains cash deposits at
several institutions located in the greater Chicago, Illinoisand Philadelphia, Pennsylvania metropolitan areas. Deposits
at each institution are insured up to $100,000 by the Federal Deposit Insurance
Corporation or the Securities Investor Protector
Corporation.
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - Continued
Bank balances of amounts reported by
financial institutions are categorized as follows:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Amounts
insured
|
|
$ |
576,563 |
|
|
$ |
432,678 |
|
Uninsured and uncollateralized
amounts
|
|
|
523,295 |
|
|
|
1,412,560 |
|
Total bank
balances
|
|
$ |
1,099,858 |
|
|
$ |
1,845,238 |
|
Marketable
securities
Accounts
receivable
Credit terms are extended to customers
in the normal course of business. The Company performs ongoing credit
evaluations of its customers’ financial condition and generally requires no
collateral.
Accounts receivable are recorded at
invoice amounts, and reduced to their estimated net realizable value by
recognition of an allowance for doubtful accounts. The Company’s
estimate of the allowance for doubtful accounts is based upon historical
experience, its evaluation of the current status of specific receivables, and
unusual circumstances, if any. Accounts are considered past due if
payment is not made on a timely basis in accordance with the Company’s credit
terms. Accounts considered uncollectible are charged against the
allowance.
Inventories
Inventories are stated at the lower of
cost or market, cost being determined by the first-in, first-out
method.
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – Continued
Property and
equipment
Property and equipment are stated at
depreciated cost or fair value where depreciated cost is not
recoverable. 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 and
39
|
Machinery and
equipment
|
|
5 – 12
|
Office
equipment
|
|
5 – 7
|
Vehicles
|
|
5
|
Intangible
assets
The
Company accounts for intangible assets at historical cost. Intangible
assets acquired in a business combination are recorded under the purchase method
of accounting at their estimated fair values at the date of
acquisition. Goodwill represents the excess purchase price over the
fair value of the net tangible and other intangible assets
acquired. Goodwill is not amortized and is reviewed for impairment at
least annually. The Company amortizes other intangible assets over
their estimated useful lives, as disclosed in the table below.
The
Company reviews intangible assets and their related useful lives at least once a
year to determine if any adverse conditions exist that would indicate the
carrying value of these assets may not be recoverable. The
Company conducts more frequent impairment assessments if certain conditions
exist, including: a change in the competitive landscape, any internal
decisions to pursue new or different strategies, a loss of a significant
customer, or a significant change in the market place including changes in the
prices paid for the Company’s products or changes in the size of the market for
the Company’s products.
If the
estimate of an intangible asset’s remaining useful life is changed, the
remaining carrying amount of the intangible asset is amortized prospectively
over the revised remaining useful life.
Intangible assets are being amortized
over the following useful lives:
Category
|
|
Years
|
Recipes
|
|
4
|
Customer lists and
other
customer related
intangibles
|
|
15
|
Lease
agreement
|
|
7
|
Trade names
|
|
15
|
Formula
|
|
10
|
Customer
relationships
|
|
12
|
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
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 non-current, 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 non-current depending on the periods in which the
temporary differences are expected to reverse.
The principal sources of temporary
differences are different depreciation and amortization methods for financial
statement and tax purposes, unrealized gains or losses related to marketable
securities, capitalization of indirect costs for tax purposes, and the
recognition of an allowance for doubtful accounts for financial statement
purposes.
As of
January 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an interpretation of FASB
Statement No. 109” (FIN 48), which clarifies the accounting and disclosure
for uncertainty in tax positions, as defined. Pursuant to FIN 48, the Company
has analyzed filing positions in all of the federal and state jurisdictions
where it is required to file income tax returns, as well as all open tax years
in these jurisdictions. The only periods subject to examination for the
Company’s federal return are the 2003 through 2006 tax years. The Company
believes that its income tax filing positions and deductions would be sustained
on audit and does not anticipate any adjustments that would result in a material
change to its financial position. Therefore, no reserves for uncertain income
tax positions have been recorded pursuant to FIN 48. In addition, the Company
did not record a cumulative effect adjustment related to the adoption of FIN
48.
The
Company’s policy for recording interest and penalties associated with audits is
to record such items as a component of income before taxes. There were no such
items during the periods covered in this report.
Treasury
stock
Treasury stock is recorded using the
cost method.
Advertising
costs
The Company expenses advertising costs
as incurred. During the year ended December 31, 2007and 2006, approximately $1,642,114 and $1,435,758 of such costs
respectively, were expensed.
Earning per
common share
Earnings per common share were computed
by dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the period. For 2007 and
2006, diluted and basic earnings per share were the same, as the effect of
dilutive securities options outstanding was not significant.
Reclassification
Certain 2006 amounts have been
reclassified to conform to the 2007 presentation.
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note
3 – INTANGIBLE ASSETS
Intangible
assets, and the related accumulated amortization, consist of the
following:
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
Recipes
|
|
$ |
43,600 |
|
|
$ |
37,242 |
|
|
$ |
43,600 |
|
|
$ |
26,342 |
|
Customer lists and other customer
related intangibles
|
|
|
305,200 |
|
|
|
141,518 |
|
|
|
305,200 |
|
|
|
100,098 |
|
Lease
acquisition
|
|
|
87,200 |
|
|
|
42,562 |
|
|
|
87,200 |
|
|
|
30,105 |
|
Other
|
|
|
6,638 |
|
|
|
3,319 |
|
|
|
6,638 |
|
|
|
1,991 |
|
Customer
relationship
|
|
|
985,000 |
|
|
|
116,285 |
|
|
|
985,000 |
|
|
|
34,924 |
|
Contractual
backlog
|
|
|
12,000 |
|
|
|
12,000 |
|
|
|
12,000 |
|
|
|
12,000 |
|
Trade names
|
|
|
1,980,000 |
|
|
|
187,000 |
|
|
|
1,980,000 |
|
|
|
55,000 |
|
Formula
|
|
|
438,000 |
|
|
|
62,050 |
|
|
|
438,000 |
|
|
|
18,250 |
|
|
|
$ |
3.857.638 |
|
|
$ |
601,976 |
|
|
$ |
3,857,638 |
|
|
$ |
278,710 |
|
Amortization expense is expected to be
as follows for the years ending December 31:
2008
|
|
$ |
313,588
|
|
|
2009
|
|
|
306,241
|
|
|
2010
|
|
|
303,704
|
|
|
2011
|
|
|
297,850
|
|
|
2012
|
|
|
276,958
|
|
|
Thereafter
|
|
|
1,757,321
|
|
|
|
|
$ |
3,255,662
|
|
|
Amortization expense during the years
ended December 31,
2007and 2006 was
$323,266, and $186,278,
respectively.
