WWW.EXFILE.COM, INC. -- 888-775-4789 -- LIFEWAY FOODS, INC. -- FORM 10QSB
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-QSB
(Mark
One)
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þ
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QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended March 31, 2008
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o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
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For
the transition period from
to
Commission
file number: 0-17363
LIFEWAY FOODS,
INC.
(Exact
name of small business issuer as specified in it charter)
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Illinois
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36-3442829
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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6431 WEST
OAKTON, MORTON GROVE, ILLINOIS 60053
(Address
of principal executive offices)
(847) 967-1010
(Issuer’s
telephone number)
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
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 þ No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
APPLICABLE ONLY TO CORPORATE
ISSUERS
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: As of March 31, 2008, the issuer had
16,841,021 shares of common stock, no par value, outstanding.
Transitional
Small Business Disclosure Format (Check one): Yes o No þ
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PART I — FINANCIAL
INFORMATION
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3
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ITEM 1. FINANCIAL
STATEMENTS
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3
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
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19
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ITEM 3. CONTROLS AND
PROCEDURES
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21
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PART II — OTHER INFORMATION
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21
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ITEM 1. LEGAL PROCEEDINGS
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21
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ITEM 6. EXHIBITS
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21
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SIGNATURE
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22
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LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Consolidated
Statements of Financial Condition
March
31, 2008 and 2007 (Unaudited) and
December 31, 2007
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(Unaudited)
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March
31,
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December
31,
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2008
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2007
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2007
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ASSETS
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Current
assets
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Cash
and cash equivalents
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$ |
392,790 |
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$ |
1,013,345 |
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$ |
595,885 |
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Marketable
securities
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6,790,850 |
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8,560,756 |
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6,989,474 |
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Inventories
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3,669,990 |
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2,883,455 |
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3,506,554 |
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Accounts
receivable, net of allowance for doubtful accounts
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of
$39,460 and $39,460 at March 31, 2008 and 2007 and
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$39,460
at December 31, 2007
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4,926,058 |
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4,587,966 |
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4,209,662 |
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Prepaid
expenses and other current assets
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|
9,087 |
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9,992 |
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21,253 |
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Other
receivables
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134,298 |
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50,425 |
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43,111 |
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Deferred
income taxes
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467,695 |
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- |
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311,960 |
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Refundable
income taxes
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— |
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158,553 |
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240,880 |
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Total
current assets
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16,390,768 |
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17,264,492 |
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15,918,779 |
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Property
and equipment, net
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9,854,945 |
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8,554,799 |
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9,678,948 |
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Intangible
assets
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Goodwill
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5,414,858 |
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3,952,425 |
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5,414,858 |
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Other
intangible assets, net of accumulated amortization
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of
$681,837 and $358,985 at March 31, 2008 and 2007 and
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$601,976
at December 31, 2007
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3,175,801 |
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3,498,653 |
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3,255,662 |
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Total
intangible assets
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8,590,659 |
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7,451,078 |
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8,670,520 |
