Lifeway Foods, Inc. - Quarter Report: 2008 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
______________________________________
|
(Mark
One)
|
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended: September 30, 2008
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from __________ to __________
Commission
File Number: 000-17363
______________________________________
LIFEWAY
FOODS, INC.
(Exact
Name of Registrant as Specified in its Charter)
______________________________________
|
Illinois
|
36-3442829
|
|
(State
or Other Jurisdiction of Incorporation
or
Organization)
|
(I.R.S.
Employer Identification No.)
|
6431 West Oakton, Morton Grove, IL
60053
(Address
of Principal Executive Offices, Zip Code)
(847-967-1010)
(Registrant’s
Telephone Number, Including Area Code)
|
Indicate
by check mark whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
o
|
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
|
|
Large accelerated
filer o
|
Accelerated filer
o
|
Non-accelerated
filer o
|
Smaller reporting
company x
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No
x
|
|
As
of September 30, 2008, the issuer had 16,730,226 shares of common
stock, no par value, outstanding.
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LIFEWAY
FOODS, INC.
CONTENTS
TO FORM 10-Q
|
PART
I —
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FINANCIAL
INFORMATION
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Page(s)
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|
|
ITEM
1.
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FINANCIAL
STATEMENTS
|
3
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|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
8
|
||
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ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
21
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|
|
ITEM
3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
24
|
|
|
ITEM 4T.
|
CONTROLS
AND PROCEDURES
|
24
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|
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PART
II —
|
OTHER
INFORMATION
|
24
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ITEM
1.
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LEGAL
PROCEEDINGS
|
24
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|
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ITEM 1A.
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RISK
FACTORS
|
24
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|
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ITEM
2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
24
|
|
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
24
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|
|
ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
24
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|
|
ITEM
5.
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OTHER
INFORMATION
|
25
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ITEM
6.
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EXHIBITS
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25
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SIGNATURES
|
26
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||
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EXHIBIT
INDEX
|
27
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- 2
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 and 2007
AND
DECEMBER 31, 2007
- 3
-
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Consoldiated Statements of Financial
Condition
September 30, 2008 and 2007
(Unaudited) and December 31, 2007
|
(Unaudited)
|
||||||||||||
|
September
30,
|
December
31,
|
|||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
ASSETS
|
||||||||||||
|
Current
assets
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 530,866 | $ | 1,624,566 | $ | 595,885 | ||||||
|
Marketable
securities
|
5,668,940 | 6,557,841 | 6,989,474 | |||||||||
|
Inventories
|