Note 4 – MARKETABLE
SECURITIES
The cost and fair value of marketable
securities classified as available for sale and trading are as
follows:
December 31,
2007
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$ |
3,037,507 |
|
|
$ |
331,776 |
|
|
$ |
(309,014 |
) |
|
$ |
3,060,269 |
|
Mutual
Funds
|
|
|
946,357 |
|
|
|
4,978 |
|
|
|
(104,529 |
) |
|
|
846,806 |
|
Preferred
Securities
|
|
|
1,776,750 |
|
|
|
40,020 |
|
|
|
(241,726 |
) |
|
|
1,575,044 |
|
Corporate
Bonds
|
|
|
1,480,433 |
|
|
|
1,556 |
|
|
|
(79,433 |
) |
|
|
1,402,556 |
|
Municipal
Bonds
|
|
|
4,586 |
|
|
|
253 |
|
|
|
— |
|
|
|
4,839 |
|
Government
agency
Obligations
|
|
|
100,000 |
|
|
|
— |
|
|
|
(40 |
) |
|
|
99,960 |
|
Total
|
|
$ |
7,345,633 |
|
|
$ |
378,583 |
|
|
$ |
(734,742 |
) |
|
$ |
6,989,474 |
|
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note 4 – MARKETABLE SECURITIES -
Continued
December
31, 2006
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$ |
3,048,755 |
|
|
$ |
359,729 |
|
|
$ |
(69,950 |
) |
|
$ |
3,338,534 |
|
Mutual
Funds
|
|
|
522,492 |
|
|
|
3,248 |
|
|
|
(7,675 |
) |
|
|
518,065 |
|
Preferred
Securities
|
|
|
1,353,568 |
|
|
|
6,554 |
|
|
|
(11,347 |
) |
|
|
1,348,775 |
|
Private
Investment LP
|
|
|
600,000 |
|
|
|
71,632 |
|
|
|
— |
|
|
|
671,632 |
|
Certificates
of Deposit
|
|
|
225,000 |
|
|
|
2,190 |
|
|
|
(2,393 |
) |
|
|
224,797 |
|
Corporate
Bonds
|
|
|
2,185,982 |
|
|
|
2,408 |
|
|
|
(95,075 |
) |
|
|
2,093,315 |
|
Municipal
Bonds
|
|
|
160,757 |
|
|
|
2,937 |
|
|
|
(303 |
) |
|
|
163,391 |
|
Government
agency
|
|
|
134,776 |
|
|
|
— |
|
|
|
(1,922 |
) |
|
|
132,854 |
|
Total
|
|
$ |
8,231,330 |
|
|
$ |
448,698 |
|
|
$ |
(188,665 |
) |
|
$ |
8,491,363 |
|
Proceeds from the sale of marketable
securities were $7,168,246
and $7,285,071 during the
years ended December 31,
2007and 2006,
respectively.
Gross gains of $876,527 and $596,692 and gross losses of
$336,788 and $240,134 were realized on these sales during the years ended
December 31, 2007
and 2006,
respectively.
The following table shows the gross
unrealized losses and fair value of Company’s investments with unrealized losses
that are not deemed to be other-than-temporarily impaired, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position, at December 31, 2007:
|
|
Less
Than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
Description
of Securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$ |
1,378,753 |
|
|
$ |
(248,489 |
) |
|
$ |
261,168 |
|
|
$ |
(60,525 |
) |
|
$ |
1,639,921 |
|
|
$ |
(309,014 |
) |
Mutual
Funds
|
|
|
544,057 |
|
|
|
(98,306 |
) |
|
|
128,370 |
|
|
|
(6,223 |
) |
|
|
672,427 |
|
|
|
(104,529 |
) |
Preferred
Securities
|
|
|
723,374 |
|
|
|
(140,818 |
) |
|
|
523,645 |
|
|
|
(100,908 |
) |
|
|
1,247,019 |
|
|
|
(241,726 |
) |
Corporate
Bonds
|
|
|
— |
|
|
|
— |
|
|
|
1,295,737 |
|
|
|
(79,433 |
) |
|
|
1,295,737 |
|
|
|
(79,433 |
) |
Government
Agency Obligations
|
|
|
— |
|
|
|
— |
|
|
|
99,960 |
|
|
|
(40 |
) |
|
|
99,960 |
|
|
|
(40 |
) |
|
|
$ |
2,646,184 |
|
|
$ |
(487,613 |
) |
|
$ |
2,308,880 |
|
|
$ |
(247,129 |
) |
|
$ |
4,955,064 |
|
|
$ |
(734,742 |
) |
Equities, Mutual Funds and Corporate
Bonds and Government Agency Obligations - The Company’s investments in equity
securities, mutual funds and corporate bonds consist of investments in common
stock and debt securities of companies in various industries. The
Company evaluated the near-term prospects of the issuer in relation to the
severity and duration of the impairment. Based on that evaluation and the
Company’s ability and intent to hold these investments for a reasonable period
of time sufficient for a forecasted recovery of fair value, the Company does not
consider any material investments to be other-than-temporarily impaired at
December 31,
2007.