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Other
assets
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500,000 |
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— |
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500,000 |
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Total
assets
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$ |
35,336,372 |
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$ |
33,270,369 |
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$ |
34,268,247 |
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LIABILITIES AND
STOCKHOLDERS’
EQUITY
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Current
liabilities
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Current
maturities of notes payable
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$ |
1,131,725 |
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1,129,004 |
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$ |
1,136,126 |
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Accounts
payable
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1,966,926 |
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1,239,046 |
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1,594,330 |
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Accrued
expenses
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392,384 |
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341,189 |
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414,039 |
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Accrued
income taxes
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203,529 |
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--- |
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--- |
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Total
current liabilities
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3,694,564 |
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2,709,239 |
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3,144,495 |
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Notes
payable
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3,813,825 |
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5,201,873 |
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4,096,797 |
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Deferred
income taxes
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|
1,679,859 |
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|
485,244 |
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1,712,795 |
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Stockholders’
equity
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Common
stock, no par value; 20,000,000 shares authorized;17,273,776 shares
issued; 16,792,826 shares outstanding at March 31, 2008; 17,273,776 shares
issued; 16,889,237 shares outstanding at March 31, 2007; and 17,273,776
shares issues; 16,897,726 shares outstanding at December 31,
2007
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6,509,267 |
|
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6,509,267 |
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6,509,267 |
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Paid-in-capital
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1,137,709 |
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1,080,911 |
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1,120,669 |
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Treasury
stock, at cost
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|
(2,437,517 |
) |
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|
(1,411,195 |
) |
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(2,078,165 |
) |
Retained
earnings
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|
21,360,037 |
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18,454,103 |
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20,471,432 |
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Accumulated
other comprehensive income (loss), net of taxes
|
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|
(421,372 |
) |
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|
240,927 |
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|
(209,043 |
) |
Total
stockholders’ equity
|
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|
26,148,124 |
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|
24,874,013 |
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25,814,160 |
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Total
liabilities and stockholders’ equity
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$ |
35,336,372 |
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$ |
33,270,369 |
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$ |
34,768,247 |
|
See accompanying notes to financial
statements.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Consolidated
Statements of Income and Comprehensive Income
For
the Three Months Ended March 31, 2008 and 2007 (Unaudited)
and
the Year Ended December 31, 2007
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(Unaudited)
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Three
Months Ended
|
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Year
Ended
|
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March
31,
|
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December
31,
|
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|
2008
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2007
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2007
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Sales
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$ |
11,122,238 |
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$ |
9,022,244 |
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$ |
38,729,156 |
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Cost
of goods sold
|
|
|
7,442,083 |
|
|
|
5,284,532 |
|
|
|
25,582,981 |
|
Depreciation
expense
|
|
|
189,424 |
|
|
|
165,293 |
|
|
|
726,647 |
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|
|
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|
|
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|
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Total
cost of goods sold
|
|
|
7,631,507 |
|
|
|
5,449,825 |
|
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|
26,309,628 |
|
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|
|
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|
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|
|
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Gross
profit
|
|
|
3,490,731 |
|
|
|
3,572,419 |
|
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|
12,419,528 |
|
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|
|
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|
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Selling
Expenses
|
|
|
1,059,166 |
|
|
|
770,081 |
|
|
|
3,744,388 |
|
General
and Administrative
|
|
|
985,046 |
|
|
|
920,573 |
|
|
|
3,914,825 |
|
Amortization
expense
|
|
|
79,861 |
|
|
|
80,275 |
|
|
|
323,266 |
|
|
|
|
|
|
|
|
|
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|