4,207,094 | 4,061,189 | 3,506,554 | |||||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $35,011 and
$39,460 at September 30, 2008 and 2007 and $39,460 at December
31, 2007
|
5,161,414 | 4,845,956 | 4,209,662 | |||||||||
|
Prepaid
expenses and other current assets
|
20,864 | 13,051 | 21,253 | |||||||||
|
Other
receivables
|
28,918 | 45,810 | 43,111 | |||||||||
|
Deferred
income taxes
|
909,479 | 225,803 | 311,960 | |||||||||
|
Refundable
income taxes
|
125,763 | 240,880 | ||||||||||
|
Total
current assets
|
16,527,575 | 17,499,979 | 15,918,779 | |||||||||
|
Property
and equipment, net
|
10,989,500 | 9,176,479 | 9,678,948 | |||||||||
|
Intangible
assets
|
||||||||||||
|
Goodwill
|
5,414,858 | 3,952,425 | 5,414,858 | |||||||||
|
Other
intangible assets, net of accumulated amortization of $841,561 and
$520,979 at September 30, 2008 and 2007 and $601,976 at December
31, 2007
|
3,016,077 | 3,342,517 | 3,255,662 | |||||||||
|
Total
intangible assets
|
8,430,935 | 7,294,942 | 8,670,520 | |||||||||
|
Other
assets
|
500,000 | 500,000 | 500,000 | |||||||||
|
Total
assets
|
$ | 36,448,010 | $ | 34,471,400 | $ | 34,768,247 | ||||||
|
LIABILITIES AND
STOCKHOLDERS’
EQUITY
|
||||||||||||
|
Current
liabilities
|
||||||||||||
|
Current
maturities of notes payable
|
$ | 1,125,608 | $ | 1,434,903 | $ | 1,136,126 | ||||||
|
Accounts
payable
|
2,361,318 | 1,865,041 | 1,594,330 | |||||||||
|
Accrued
expenses
|
532,662 | 441,068 | 414,039 | |||||||||
|
Margin
payable
|
428,951 | — | — | |||||||||
|
Accrued
income taxes
|
308,260 | — | — | |||||||||
|
Total
current liabilities
|
4,756,799 | 3,741,012 | 3,144,495 | |||||||||
|
Notes
payable
|
3,219,338 | 4,424,266 | 4,096,797 | |||||||||
|
Deferred
income taxes
|
1,615,421 | 510,000 | 1,712,795 | |||||||||
|
Stockholders’
equity
|
||||||||||||
|
Common
stock, no par value; 20,000,000 shares authorized; 17,273,776 shares
issued; 16,730,226 shares outstanding at September 30, 2008; 17,273,776
shares issued; 16,825,626 shares outstanding at September 30, 2007; and
17,273,776 shares issues; 16,897,726 shares outstanding at December 31,
2007
|
6,509,267 | 6,509,267 | 6,509,267 | |||||||||
|
Paid-in-capital
|
1,175,539 | 1,103,630 | 1,120,669 | |||||||||
|
Treasury
stock, at cost
|
(3,207,213 | ) | (2,081,915 | ) | (2,078,165 | ) | ||||||
|
Retained
earnings
|
23,126,672 | 20,318,323 | 20,471,432 | |||||||||
|
Accumulated
other comprehensive income (loss), net of taxes
|
(747,813 | ) | (53,183 | ) | (209,043 | ) | ||||||
|
Total
stockholders’ equity
|
26,856,452 | 25,796,122 | 25,814,160 | |||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 36,448,010 | $ | 34,471,400 | $ | 34,768,247 | ||||||
See accompanying notes to financial statements
- 4
-
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Consoldiated Statements of Income and
Comprehensive Income
For the Three and Nine Months Ended
September 30, 2008 and 2007 (Unaudited)
and the Year Ended December 31,
2007
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
|
Three
Months Ended
|
Nine
Months Ended
|
Year
Ended
|
||||||||||||||||||
|
September
30,
|
September
30,
|
December
31,
|
||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
2007
|
||||||||||||||||
|
Sales
|
$ | 11,240,282 | $ | 9,817,478 | $ | 33,885,912 | $ | 28,554,984 | $ | 38,729,156 | ||||||||||
|
Cost
of goods sold
|
7,505,794 | 6,901,471 | 22,403,574 | 17,885,885 | 25,582,981 | |||||||||||||||
|
Depreciation
expense
|
197,366 | 195,348 | 581,920 | 546,945 | 726,647 | |||||||||||||||
|
Total
cost of goods sold
|
7,703,160 | 7,096,819 | 22,985,494 | 18,432,830 | 26,309,628 | |||||||||||||||
|
Gross
profit
|
3,537,122 | 2,720,659 | 10,900,418 | 10,122,154 | 12,419,528 | |||||||||||||||
|
Selling
Expenses
|
957,978 | 1,174,140 | 3,171,269 | 2,856,483 | 3,744,388 | |||||||||||||||
|
General
and Administrative
|
1,032,043 | 916,893 | 3,109,506 | 2,879,582 | 3,914,825 | |||||||||||||||
|
Amortization
expense
|
79,862 | 48,583 | 239,585 | 242,269 | 323,266 | |||||||||||||||