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note 4 – MARKETABLE SECURITIES -
Continued
Preferred Securities- The Company’s investments in preferred
securities consist of investments in preferred stock of companies in various
industries. The Company evaluated the near-term prospects of the
security in relation to the severity and duration of the impairment. Based on
that evaluation and the Company’s ability and intent to hold these investments
for a reasonable period of time sufficient for a forecasted recovery of fair
value, the Company does not consider any material investments to be
other-than-temporarily impaired at December 31, 2007.
Note 5 – INVENTORIES
Inventories consist of the
following:
|
|
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Finished
goods
|
|
$ |
1,296,985 |
|
|
$ |
952,484 |
|
Production
supplies
|
|
|
1,383,384 |
|
|
|
988,174 |
|
Raw
materials
|
|
|
826,185 |
|
|
|
581,538 |
|
Total
inventories
|
|
$ |
3,506,554 |
|
|
$ |
2,522,196 |
|
Note 6 – PROPERTY AND
EQUIPMENT
Property and equipment consist of the
following:
|
|
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Land
|
|
$ |
969,232 |
|
|
$ |
969,232 |
|
Buildings and
improvements
|
|
|
6,743,647 |
|
|
|
6,713,743 |
|
Machinery and
equipment
|
|
|
8,159,199 |
|
|
|
7,143,537 |
|
Vehicles
|
|
|
581,458 |
|
|
|
534,365 |
|
Office
equipment
|
|
|
101,583 |
|
|
|
89,192 |
|
Construction in
process
|
|
|
719,830 |
|
|
|
— |
|
|
|
|
17,274,949 |
|
|
|
15,450,069 |
|
Less accumulated
depreciation
|
|
|
7,596,001 |
|
|
|
6,869,353 |
|
Total property and
equipment
|
|
$ |
9,678,948 |
|
|
$ |
8 ,580,716 |
|
Estimated costs to complete construction
in progress as of December 31, 2007 was $300,000.
Depreciation expense during the years
ended December 31, 2007
and 2006 was $726,647 and $572,476,
respectively.
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note 7 –ACCRUED
EXPENSES
Accrued expenses consist of the
following:
|
|
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Accrued payroll and payroll
taxes
|
|
$ |
58,395 |
|
|
$ |
139,367 |
|
Accrued property
tax
|
|
|
285,279 |
|
|
|
269,435 |
|
Other
|
|
|
70,365 |
|
|
|
71,299 |
|
|
|
$ |
414,039 |
|
|
$ |
480,101 |
|
Note 8 – NOTES
PAYABLE
Notes payable consist of the
following:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Mortgage note payable to a bank,
payable in monthly installments of $3,273 including interest at 7%, with a
balloon payment of $416,825 due September 25, 2011. Collateralized by
real estate.
|
|
$ |
446,450 |
|
|
$ |
453,355 |
|
Mortgage note payable to a bank,
payable in monthly installments of $19,513 including interest at 5.6%,
with a balloon payment of $2,652,143 due July 14, 2010. Collateralized by real
estate.
|
|
|
2,834,970 |
|
|
|
2,905,988 |
|
Note payable to Amani Holding LLC,
payable in quarterly installments of $262,500 plus interest at the
floating prime rate per annum (7.25% at December 31,
2007) due September 1, 2010 secured by
letter of credit
|
|
|
1,951,503 |
|
|
|
3,518,711 |
|
Total notes
payable
|
|
|
5,232,923 |
|
|
|
6,878,054 |
|
Less current
maturities
|
|
|
1,136,126 |
|
|
|
1,131,336 |
|
Total long-term
portion
|
|
$ |
4,096,797 |
|
|
$ |
5,746,718 |
|
Maturities of notes payables are as
follows:
For the Year Ended December
31,
|
|
|
|
|
2008
|
|
$ |
1,136,126 |
|
2009
|
|
|
992,703 |
|
2010
|
|
|
2,684,815 |
|
2011
|
|
|
419,279 |
|
Total
|
|
$ |
5,232,923 |
|
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note
9 – PROVISION FOR INCOME TAXES
The provision for income taxes consists
of the following:
|
|
|
|
|
|
For the Years
Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$ |
1,699,408 |
|
|
$ |
1,390,590 |
|
State and
local
|
|
|
336,848 |
|
|
|
321,454 |
|
Total
current
|
|
|
2,036,256 |
|
|
|
1,712,044 |
|
Deferred
|
|
|
(223,717 |
)
|
|
|
33,031 |
|
Provision for income
taxes
|
|
$ |
1,812,539 |
|
|
$ |
1,745,075 |
|
A reconciliation of the provision for
income taxes and the income tax computed at the statutory rate is as
follows:
|
|
|
|
|
|
For the Years
Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Federal income tax
expense
computed at the
statutory rate
|
|
$ |
1,688,168 |
|
|
$ |
1,577,226 |
|
State and local tax expense,
net
|
|
|
238,330 |
|
|
|
222,667 |
|
Permanent
differences
|
|
|
(113,959 |
)
|
|
|
(54,818 |
)
|
Provision for income
taxes
|
|
$ |
1,812,539 |
|
|
$ |
1,745,075 |
|
Amounts
for deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Non-current deferred tax
liabilities
arising from:
Temporary differences
-
|
|
|
|
|
|
|
accumulated depreciation and
amortization
|
|
$ |
(1,712,795 |
)
|
|
$ |
(449,619 |
)
|
Current deferred tax assets
(liabilities) arising from:
|
|
|
|
|
|
|
|
|
Unrealized losses (gains) on
marketable securities
|
|
|
147,077 |
|
|
|
(108,188 |
)
|
Inventory
|
|
|
148,586 |
|
|
|
107,382 |
|
Allowance for doubtful
accounts
|
|
|
16,297 |
|
|
|
33,040 |
|
Total current deferred tax
assets
(liabilities)
|
|
|
311,960 |
|
|
|
32,234 |
|
Net deferred tax
liability
|
|
$ |
(1,400,835 |
)
|
|
$ |
(417,385 |
)
|
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note 10 – SUPPLEMENTAL CASH FLOW
INFORMATION
Cash paid for interest and income taxes
are as follows:
|
|
|
|
|
|
For the Years
Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Interest
|
|
$ |
430,098 |
|
|
$ |
337,768 |
|
Income
taxes
|
|
$ |
2,026,031 |
|
|
$ |
1,556,586 |
|
Note 11 – STOCK AWARD AND 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 600,000 of the Company’s
common stock shares. Pursuant to such 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 468,000 shares
available for issuance under the Plan at December 31, 2007and 2006. 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, 2007and 2006, there were no stock options
outstanding or exercisable.