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Total
Operating Expenses
|
|
|
2,124,073 |
|
|
|
1,770,929 |
|
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|
7,982,479 |
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Income
from operations
|
|
|
1,366,658 |
|
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|
1,801,490 |
|
|
|
4,437,049 |
|
|
|
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|
|
|
|
|
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Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
|
103,133 |
|
|
|
65,799 |
|
|
|
350,286 |
|
Rental
Income
|
|
|
11,647 |
|
|
|
8,600 |
|
|
|
48,305 |
|
Interest
expense
|
|
|
(85,956 |
) |
|
|
(109,529 |
) |
|
|
(410,180 |
) |
Gain
(loss) on sale of marketable
|
|
|
|
|
|
|
|
|
|
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|
securities,
net
|
|
|
51,029 |
|
|
|
14,745 |
|
|
|
539,739 |
|
Total
other income (Expense)
|
|
|
79,853 |
|
|
|
(20,385 |
) |
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|
528,150 |
|
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Income
before provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
1,446,511 |
|
|
|
1,781,105 |
|
|
|
4,965,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
557,906 |
|
|
|
645,774 |
|
|
|
1,812,539 |
|
|
|
|
|
|
|
|
|
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Net
income
|
|
$ |
888,605 |
|
|
$ |
1,135,331 |
|
|
$ |
3,152,660 |
|
|
|
|
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|
|
|
|
|
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Basic
and diluted earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share
|
|
|
0.05 |
|
|
|
0.07 |
|
|
|
0.19 |
|
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|
|
|
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|
|
|
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Weighted
average number of
|
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|
|
|
|
|
|
|
|
|
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|
shares
outstanding
|
|
|
16,814,740 |
|
|
|
16,895,351 |
|
|
|
16,855,611 |
|
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|
|
|
|
|
|
|
|
|
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COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net
income
|
|
$ |
888,605 |
|
|
$ |
1,135,331 |
|
|
$ |
3,152,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss),
|
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|
|
|
|
|
|
|
|
|
|
|
net
of tax:
|
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|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax benefits)
|
|
|
(182,376 |
) |
|
|
95,783 |
|
|
|
(47,091 |
) |
Less
reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
for
(gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income (net of taxes)
|
|
|
(29,954 |
) |
|
|
(8,626 |
) |
|
|
(315,721 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
676,275 |
|
|
$ |
1,222,488 |
|
|
$ |
2,789,848 |
|
See
accompanying notes to financial statements.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in STockholders’
Equity
For
the Three Months Ended March 31, 2008 (Unaudited)
and
the Year Ended December 31, 2007
|
|
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, 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
losses 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
of stock
|
|
|
— |
|
|
|
( 37,000 |
) |
|
|
37,000 |
|
|
|
— |
|
|
|
— |
|
|
|
( 363,102 |
) |
|
|
— |
|
|
|
— |
|
|
|
(363,102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of treasury stock for compensation
|
|
|
— |
|
|
|
2,100 |
|
|
|
( 2,100 |
) |
|
|
— |
|
|
|
17,040 |
|
|
|
3,750 |
|
|
|
— |
|
|
|
— |
|
|
|
20,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities, net of taxes and reclassification
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( 212,329 |
) |
|
|
(212,329 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the three months ended March 31,
2008
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
888,605 |
|
|
|
— |
|
|
|
888,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at March 31, 2008
|
|
|
17,273,776 |
|
|
|
16,792,826 |
|
|
|
480,950 |
|
|
$ |
6,509,267 |
|
|
$ |
1,137,709 |
|
|
$ |
(2,437,517 |
) |
|
$ |
21,360,037 |
|
|
$ |
(421,372 |
) |
|
$ |
26,148,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For
the Three Months Ended March 31, 2008 and 2007 (Unaudited)
and
the Year Ended December 31, 2007
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
888,605 |
|
|
$ |
1,135,331 |
|
|
$ |
3,152,660 |
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
flows from operating activities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
269,285 |
|
|
|
245,568 |
|
|
|
1,049,913 |
|
(Gain)Loss
on sale of marketable securities, net
|
|
|
(51,029 |
) |
|
|
(14,745 |
) |
|
|
(539,739 |
) |
Deferred
income taxes
|
|
|
(39,280 |
) |
|
|
6,536 |
|
|
|
(223,717 |
) |
Treasury
stock issued for compensation
|
|
|
20,790 |
|
|
|
--- |
|
|
|
48,509 |
|
Increase
(decrease) in allowance for doubtful accounts
|
|
|
--- |
|
|
|
(40,540 |
) |
|
|
(40,540 |
) |
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(716,396 |
) |
|
|
(604,709 |
) |
|
|
(226,405 |
) |
Other
receivables
|
|
|
(91,187 |
) |
|
|
20,625 |
|
|
|
27,939 |
|
Inventories
|
|
|
(163,436 |
) |
|
|
(361,259 |
) |
|
|
(984,358 |
) |
Refundable
income taxes
|
|
|
240,880 |
|
|
|
109,218 |
|
|
|
26,891 |
|
Prepaid
expenses and other current assets
|
|
|
12,166 |
|
|
|
1,991 |
|
|
|
(9,270 |
) |
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
372,596 |
|
|
|
(223,968 |
) |
|
|
131,316 |
|
Accrued
expenses
|
|
|
(21,655 |
) |
|
|
(138,912 |
) |
|
|
(66,062 |
) |
Accrued
income taxes
|
|
|
203,529 |
|
|
|
--- |
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
924,868 |
|
|
|
135,136 |
|
|
|
2,347,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in cost method securities
|
|
|
--- |
|
|
|
--- |
|
|
|
(500,000 |
) |
Purchases
of marketable securities
|
|
|
(1,976,684 |
) |
|
|
(802,587 |
) |
|
|
(5,744,697 |
) |
Sale
of marketable securities
|
|
|
1,864,617 |
|
|
|
896,419 |
|
|
|
7,168,246 |
|
Purchases
of property and equipment
|
|
|
(365,421 |
) |
|
|
(139,376 |
) |
|
|
(1,824,879 |
) |
Net
cash used in investing activities
|
|
|
(477,488 |
) |
|
|
(45,544 |
) |
|
|
(901,330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
of note payable
|
|
|
--- |
|
|
|
--- |
|
|
|
300,000 |
|
Purchases
of treasury stock, net
|
|
|
(363,102 |
) |
|
|
(76,882 |
) |
|
|
(752,603 |
) |
Repayment
of notes payable
|
|
|
(287,373 |
) |
|
|
(547,177 |
) |
|
|
(1,945,131 |
) |
Net
cash used in financing activities
|
|
|
(650,475 |
) |
|
|
(624,059 |
) |
|
|
(2,397,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(203,095 |
) |
|
|
(534,467 |
) |
|
|
(951,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at the beginning of the period
|
|
|
595,885 |
|
|
|
1,547,812 |
|
|
|
1,547,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at the end of the period
|
|
$ |
392,790 |
|
|
$ |
1,013,345 |
|
|
$ |
595,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2008 and 2007
and
December 31, 2007
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.