|
Total
Operating Expenses
|
2,069,883 | 2,139,616 | 6,520,360 | 5,978,334 | 7,982,479 | |||||||||||||||
|
Income
from operations
|
1,467,239 | 581,043 | 4,380,058 | 4,143,820 | 4,437,049 | |||||||||||||||
|
Other
income (expense):
|
||||||||||||||||||||
|
Interest
and dividend income
|
95,042 | 84,918 | 261,037 | 249,082 | 350,286 | |||||||||||||||
|
Rental
Income
|
13,647 | 9,731 | 36,940 | 27,912 | 48,305 | |||||||||||||||
|
Interest
expense
|
(71,928 | ) | (102,197 | ) | (226,851 | ) | (321,009 | ) | (410,180 | ) | ||||||||||
|
Impairment
of marketable securities
|
(270,908 | ) | — | (270,908 | ) | |||||||||||||||
|
Gain
(loss) on sale of marketable securities, net
|
(110,259 | ) | 209,207 | (146,404 | ) | 663,538 | 539,739 | |||||||||||||
|
Total
other income (Expense)
|
(344,406 | ) | 201,659 | (346,186 | ) | 619,523 | 528,150 | |||||||||||||
|
Income
before provision for
|
||||||||||||||||||||
|
income
taxes
|
1,122,833 | 782,702 | 4,033,872 | 4,763,343 | 4,965,199 | |||||||||||||||
|
Provision
for income taxes
|
267,917 | 314,508 | 1,378,632 | 1,763,792 | 1,812,539 | |||||||||||||||
|
Net
income
|
$ | 854,916 | $ | 468,194 | $ | 2,655,240 | $ | 2,999,551 | $ | 3,152,660 | ||||||||||
|
Basic
and diluted earnings per common share
|
0.05 | 0.03 | 0.16 | 0.18 | 0.19 | |||||||||||||||
|
Weighted
average number of shares outstanding
|
16,730,526 | 16,824,911 | 16,772,280 | 16,865,390 | 16,855,611 | |||||||||||||||
|
COMPREHENSIVE
INCOME
|
||||||||||||||||||||
|
Net
income
|
$ | 854,916 | $ | 468,194 | $ | 2,655,240 | $ | 2,999,551 | $ | 3,152,660 | ||||||||||
|
Other comprehensive
income (loss), net
of tax:
|
||||||||||||||||||||
|
Unrealized
gains (losses) on marketable securities (net of tax
benefits)
|
(480,045 | ) | (57,187 | ) | (895,641 | ) | 181,647 | (47,091 | ) | |||||||||||
|
Less
reclassification adjustment for (gains) losses included in net
income (net of taxes)
|
64,746 | (123,372 | ) | 85,963 | (388,600 | ) | (315,721 | ) | ||||||||||||
|
Comprehensive
income
|
$ | 439,617 | $ | 287,635 | $ | 1,845,562 | $ | 2,792,598 | $ | 2,789,848 | ||||||||||
See
accompanying notes to financial statements
See accompanying notes to financial statements
- 5
-
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Consoldiated Statements of Changes in
Stockholders’
Equity
For the Nine Months Ended
September 30, 2008 (Unaudited)
and the Year Ended December 31,
2007
|
Common
Stock, No Par Value
|
Accumulated
|
|||||||||||||||||||||||||||||||||||
|
20,000,000
Shares
|
#
of Shares
|
Other
|
||||||||||||||||||||||||||||||||||
|
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
|
— | ( 100,000 | ) | 100,000 | — | — | ( 1,139,987 | ) | — | — | ( 1,139,987 | ) | ||||||||||||||||||||||||
|
Issuance
of treasury stock for compensation
|
— | 2,500 | ( 2,500 | ) | — | 54,870 | 10,939 | — | — | 65,809 | ||||||||||||||||||||||||||
|
Other
comprehensive income (loss): Unrealized gains on securities, net of
taxes
and reclassification adjustment
|
— | — | — | — | — | — | — | ( 538,770 | ) | ( 538,770 | ) | |||||||||||||||||||||||||
|
Net
income for the nine months ended September 30,
2008
|
— | — | — | — | — | — | 2,655,240 | — | 2,655,240 | |||||||||||||||||||||||||||
|
Balances
at September 30, 2008
|
17,273,776 | 16,730,226 | 543,550 | $ | 6,509,267 | $ | 1,175,539 | $ | (3,207,213 | ) | $ | 23,126,672 | $ | (747,813 | ) | $ | 26,856,452 | |||||||||||||||||||
See accompanying notes to financial statements
- 6
-
LIFEWAY FOODS, INC. AND
SUBSIDIARIES
Consoldiated Statements of Cash
Flows
For the Nine Months Ended
September 30, 2008 and 2007 (Unaudited)
and the Year Ended December 31,
2007
|
(Unaudited)
|
||||||||||||
|
Nine
Months Ended
|
||||||||||||
|
September
30,
|
December
31,
|
|||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Cash flows from
operating activities:
|
||||||||||||
|
Net
income
|
$ | 2,655,240 | $ | 2,999,551 | $ | 3,152,660 | ||||||
|
Adjustments
to reconcile net income to net cash flows from operating