On May 23, 2005, Lifeway’s Board of Directors approved
awards of an aggregate amount of 11,200 common shares to be awarded under its
Employee and Consulting Services and Compensation Plan to certain employees and
consultants for services rendered to the Company. The stock awards
were made on June 1,
2005and have vesting
periods of one year. The expense for the awards is measured as of
June 1, 2005at $6.25 per share for 11,200 shares, or
a total stock award expense of $70,000. This expense will be
recognized as the stock awards vest in 12 equal portions of $5,833, or 932
shares per month for one year. During 2005, 7,534 shares vested and
the Company recognized a related expense of $40,833. During the year
ended December 31, 2006, 4,666 shares vested for an expense of
$29,166.
On May
18, 2007, Lifeway’s Board of Directors approved awards of an aggregate amount of
8,400 shares to be awarded under its Employee and Consulting Services and
Compensation Plan to certain key employees and consultants for services rendered
to the Company. The stock awards were made on June 1, 2007 and have
vesting periods of one year. The expense for the awards is measured as of June
1, 2007 at
$9.90 per share for 8,400 shares, or a total stock award expense of $83,160.
This expense will be recognized as the stock awards vest in 12 equal portions of
$6,930, or 700 shares per month for one year.
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note
12 – RECENT ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value in accordance with U.S. GAAP, and expands disclosures about fair value
measurements. The Statement clarifies that the exchange price is the price in an
orderly transaction between market participants to sell an asset or transfer a
liability at the measurement date. The statement emphasizes that fair value is a
market-based measurement and not an entity-specific measurement. The statement
establishes a fair value hierarchy used in fair value measurements and expands
the required disclosures of assets and liabilities measured at fair value.
Management will be required to adopt this statement beginning in 2008. The
adoption of this standard is not expected to have a material impact on the
Company’s financial condition, results of operations or liquidity.
In February 2007, the FASB issued SFAS
No. 159,The Fair Value
Option for Financial Assets and Financial Liabilities.SFAS No. 159 permits entities to
elect to measure many financial instruments and certain other items at fair
value and establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS No. 159 is
effective for the Company beginning February 3, 2008. We are in the
process of assessing the impact of SFAS No. 159 on the financial condition and
results of operations of the Company.
In December 2007, the FASB issued SFAS
No. 141(R) “Business Combinations.” SFAS No. 141(R) states that all
business combinations (whether full, partial or step acquisitions) will result
in all assets and liabilities of an acquired business being recorded at their
acquisition date fair values. Earn-outs and other forms of contingent
consideration and certain acquired contingencies will also be recorded at fair
value at the acquisition date. SFAS No. 141(R) also states
acquisition costs will generally be expensed as incurred; in-process research
and development will be recorded at fair value as an indefinite-lived intangible
asset at the acquisition date; changes in deferred tax asset valuation
allowances and income tax uncertainties after the acquisition date generally
will affect income tax expense; and restructuring costs will be expensed in
periods after the acquisition date. This statement is effective for
financial statements issued for fiscal years beginning after December 15,
2008. The Company will apply the provisions of this standard to any
acquisitions that it completes on or after December 15,
2008.
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements
December
31, 2007 and 2006
Note
12 – RECENT ACCOUNTING PRONOUNCEMENTS - Continued
In December 2007, the FASB issued SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51.” This statement amends ARB
No. 51 to establish accounting and reporting standards for the
noncontrolling interest (minority interest) in a subsidiary and for the
deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests
will be classified as equity in the consolidated balance sheets. This
statement also provides guidance on a subsidiary deconsolidation as well as
stating that entities need to provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. This statement is effective for financial
statements issued for fiscal years beginning after December 15,
2008. The adoption of this standard is not expected to have a
material impact on the Company’s financial condition, results of operations or
liquidity.
In March 2008, the FASB issued SFAS No.
161, “Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133” (“SFAS No. 161”). This statement
requires enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 also
requires that objectives for using derivative instruments be disclosed in terms
of underlying risk and accounting designation and requires cross-referencing
within the footnotes. This statement also suggests disclosing the
fair values of derivative instruments and their gains and losses in a tabular
format. This statement is effective for financial statements issued
for fiscal years and interim periods beginning after November 15,
2008. The adoption of this standard is not expected to have a
material impact on the Company’s financial condition, results of operations or
liquidity.
Note
13 - STOCK SPLIT
On June
8, 2006, the Board of Directors approved a two-for-one split of the Company’s
common stock and an amendment to its charter to increase the number of common
shares authorized from 10 million to 20 million. As a result of the
stock split, each shareholder of record at the close of business on July 19,
2006 received one additional share of common stock for every one share held on
such date. Upon completion of the split, the total number of shares
of common stock outstanding increased from approximately 8,391,000 to
approximately 16,782,000.
The
earnings per share calculations as presented on the Consolidated Statements of
Income and Comprehensive Income, the number of shares issued and outstanding per
the Statement of Changes in Stockholders’ Equity and share amounts referenced
throughout the Notes to the Consolidated Financial Statements have been adjusted
to reflect split adjusted share amounts.
ITEM
8. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
8A(T). CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and
Procedures
We
maintain disclosure controls and procedures that are designed to ensure material
information required to be disclosed in our reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required financial disclosure. In designing and evaluating the
disclosure controls and procedures, we recognized that a control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected.
As of
December 31, 2007, we carried out an evaluation under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective at the reasonable assurance level as
of December 31, 2007 in ensuring that information required to be disclosed
by us under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified under the Exchange Act rules and forms due to
the material weaknesses described below. As a result, we performed additional
analysis and other post-closing procedures to ensure our consolidated financial
statements were prepared in accordance with generally accepted accounting
principles. Accordingly, management believes the consolidated financial
statements included in this Form 10-KSB fairly present, in all material
respects, our financial condition, results of operations and cash flows for the
periods presented.