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 the allowance for doubtful accounts, the valuation
of goodwill, 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, Illinois and 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
March
31, 2008 and 2007
and
December 31, 2007
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Bank
balances of amounts reported by financial institutions are categorized as
follows:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Amounts
insured
|
|
$ |
280,180 |
|
|
$ |
244,029 |
|
|
$ |
576,563 |
|
Uninsured
and uncollateralized amounts
|
|
|
762,102 |
|
|
|
1,045,160 |
|
|
|
523,295 |
|
Total
bank balances
|
|
$ |
1,042,282 |
|
|
$ |
1,289,189 |
|
|
$ |
1,099,858 |
|
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.
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.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2008 and 2007
and
December 31, 2007
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
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
March
31, 2008 and 2007
and
December 31, 2007
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, 2007 and for the three months ended March 31, 2008 and 2007,
approximately $1,642,114, $403,623 and $322,636 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 the three months ended March 31, 2008 and 2007 and
the year ended December 31, 2007, diluted and basic earnings per share were the
same, as the effect of dilutive securities options outstanding was not
significant.
Reclassification
Certain 2007 amounts have been
reclassified to conform to the 2008 presentation.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2008 and 2007
and
December 31, 2007
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Recent accounting
pronouncements adopted
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. The adoption of SFAS
No. 159 will not impact the financial condition or results of operations of
the Company.
Note
3 – INTANGIBLE ASSETS
Intangible
assets, and the related accumulated amortization, consist of the
following:
|
|
March
31, 2008
|
|
|
March
31, 2007
|
|
|
December
31, 2007
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
Recipes
|
|
$ |
43,600 |
|
|
$ |
38,831 |
|
|
$ |
43,600 |
|
|
$ |
29,067 |
|
|
$ |
43,600 |
|
|
$ |
37,242 |
|
Customer
lists and other customer related intangibles
|
|
|
305,200 |
|
|
|
151,873 |
|
|
|
305,200 |
|
|
|
110,453 |
|
|
|
305,200 |
|
|
|
141,518 |
|
Lease
acquisition
|
|
|
87,200 |
|
|
|
45,676 |
|
|
|
87,200 |
|
|
|
33,219 |
|
|
|
87,200 |
|
|
|
42,562 |
|
Other
|
|
|
6,638 |
|
|
|
3,651 |
|
|
|
6,638 |
|
|
|
2,323 |
|
|
|
6,638 |
|
|
|
3,319 |
|
Customer
relationship
|
|
|
985,000 |
|
|
|
136,806 |
|
|
|
985,000 |
|
|
|
54,723 |
|
|
|
985,000 |
|
|
|
116,285 |
|
Contractual
backlog
|
|
|
12,000 |
|
|
|
12,000 |
|
|
|
12,000 |
|
|
|
12,000 |
|
|
|
12,000 |
|
|
|
12,000 |
|
Trade
names
|
|
|
1,980,000 |
|
|
|
220,000 |
|
|
|
1,980,000 |
|
|
|
88,000 |
|
|
|
1,980,000 |
|
|
|
187,000 |
|
Formula
|
|
|
438,000 |
|
|
|
73,000 |
|
|
|
438,000 |
|
|
|
29,200 |
|
|
|
438,000 |
|
|
|
62,050 |
|
|
|
$ |
3,857,638 |
|
|
$ |
681,837 |
|
|
$ |
3,857,638 |
|
|
$ |
358,985 |
|
|
$ |
3,857,638 |
|
|
$ |
601,976 |
|
Amortization
expense is expected to be as follows for the 12 months ending March
31:
2009
|
|
|
$ |
317,857
|
|
2010
|
|
|
|
307,275
|
|
2011
|
|
|
|
303,372
|
|
2012
|
|
|
|
294,735
|
|
2013
|
|
|
|
268,783
|
|
Thereafter
|
|
|
|
1,683,779
|
|
|
|
|
$ |
3,175,801
|
|
Amortization