Management’s Report on Internal
Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in Exchange Act Rule 13a-15(f).
The Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2007. In making its assessment
of internal control over financial reporting, management used the criteria
described in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In conjunction
with our auditors, management identified two material weaknesses in the
Company’s internal control over financial reporting. A material weakness is a
significant deficiency, or a combination of significant deficiencies which when
aggregated, results in there being more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis by employees in the normal course of their
assigned functions. As a result of these material weaknesses, we concluded that
the Company’s internal control over financial reporting was not effective as of
December 31, 2007 based on the criteria in Internal Control —
Integrated Framework. We are taking steps to address these material weaknesses
which could possibly have led to a material misstatement in our financial
statements if not detected and corrected.
We have
identified a material weakness in our internal control for financial reporting
due to incomplete and undocumented financial reporting processes, including an
overview of the financial statement disclosure principles, and no documented
accounting procedures manual available for employee
use. Additionally, there was no requirement to post monthly activity
to the Company’s general ledger. We plan to take corrective action to
improve our review procedures for posting and updating the monthly financial
activity and have begun creating an accounting manual for its accounting
personnel during 2008.
This Annual Report on
Form 10-KSB does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this Annual Report on Form 10-KSB.
ITEM
8B. OTHER
INFORMATION
None.
PART
III
Certain
information required by Part III is omitted from this report in that Lifeway
intends to 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 AND EXECUTIVE
OFFICERS.
LUDMILA
SMOLYANSKY, 58, was appointed as a Director by the Board to fill a vacancy
created by an increase of the maximum number of Directors up to seven and
unanimously elected as the Chairperson of the Board in November 2002. The
Company has determined to intentionally keep one seat vacant at this time, for a
total of six directors. For more than 20 years, Mrs. Smolyansky has
been the operator of several independent delicatessen, gourmet food
distributorship businesses and imported food distributorships. In 2002, prior to
the commencement of her tenure as a Director, she was hired by the Company as
its General Manager. Mrs. Smolyansky devotes as much time as necessary to
the business of the Company and currently holds no other directorships in any
other reporting company. Mrs. Smolyansky is the mother of Julie Smolyansky
(the President, Chief Executive Officer (CEO), and a Director of the Company)
and Edward P. Smolyansky (the Company Treasurer and Chief Financial and
Accounting Officer).
JULIE
SMOLYANSKY, 32, was appointed as a Director, and elected President, CEO, CFO and
Treasurer of the Company by the Board of Directors to fill the vacancies in
those positions created by the death of her father, Michael Smolyansky, in
June 2002. She is a graduate with a Bachelor’s degree from the University
of Illinois at Chicago. Prior to her appointment, Ms. Smolyansky spent six
years as the Company’s Director of Sales and Marketing. She devotes as much time
as necessary to the business of the Company and
currently
holds no other directorships in any other reporting company. Ms. Smolyansky
is the daughter of Ludmila Smolyansky, the Chairperson of the Board. In 2004,
Ms. Smolyansky resigned as CFO and Treasurer and Edward Smolyansky,
Ms. Smolyansky’s brother, was appointed to such positions.
POL
SIKAR, 59, has been a Director of the Company since its inception in
February 1986. He is a graduate with a Master’s degree from the Odessa
State Institute of Civil Engineering in Russia. For more than 12 years, he
has been President and a major shareholder of Montrose Glass & Mirror Co., a
company providing glass and mirror products to the wholesale and retail trade in
the greater Chicago area. Mr. Sikar devotes as much time as necessary to
the business of the Company. Mr. Sikar holds no other directorships in any
other reporting company.
RENZO
BERNARDI, 55, has been a Director of the Company since 1994. Mr. Bernardi
is the president and founder of Renzo & Sons, Inc., a Dairy and Food Service
Company which has been in business since 1969 (formerly, Renzo-Milk Distribution
Systems). He has over 30 years of experience in the dairy distribution
industry. Mr. Bernardi is a graduate of Instituto Teonico E Commerciale of
Macomer, Sardinia. Mr. Bernardi devotes as much time as necessary to the
business of the Company. Mr. Bernardi holds no other directorships in any other
reporting company.
JUAN
CARLOS DALTO, 44, has served as a director of the Company since July 2004.
Juan Carlos Dalto is President and CEO of The Dannon Company. He has extensive
international background in the packaged goods industry and has strategic and
direct responsibilities for Dannon’s dairy products in the United States and
Canada. Mr. Dalto joined Dannon’s parent company, Groupe Danone, as
Marketing VP for Danone Argentina, his native country, in December 1997
after which he served as CEO for Danone Portugal in 2000. Mr. Dalto holds a
Masters in Strategic Marketing from Adam Smith Open University, Buenos Aires,
Argentina and a Diploma for Business Executives in Strategic Marketing Planning
from University of Michigan. He also holds a degree in Industrial Engineering
from the Buenos Aires Institute of Technology.
JULIE
OBERWEIS, 33, has served as a director of the Company since June 2006. She
is the co-founder and CFO of Stratigent, LLC, a web analytics consulting
company. Prior to Stratigent, she worked in investment consulting at Cambridge
Associates as well as at Ritchie Capital Management, L.L.C., a global
alternative asset management firm. She currently sits on the board of Oberweis
Group, Inc., the holding company of Oberweis Dairy, and the DuPage Childrens
Museum. Julie holds a degree in finance from the University of Illinois and is a
Chartered Financial Analyst (CFA) charterholder.
EDWARD P.
SMOLYANSKY, 28, was appointed as Chief Financial and Accounting Officer and
Treasurer of Lifeway Foods in November 2004. He had served as the
Controller of the Company June 2002 until such time. He received his
baccalaureate degree in finance from Loyola University of Chicago in
December 2001. Edward P. Smolyansky is the brother of Company President and
Chief Executive Officer Julie Smolyansky and the son of Lifeway’s Chairperson of
the Board of Directors, Ludmila Smolyansky.
KEY
EMPLOYEES.
VALERIY
NIKOLENKO, 62, Vice President of Operations, has been VP of Operations for
13 years with Lifeway Foods.
SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a)
of the Securities and Exchange Act of 1934 requires the Company’s officers and
Directors, and persons who own more than 10% of a registered class of the
Company’s equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (“SEC”). Officers,
directors, and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of copies of such reports received or representations from
certain reporting persons, the Company believes that, during the year ended
December 31, 2007, other than the filings listed below, all other Section
16(a) filing requirements applicable to its officers, Directors and 10%
shareholders were timely met. Those filings were:
Form 4
filed on behalf of Renzo Bernardi on March 12, 2007 for the sale of shares on
the earliest transaction date of March 7, 2007.
Form 4
filed on behalf of Julie Smolyansky on June 29, 2007 for the acquisition of
shares on the earliest transaction date of June 1, 2007.
Form 4
filed on behalf of Edward Smolyansky on June 29, 2007 for the acquisition of
shares on the earliest transaction date of June 1, 2007.
Form 4
filed on behalf of Pol Sikar on September 26, 2007 for six sales of shares on
the earliest transaction date of September 10, 2007.
FAMILY
RELATIONSHIPS
Julie
Smolyansky, the President, CEO and director of Lifeway is the daughter of
Ludmila Smolyansky, Chairperson of the Board of Directors of Lifeway and the
sister of Edward P. Smolyansky. Edward P. Smolyansky, the Chief Financial and
Accounting Officer and Treasurer of Lifeway is the son of Ludmila Smolyansky and
the brother of Julie Smolyansky.
CODE OF ETHICS
The
Company has adopted a Code of Ethics applicable to all officers which is
included in this report as an exhibit hereto. The Company has posted such Code
of Ethics on its website, which can be found at www.lifeway.net. Any
person may, without charge, request a copy of such Code of Ethics by contacting
the Company at 847-967-1010 or by email at [email protected].
ITEM
10. EXECUTIVE
COMPENSATION.
Summary
Compensation Table
|
Name
|
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Awards
|
|
|
All
other Comp. (5)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julie
Smolyansky CEO and President(1)
|
|
|
2007
|
|
|
$166,153
|
|
|
$22,500
|
|
|
$17,325
|
|
|
$7,546
|
|
|
$213,524
|
|
|
Edward
Smolyansky, CFO Chief Accounting Officer and Controller
(2)
|
|
|
2007
|
|
|
$178,461
|
|
|
$22,500
|
|
|
$17,325
|
|
|
$8,038
|
|
|
$226,324
|
|
|
Ludmila
Smolyansky, Chairman (3)
|
|
|
2007
|
|
|
$162,807
|
|
|
$55,000
|
|
|
—
|
|
|
$5,600
|
|
|
$223,407
|
|
|
Val
Nikolenko, Vice President of Operations and Secretary (4)
|
|
|
2007
|
|
|
$110,832
|
|
|
$10,000
|
|
|
$
2,887
|
|
|
$4,833
|
|
|
$128,552
|
|
NOTES TO SUMMARY
COMPENSATION TABLE
|
|
|
(1)
|
|
The
Board appointed Julie Smolyansky as the CEO, CFO, President and Treasurer
of the Company on June 10, 2002. Until that date and since
September 21, 1998 she had been Director of Sales and Marketing of
the Company. Since November 2004, Ms. Smolyansky has served
solely as CEO and President.
|
|
|
|
(2)
|
|
The
Board appointed Edward Smolyansky as the CFO, Chief Accounting Officer and
Controller of the Company in November 2004.
|
|
|
|
(3)
|
|
The
Company approves, on an annual basis, the payment to Ludmila Smolyansky of
salary and bonus as other compensation for continuing advisory services to
the Company, and in light of her extensive experience. Ludmila Smolyansky
devotes as much time as necessary to the business of the
Company.
|
|
|
|
(4)
|
|
The
Board appointed Val Nikolenko as the Vice President of Operations and
Secretary of the Company in December 1993.
|
|
|
|
(5)
|
|
Represents
the Company’s portion of the matching contributions to the Company’s
401(k) plan on behalf of the Named Executive Officer.
|
Julie
Smolyansky has an employment agreement (the “Employment Agreement”) with the
Company pursuant to which she serves as Chief Executive Officer. Pursuant to the
Employment Agreement, Ms. Smolyansky is entitled to an annual base salary and an
annual bonus subject to such incentive bonus targets and plans which the Company
may adopt from time to time. The Company has not currently set any such targets
in advance or adopted any such plans. In lieu thereof, the Board of Directors
determines Ms. Smolyansky’s salary and bonus on an annual basis
concurrently with determining amounts for other executive officers. In the event
that (a) Ms. Smolyansky is terminated other than for Cause (as defined
therein) or (b) Ms. Smolyansky terminates her employment for Good
Reason (as defined therein) or death, then Ms. Smolyansky is entitled to a
lump sum payment consisting of (y) twice her then-current base salary and
(z) the aggregate of the annual bonus for which she is then eligible under
the Employment Agreement and any such plans.
Director
Compensation
|
Name
|
Fees
Earned or Paid in Cash
|
Total
|
|
|
Pol
Sikar
|
$2,500
|
$2,500
|
|
|
Renzo
Bernardi
|
$2,500
|
$2,500
|
|
|
Julie
Oberweis
|
$2,500
|
$2,500
|
|
During
2007, each outside (non-employee) director was compensated at the rate of $500
per meeting attended. Neither any employee director (Ludmila Smolyansky and
Julie Smolyansky) nor any Director serving as the nominee of Danone (Juan Carlos
Dalto) was compensated as a Director during 2007.