expense during the three months March 31, 2008 and 2007 and for the year ended
December 31, 2007 was $79,861, $80,275 and $323,266, respectively.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2008 and 2007
and
December 31, 2007
Note 4 –
MARKETABLE SECURITIES
The cost
and fair value of marketable securities classified as available for
sale are as follows:
MARCH 31,
2008
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$ |
3,074,223 |
|
|
$ |
114,067 |
|
|
$ |
( 481,142 |
) |
|
$ |
2,707,148 |
|
Mutual
Funds
|
|
|
927,055 |
|
|
|
3,744 |
|
|
|
( 144,622 |
) |
|
|
786,177 |
|
Preferred
Securities
|
|
|
1,655,421 |
|
|
|
7,680 |
|
|
|
( 167,259 |
) |
|
|
1,495,842 |
|
Corporate
Bonds
|
|
|
1,249,426 |
|
|
|
1,586 |
|
|
|
( 55,070 |
) |
|
|
1,195,942 |
|
Municipal
Bonds
|
|
|
4,586 |
|
|
|
330 |
|
|
|
— |
|
|
|
4,916 |
|
Government
agency
Obligations
|
|
|
597,978 |
|
|
|
2,955 |
|
|
|
( 108 |
) |
|
|
600,825 |
|
Total
|
|
$ |
7,508,689 |
|
|
$ |
130,362 |
|
|
$ |
( 848,201 |
) |
|
$ |
6,790,850 |
|
MARCH 31,
2007
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$ |
2,810,733 |
|
|
$ |
507,649 |
|
|
$ |
( 92,378 |
) |
|
$ |
3,226,004 |
|
Mutual
Funds
|
|
|
595,823 |
|
|
|
7,064 |
|
|
|
( 9,323 |
) |
|
|
593,564 |
|
Preferred
Securities
|
|
|
1,637,458 |
|
|
|
5,865 |
|
|
|
( 15,833 |
) |
|
|
1,627,490 |
|
Private
Investment LP
|
|
|
600,000 |
|
|
|
94,507 |
|
|
|
— |
|
|
|
694,507 |
|
Certificates
of Deposit
|
|
|
75,000 |
|
|
|
— |
|
|
|
( 2,392 |
) |
|
|
72,608 |
|
Corporate
Bonds
|
|
|
2,137,085 |
|
|
|
2,906 |
|
|
|
( 90,985 |
) |
|
|
2,049,006 |
|
Municipal
Bonds
|
|
|
160,757 |
|
|
|
3,776 |
|
|
|
( 417 |
) |
|
|
164,116 |
|
Government
agency
|
|
|
134,776 |
|
|
|
— |
|
|
|
( 1,315 |
) |
|
|
133,461 |
|
Total
|
|
$ |
8,151,632 |
|
|
$ |
621,767 |
|
|
$ |
( 212,643 |
) |
|
$ |
8,560,756 |
|
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 |
|
Proceeds
from the sale of marketable securities were $7,168,246, $1,864,617 and $896,419
during the year ended December 31, 2007 and for the three months ended March 31,
2008 and 2007, respectively.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2008 and 2007
and
December 31, 2007
Note 4 –
MARKETABLE SECURITIES - Continued
Gross
gains of $876,527, $217,112, and $23,822 and gross losses of $336,788, $166,083,
and $9,686 were realized on these sales during the year ended December 31, 2007
and for the three months ended March 31, 2008 and 2007,
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 March 31, 2008:
|
|
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
|
|
$ |
1,844,460 |
|
|
$ |
( 400,927 |
) |
|
$ |
205,483 |
|
|
$ |
( 80,215 |
) |
|
$ |
2,049,943 |
|
|
$ |
( 481,142 |
) |
Mutual
Funds
|
|
|
566,022 |
|
|
|
( 133,645 |
) |
|
|
118,911 |
|
|
|
( 10,977 |
) |
|
|
684,933 |
|
|
|
( 144,622 |
) |
Preferred
Securities
|
|
|
518,106 |
|
|
|
( 40,162 |
) |
|
|
870,085 |
|
|
|
( 127,097 |
) |
|
|
1,388,191 |
|
|
|
( 167,259 |
) |
Corporate
Bonds
|
|
|
229,348 |
|
|
|
( 4,349 |
) |
|
|
678,252 |
|
|
|
( 50,721 |
) |
|
|
907,600 |
|
|
|
( 55,070 |
) |
Government
Agency
Obligations
|
|
|
33,846 |
|
|
|
( 108 |
) |
|
|
— |
|
|
|
— |
|
|
|
33,846 |
|
|
|
( 108 |
) |
|
|
$ |
3,191,782 |
|
|
$ |
( 579,191 |
) |
|
$ |
1,872,731 |
|
|
$ |
( 269,010 |
) |
|
$ |
5,064,513 |
|
|
$ |
( 848,201 |
) |
Equities,
Mutual Funds and Corporate Bonds - 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 March 31, 2008.
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 March 31, 2008.