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The
following table sets forth certain information known to the Company regarding
the beneficial ownership of the Company’s Common Stock, the Company’s only
outstanding class of securities, as of March 3, 2008 by (a) each
shareholder known by the Company to be the beneficial owner of more than five
percent of the Company’s Common Stock, (b) each of the Company’s directors,
(c) each of the Company’s executive officers named in the Summary
Compensation Table above and (d) all executive officers and directors of
the Company as a group. The shareholders listed below have sole voting and
investment power except as noted.
Name
and Address of Beneficial Owner (1)
|
|
Amount
and Nature of Beneficial Ownership of Common Stock
|
|
Percent
Owned Beneficially
and
of Record(2)
|
Ludmila
Smolyansky(3,4)
|
|
|
7,574,273
|
(3)
|
|
|
45.0
|
%
|
Julie
Smolyansky(4)
|
|
|
509,360
|
|
|
|
3.0
|
%
|
Edward
Smolyansky(4)
|
|
|
408,055
|
|
|
|
2.4
|
%
|
Pol
Sikar(4)
|
|
|
3,000
|
|
|
|
*
|
|
Renzo
Bernardi(4)
|
|
|
13,100
|
|
|
|
*
|
|
Juan
Carlos Dalto(4,5)
|
|
|
0
|
|
|
|
*
|
|
Julie
Oberweis(4)
|
|
|
0
|
|
|
|
*
|
|
Val
Nikolenko
|
|
|
5,000
|
|
|
|
*
|
|
All
Directors and Officers of the Company as a Group (Eight persons
in total)
|
|
|
8,507,269
|
|
|
|
50.6
|
%
|
DS
Waters, LP
|
|
|
3,454,756
|
|
|
|
20.5
|
%
|
NOTES TO BENEFICIAL
OWNERSHIP TABLE
|
|
|
(1)
|
|
With
the exception of Juan Carlos Dalto and DS Waters, LP, the address for all
Directors and shareholders listed in this table is 6431 Oakton St., Morton
Grove, IL 60053. The address for Juan Carlos Dalto and DS Waters, LP is
120 White Plains Road, Tarrytown, NY 10591.
|
|
|
|
(2)
|
|
Based
upon 16,810,326 shares of Common Stock outstanding as of March 1,
2008.
|
|
|
|
(3)
|
|
On
March 3, 2008, Mrs. Smolyansky directly owned 7,568,754 shares of
Common Stock. Additionally, Mrs. Smolyansky is deemed to be the
indirect beneficial owner of 5,519 shares of Common Stock held in the
Smolyansky Family Foundation, of which Mrs. Smolyansky is the
Trustee.
|
|
|
|
(4)
|
|
A
Director or Officer of the Company.
|
|
|
|
(5)
|
|
Mr. Dalto
is also an officer of The Dannon Company, Inc., which is an affiliate of
DS Waters, LP.
|
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
N/A
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, which list is incorporated herein by
reference.
3.1
|
|
Amended
and Restated By-laws (incorporated by reference to
Exhibit No. 3.5 of Lifeway’s Current Report on Form 8-K
dated and filed on December 10, 2002). (File
No. 000-17363)
|
3.2
|
|
Articles
of Incorporation, as amended and currently in effect (incorporated by
reference to Exhibit 3.5 of Lifeway’s Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2000 and filed on
August 8, 2000). (File No. 000-17363)
|
4.1
|
|
Form
of Promissory Note, dated August 3, 2006 in favor of Amani Holdings,
LLC (incorporated by reference to Exhibit 4.1 of Lifeway’s Current
Report on Form 8-K dated August 9, 2006 and filed on
August 9, 2006). (File No. 000-17363)
|
10.1
|
|
Lifeway
Foods, Inc. Consulting and Services Compensation Plan, dated June 5,
1995 (incorporated by reference to Lifeway’s Registration Statement on
Form S-8, File No. 33-93306). (File
No. 000-17363)
|
10.2
|
|
Stock
Purchase Agreement with Danone Foods, Inc., dated October 1, 1999
(incorporated by reference to Exhibit 10.10 of Lifeway’s Current
Report on Form 8-K dated October 1, 1999, and filed
October 12, 1999). (File No. 000-17363)
|
10.3
|
|
Employment
Agreement, dated September 12, 2002, between Lifeway Foods, Inc. and
Julie Smolyansky (incorporated by reference to Exhibit 10.14 of
Amendment No. 2 filed April 30, 2003 to Lifeway’s Quarterly
Report on Form 10-QSB/A for the quarter ended September 30,
2002). (File No. 000-17363)
|
10.4
|
|
Stock
Purchase Agreement dated as of July 27, 2006, among Lifeway Foods,
Inc., George Economy, Amani Holdings, LLC, the other shareholders of
Helios Nutrition, Ltd. and Pride of Main Street Dairy, L.L.C.
(incorporated by reference to Exhibit 10.1 of Lifeway’s Current Report on
Form 8-K dated August 9, 2006 and filed on August 9, 2006).
(File No. 000-17363)
|
10.5
|
|
Fourth
Extension to Stockholders’ Agreement, dated May 3, 2006, between
Lifeway Foods, Inc. and DS Waters, L.P. (incorporated by reference to
Exhibit 99.1 of Lifeway’s Current Report on Form 8-K dated
April 28, 2006 and filed on May 5, 2006). (File
No. 0-17363)
|
10.6
|
|
Fifth
Extension to Stockholders’ Agreement, dated December 26, 2006,
between Lifeway Foods, Inc. and DS Waters, L.P. (incorporated by reference
to Exhibit 10.1 of Lifeway’s Current Report on Form 8-K dated
January 3, 2007 and filed on January 3, 2007). (File
No. 0-17363)
|
11
|
|
Statement
re: computation of per share earnings. (Incorporated by reference to Note
2 of the Consolidated Financial Statements).
|
14
|
|
Code
of Ethics
|
21
|
|
List
of Subsidiaries of the Registrant
|
31.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Julie Smolyansky.
|
31.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Edward P. Smolyansky.
|
32.1
|
|
Section 1350
Certification of Julie Smolyansky.
|
32.2
|
|
Section 1350
Certification of Edward P. Smolyansky
|
99 |
|
Press
Release dated March 31, 2008.
|
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
AUDIT
FEES
In 2007
and 2006, Plante & Moran, PLLC, billed Lifeway approximately $151,000 and
$136,000, respectively, for professional services rendered for the audit of
Lifeway’s annual financial statements and review of financial statements
included in Lifeway’s Forms 10-QSB or services that are normally provided in
connection with statutory and regulatory filings or engagements in 2006 and
2007.