Municipal
Bonds - The unrealized losses on the Company’s investments in mutual bonds were
caused by interest rate increases since the date of purchase. Because the
Company has the ability and intent to hold these investments until maturity, the
Company does not consider these investments to be other-than-temporarily
impaired at March 31, 2008.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2008 and 2007
and
December 31, 2007
Note 5 –
INVENTORIES
Inventories
consist of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Finished
goods
|
|
$ |
1,201,472 |
|
|
$ |
1,084,748 |
|
|
$ |
1,296,985 |
|
Production
supplies
|
|
|
1,357,834 |
|
|
|
1,134,987 |
|
|
|
1,383,384 |
|
Raw
materials
|
|
|
1,110,684 |
|
|
|
663,720 |
|
|
|
826,185 |
|
Total
inventories
|
|
$ |
3,669,990 |
|
|
$ |
2,883,455 |
|
|
$ |
3,506,554 |
|
Note 6 –
PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Land
|
|
$ |
969,232 |
|
|
$ |
969,232 |
|
|
$ |
969,232 |
|
Buildings
and improvements
|
|
|
6,772,762 |
|
|
|
6,713,743 |
|
|
|
6,743,647 |
|
Machinery
and equipment
|
|
|
8,166,465 |
|
|
|
7,274,990 |
|
|
|
8,159,199 |
|
Vehicles
|
|
|
581,458 |
|
|
|
534,365 |
|
|
|
581,458 |
|
Office
equipment
|
|
|
102,830 |
|
|
|
97,115 |
|
|
|
101,583 |
|
Construction
in process
|
|
|
1,047,623 |
|
|
|
|
|
|
|
719,830 |
|
|
|
|
17,640,370 |
|
|
$ |
15,589,445 |
|
|
|
17,274,949 |
|
Less
accumulated depreciation
|
|
|
7,785,425 |
|
|
|
7,034,646 |
|
|
|
7,596,001 |
|
Total
property and equipment
|
|
$ |
9,854,945 |
|
|
$ |
8,554,799 |
|
|
$ |
9,678,948 |
|
Depreciation
expense during the years ended December 31, 2007 and for the three months ended
March 31, 2008 and 2007 was $726,647, $189,424 and $165,293,
respectively.
Note 7 – ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Accrued
payroll and payroll taxes
|
|
$ |
101,670 |
|
|
$ |
93,727 |
|
|
$ |
58,395 |
|
Accrued
property tax
|
|
|
220,253 |
|
|
|
206,000 |
|
|
|
285,279 |
|
Other
|
|
|
70,461 |
|
|
|
41,458 |
|
|
|
70,365 |
|
|
|
$ |
392,384 |
|
|
$ |
341,185 |
|
|
$ |
414,039 |
|
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2008 and 2007
and
December 31, 2007
Note
8 – NOTES PAYABLE
Notes
payable consist of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
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.
|
|
$ |
444,499 |
|
|
$ |
451,542 |
|
|
$ |
446,450 |
|
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.
|
|
|
2,816,481 |
|
|
|
2,888,051 |
|
|
|
2,834,970 |
|
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
|
|
|
1,684,570 |
|
|
|
2,991,284 |
|
|
|
1,951,503 |
|
Total
notes payable
|
|
|
4,945,550 |
|
|
|
6,330,877 |
|
|
|
5,232,923 |
|
Less
current maturities
|
|
|
1,131,725 |
|
|
|
1,129,004 |
|
|
|
1,136,126 |
|
Total
long-term portion
|
|
$ |
3,813,825 |
|
|
$ |
5,201,873 |
|
|
$ |
4,096,797 |
|
Maturities
of notes payables are as follows:
For
the Year Ended March 31,
|
|
|
|
|
2009
|
|
$ |
1,131,725 |
|
2010
|
|
|
708,435 |
|
2011
|
|
|
2,684,815 |
|
2012
|
|
|
420,575 |
|
Total
|
|
$ |
4,945,550 |
|
Note
9 – PROVISION FOR INCOME TAXES
The
provision for income taxes consists of the following:
|
|
|
|
|
For
the
|
|
|
|
For
the Three Months Ended
|
|
|
Year
Ended
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
488,599 |
|
|
$ |
537,138 |
|
|
$ |
1,699,408 |
|
State
and local
|
|
|
108,587 |
|
|
|
102,100 |
|
|
|
336,848 |
|
Total
current
|
|
|
597,186 |
|
|
|
639,238 |
|
|
|
2,036,256 |
|
Deferred
|
|
|
(39,280 |
) |
|
|
6,536 |
|
|
|
(223,717 |
) |
Provision
for income taxes
|
|
$ |
557,906 |
|
|
$ |
645,774 |
|
|
$ |
1,812,539 |
|
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2008 and 2007
and
December 31, 2007
Note
9 – PROVISION FOR INCOME TAXES - Continued
A
reconciliation of the provision for income taxes and the income tax computed at
the statutory rate is as follows:
|
|
|
|
|
For
the
|
|
|
|
For
the Three Months Ended
|
|
|
Year
Ended
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Federal
income tax expense
computed
at the statutory rate
|
|
$ |
491,814 |
|
|
$ |
605,576 |
|
|
$ |
1,688,168 |
|
State
and local tax expense, net
|
|
|
69,433 |
|
|
|
85,493 |
|
|
|
238,330 |
|
Permanent
differences
|
|
|
(3,341 |
) |
|
|
(45,295 |
) |
|
|
(113,959 |
) |
Provision
for income taxes
|
|
$ |
557,906 |
|
|
$ |
645,774 |
|
|
$ |
1,812,539 |
|
Amounts
for deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Non-current
deferred tax liabilities
arising
from:
Temporary
differences -
|
|
|
|
|
|
|
|
|
|
accumulated
depreciation and amortization
|
|
$ |
(1,679,859 |
) |
|
$ |
(454,212 |
) |
|
$ |
(1,712,795 |
) |
Current
deferred tax assets (liabilities) arising from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses (gains) on marketable securities
|
|
|
296,468 |
|
|
|
(169,511 |
) |
|
|
147,077 |
|
Inventory
|
|
|
154,930 |
|
|
|
122,183 |
|
|
|
148,586 |
|
Allowance
for doubtful accounts
|
|
|
16,297 |
|
|
|
16,296 |
|
|
|
16,297 |
|
Total
current deferred tax assets
(liabilities)
|
|
|
467,695 |
|
|
|
(31,032 |
) |
|
|
311,960 |
|
Net
deferred tax liability
|
|
$ |
(1,212,164 |
) |
|
$ |
(485,244 |
) |
|
$ |
(1,400,835 |
) |
Note
10 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid
for interest and income taxes are as follows:
|
|
|
|
|
For
the
|
|
|
|
For
the Years Ended
|
|
|
Year
Ended
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Interest
|
|
$ |
85,956 |
|
|
$ |
96,908 |
|
|
$ |
430,098 |
|
Income
taxes
|
|
$ |
133,250 |
|
|
$ |
551,386 |
|
|
$ |
2,026,031 |
|
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2008 and 2007
and
December 31, 2007
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, 2007
and March 31, 2008 and 2007. 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, 2007 and at March 31, 2008 and 2007, there were no stock options
outstanding or exercisable.
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.
Note
12 – FAIR VALUE MEASUREMENTS
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.
Level 1 –
Inputs use quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access.
Level 2 –
Inputs use other inputs that are observable, either directly or
indirectly. These inputs include quoted prices for similar assets and
liabilities in active markets, and other inputs such as interest rates and yield
curves that are observable at commonly quoted intervals.
Level 3 –
Inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset
or liability.
In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company’s assessment of the significance of particular
inputs to these fair measurements requires judgment and considers factors
specific to each asset or liability.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2008 and 2007
and
December 31, 2007
Note
12 – FAIR VALUE MEASUREMENTS - Continued
Disclosures
concerning assets and liabilities measured at fair value are as
follows:
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance
at
March
31, 2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities- available - for - sale
|
|
$ |
6,790,850 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,790,850 |
|
Note
13 – RECENT ACCOUNTING PRONOUNCEMENTS
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.
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.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Comparison of Quarter Ended
March 31, 2008 to Quarter Ended March 31, 2007
The
following analysis should be read in conjunction with the unaudited financial
statements of the Company and related notes included elsewhere in this quarterly
report and the audited financial statements and Management’s Discussion and
Analysis contained in our Form 10-KSB, for the fiscal year ended December 31,
2007.
Results
of Operations
Sales
increased by $2,099,994, (approximately 23%) to $11,122,238 during the three
month period ended March 31, 2008 from $9,022,244 during the same three month
period in 2007. This increase is primarily attributable to increased sales and
awareness of Lifeway’s flagship line, Kefir, as well as ProBugs™ Organic Kefir
for kids. Lifeway’s “Helios Organic” brand kefir, which was acquired
in 2006, accounted for revenues of $1,207,237 during the first quarter 2008,
compared with revenues of $1,138,882 during the first quarter
2007. Lifeway’s “Pride of Main Street Milk” line, also acquired in
2006, accounted for revenues of $427,870 during the first quarter 2008, compared
with revenues of $181,149 during the first quarter 2007. This
represents an increase of 236% for the Pride of Main Street Milk line in the
first quarter 2008 when compared to the same period in 2007.