AUDIT-RELATED
FEES
In 2007
and 2006, Lifeway’s principal accountant billed Lifeway approximately $55,000
and $0, respectively, for professional services rendered in connection with the
audit of the consolidated financial statements of Helios Nutrution, LTD and
subsidiary as of and for the year ended December 31, 2005 included in the
Company’s
8-K/A dated October 19, 2006.
TAX
FEES
No
professional services were rendered by Plante & Moran, PLLC to Lifeway
regarding tax advice, tax compliance and tax planning during 2006 and
2007.
ALL OTHER
FEES
No other
fees were billed to Lifeway by Plante during 2006 and 2007 other than those
described in this report.
No hours
expended by Plante & Moran. PLLC in its engagement to audit Lifeway’s
financial statements for the most recent fiscal year were attributable to work
performed by persons other than Plante’s full-time permanent employees. The
Audit Committee has approved 100% of all services performed by Plante for
Lifeway and disclosed above.
AUDIT
COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The
Lifeway Audit Committee (the “Committee”), comprised of Messrs. Pol Sikar and
Renzo Bernardi, pre-approved Plante & Moran, PLLC as the Company’s
independent auditor for the year-ended December 31, 2007 and has adopted
the following guidelines regarding the engagement of the Company’s independent
auditor to perform services for the Company:
For audit
services (including statutory audit engagements as required under local country
laws), the independent auditor will provide the Committee with an engagement
letter during the January-March quarter of each year outlining the scope of the
audit services proposed to be performed during the fiscal year. If agreed to by
the Committee, this engagement letter will be formally accepted by the Committee
at its first or second quarter meeting.
The
independent auditor will submit to the Committee for approval an audit services
fee proposal after acceptance of the engagement letter.
For
non-audit services, company management will submit to the Committee for approval
(during the second or third quarter of each fiscal year) the list of non-audit
services that it recommends the Committee engage the independent auditor to
provide for the fiscal year. Company management and the independent auditor will
each confirm to the Committee that each non-audit service on the list is
permissible under all applicable legal requirements. In addition to the list of
planned non-audit services, a budget estimating non-audit service spending for
the fiscal year will be provided. The Committee will approve both the list of
permissible non-audit services and the budget for such services. The Committee
will be informed routinely as to the non-audit services actually provided by the
independent auditor pursuant to this pre-approval process.
To ensure
prompt handling of unexpected matters, the Committee delegates to either member
thereof the authority to amend or modify the list of approved permissible
non-audit services and fees. Either member will report action taken to the
Committee at the next Committee meeting.
The
independent auditor must ensure that all audit and non-audit services provided
to the Company have been approved by the Committee. The Controller or Chief
Financial Officer will be responsible for tracking all independent auditor fees
against the budget for such services and report at least annually to the
Committee.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunder duly authorized.
|
LIFEWAY
FOODS, INC. |
|
|
|
|
|
|
|
|
|
By:
|
/s/ Julie
Smolyansky |
|
|
|
Julie
Smolyansky |
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Chief
Executive Officer, President,
and Director
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By:
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/s/ Edward
P. Smolyansky |
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Edward
P. Smolyansky |
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Chief
Financial and Accounting Officer and
Treasurer
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Date: March
31, 2008
KNOW ALL
MEN BY THESE PRESENTS, that each individual whose signature appears below hereby
constitutes and appoints Julie Smolyansky and Edward P. Smolyansky, and each of
them individually, his or her true and lawful agent, proxy and attorney-in-fact,
with full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to (i) act on, sign and
file with the Securities and Exchange Commission any and all amendments to this
Report together with all schedules and exhibits thereto, (ii) act on, sign and
file with the Securities and Exchange Commission any and all exhibits to this
Report and any and all exhibits and schedules thereto, (iii) act on, sign and
file any and all such certificates, notices, communications, reports,
instruments, agreements and other documents as may be necessary or appropriate
in connection therewith and (iv) take any and all such actions which may be
necessary or appropriate in connection therewith, granting unto such agents,
proxies and attorneys-in-fact, and each of them individually, full power and
authority to do and perform each and every act and thing necessary or
appropriate to be done, as fully for all intents and purposes as he or she might
or could do in person, and hereby approving, ratifying and confirming all that
such agents, proxies and attorneys-in-fact, any of them or any of his, her or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
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/s/ Julie
Smolyansky |
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Julie
Smolyansky |
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Chief
Executive Officer, President,
and Director
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Date: March
31, 2008 |
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/s/ Ludmila Smolyansky |
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Ludmila
Smolyansky |
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Chairperson
of the Board of Directors
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Date: March
31, 2008 |
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/s/ Pol Sikar |
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Pol
Sikar |
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Date: March
31, 2008 |
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Juan
Carlos Dalto |
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Date: March
31, 2008 |
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Renzo
Bernardi |
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Date: March
31, 2008 |
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/s/ Julie Oberweis |
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Julie
Oberweis |
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Date: March
31, 2008 |
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INDEX
OF EXHIBITS
Exhibit No.
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Description of Exhibit
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14
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Code
of Ethics
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21
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List
of Subsidiaries
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23
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Consent
of Plante & Moran PLLC
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31.1
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Rule
13a-14(a)/15d-14(a) Certification of Julie Smolyansky.
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31.2
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Rule
13a-14(a)/15d-14(a) Certification of Edward P.
Smolyansky.
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32.1
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Section
1350 Certification of Julie Smolyansky.
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32.2
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Section
1350 Certification of Edward P. Smolyansky.
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99
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Press
Release dated March 31, 2008 - “Lifeway
Foods Reports Record 4th Quarter and Twelve Months Ended December
31, 2007 Results.”
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