Cost of
goods sold as a percentage of sales was approximately 69% during the first
quarter 2008, compared to about 60% during the same period in 2007. The increase
was primarily attributable to the increased cost of milk, our largest raw
material, and the cost of transportation. The cost of milk was
approximately 30% higher in the first quarter 2008 when compared to the same
quarter in 2008. Despite these increases in cost of goods sold, gross
profit declined 2%. In April 2008 and May 2008, the cost of milk was
approximately 10% lower when compared to the average cost in the first quarter
2008.
Operating
expenses as a percentage of sales was approximately 19% during the first quarter
2008, compared to about 20% during the same period in
2007. Despite incurring several one time expenses related to
Sarbanes Oxley 404 compliance, we were able to lower our overall operating
expenses as a percentage of sales in the first quarter 2008. Total
operating expenses increased by $353,144 (approximately 20%) to $2,124,073
during the three month period ended March 31, 2008 from $1,770,929 during the
same three month period in 2007. The increase is primarily
attributable to increased selling and advertising expenses, which increased by
$289,085 (approximately 38%) to $1,059,166 during the three month period ended
March 31, 2008 from $770,081 during the same three month period in
2007
Total
other income for the first quarter ended March 31, 2008 was $79,853, compared
with other expenses of $20,385 during the same period in 2007. This
increase in other income is attributable to a $37,334 increase in interest and
dividend income, as well as an increase in the gain on the sale of marketable
securities of $36,284.
Provision
for income taxes was $557,906, or a 39% tax rate during the first quarter 2008
compared with $645,774, or a 36% tax rate, during the same period in 2007.
Income taxes are discussed in Note 9 of the Notes to Consolidated Financial
Statements.
Total net
income was $888,605 or $.05 per share for the first quarter ended March 31,
2008, compared with $1,135,331, or $.07 per share in the same period in
2007.
Sources
and Uses of Cash
Net cash
provided by operating activities was $924,868 during the three months ended
March 31, 2008, which is an increase of $789,732 when compared to the same
period in 2007. This increase is primarily attributable to the
increase in accounts payable of $596,564.
Net cash
used in investing activities was $477,488 during the three months ended March
31, 2008, which is an increase of $431,944 when compared to the same period in
2007. This increase is primarily due to the Company’s purchase of
machinery and equipment related to its expansion in 2008, which was $365,421,
compared with the Company’s purchase of machinery and equipment in 2007, which
was $139,376.
Significant
portions of our assets are held in marketable securities. The majority 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.
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.
|
As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our principal executive officer and
principal financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15 and 15d-15 of the Securities
Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms.
There was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.
The Company is currently a
defendant in the following litigation: United
States of America v. Lifeway Foods, Inc., et al., 08cv02469 (the
“Action”). The Action was filed by the U.S. Department of
Justice Office of Consumer Litigation on behalf of the U.S. Food and Drug
Administration (“FDA”) on April 30, 2008, seeking a permanent
injunction against the Company and its principles, for alleged violations of the
Federal Food, Drug and Cosmetics Act (the “Act”) with regard to
certain cream cheese, cream cheese spreads that were allegedly adulterated
and/or misbranded within the meaning of the Act. Prior to the filing
of the Action, the Company and the FDA had engaged in negotiations to address
the alleged violations and ultimately agreed to a Consent Decree that was
submitted to the court on May 9, 2008. The Consent Decree provides
that the Company will cease the production of certain food products at two
locations unless certain requirements are met, to ensure compliance with the
Act. The Consent Decree is being presented to the Court on May 15, 2008
for approval and entry. On May 14, 2008, the First Amended Complaint for
Permanent Injunction was filed and the Answer to the same was filed the same
day. It is believed the entry of the Consent Decree will resolve this
Action.
ITEM 6.
EXHIBITS
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
3.4
|
|
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)
|
|
|
|
3.5
|
|
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)
|
|
|
|
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.
|
|
|
|
|
|
|
In
accordance with the requirements of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 15,
2008
|
|
|
|
|
|
|
LIFEWAY
FOODS, INC.
|
|
|
|
|
|
|
|
|
|
/s/
Julie Smolyansky
|
|
|
|
|
Julie
Smolyansky
|
|
|
|
|
Chief
Executive Officer, President, and Director
|
|
|
|
|
|
|
|
|
|
/s/
Edward P. Smolyansky
|
|
|
|
|
Chief
Financial and Accounting Officer
|
|
|
|
|
and
Treasurer
|
|
|
EXHIBIT
INDEX
Exhibit
Number
|
|
Description |
|
|
|
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.
|
|
|
|
|
|
|