activities, net of acquisition:
|
||||||||||||
|
Depreciation
and amortization
|
821,505 | 789,215 | 1,049,913 | |||||||||
|
(Gain)Loss
on sale of marketable securities, net
|
146,404 | (663,538 | ) | (539,739 | ) | |||||||
|
Impairment
of marketable securities
|
270,908 | — | — | |||||||||
|
Deferred
income taxes
|
(125,221 | ) | 12,419 | (223,717 | ) | |||||||
|
Treasury
stock issued for compensation
|
65,809 | 27,720 | 48,509 | |||||||||
|
Increase
(decrease) in allowance for doubtful accounts
|
(4,449 | ) | (40,540 | ) | (40,540 | ) | ||||||
|
(Increase)
decrease in operating assets:
|
||||||||||||
|
Accounts
receivable
|
(947,303 | ) | (862,699 | ) | (226,405 | ) | ||||||
|
Other
receivables
|
14,193 | 25,240 | 27,939 | |||||||||
|
Inventories
|
(700,540 | ) | (1,538,993 | ) | (984,358 | ) | ||||||
|
Refundable
income taxes
|
240,880 | 142,008 | 26,891 | |||||||||
|
Prepaid
expenses and other current assets
|
665 | (1,068 | ) | (9,270 | ) | |||||||
|
Increase
(decrease) in operating liabilities:
|
||||||||||||
|
Accounts
payable
|
766,988 | 402,027 | 131,316 | |||||||||
|
Accrued
expenses
|
118,650 | (44,891 | ) | (66,062 | ) | |||||||
|
Accrued
income taxes
|
308,260 | — | — | |||||||||
|
Net
cash provided by operating activities
|
3,631,989 | 1,246,451 | 2,347,137 | |||||||||
|
Cash flows from
investing activities:
|
||||||||||||
|
Investment
in cost method securities
|
— | (500,000 | ) | (500,000 | ) | |||||||
|
Purchases
of marketable securities
|
(4,864,873 | ) | (4,408,170 | ) | (5,744,697 | ) | ||||||
|
Sale
of marketable securities
|
4,659,350 | 6,652,670 | 7,168,246 | |||||||||
|
Increase
in margin payable
|
428,951 | — | — | |||||||||
|
Purchases
of property and equipment
|
(1,892,472 | ) | (1,142,709 | ) | (1,824,879 | ) | ||||||
|
Net
cash used in investing activities
|
(1,669,044 | ) | 601,791 | (901,330 | ) | |||||||
|
Cash flows from
financing activities:
|
||||||||||||
|
Proceeds
of note payable
|
— | 300,000 | 300,000 | |||||||||
|
Purchases
of treasury stock, net
|
(1,139,987 | ) | (752,603 | ) | (752,603 | ) | ||||||
|
Repayment
of notes payable
|
(887,977 | ) | (1,318,885 | ) | (1,945,131 | ) | ||||||
|
Net
cash used in financing activities
|
(2,027,964 | ) | (1,771,488 | ) | (2,397,734 | ) | ||||||
|
Net
decrease in cash and cash equivalents
|
(65,019 | ) | 76,754 | (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
|
$ | 530,866 | $ | 1,624,566 | $ | 595,885 | ||||||
See
accompanying notes to financial statements
- 7
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 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.
- 8
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 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:
|
September
30,
|
December
31,
|
|||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Amounts
insured
|
$ | 138,913 | $ | 251,315 | $ | 576,563 | ||||||
|
Uninsured
and uncollateralized amounts
|
846,239 | 1,992,169 | 523,295 | |||||||||
|
Total
bank balances
|
$ | 985,152 | $ | 2,243,484 | $ | 1,099,858 | ||||||
Marketable
securities
All
investment securities are classified either as available-for-sale or trading,
and are carried at fair value or quoted market prices. Unrealized gains and on
available-for-sale securities losses are reported as a separate component of
stockholders’ equity. Amortization, accretion, interest and dividends, realized
gains and losses, and declines in value judged to be other-than-temporary on
available-for-sale securities are recorded in other income. Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities, Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (SAB) 59, Accounting for Noncurrent Marketable
Equity Securities, and FASB Staff Position 115-1 and 124-1 The Meaning of Other-than-temporary
Impairment and its Application to Certain Investments, provide guidance
on determining when an investment is other-than-temporarily
impaired. This evaluation depends on the specific facts and circumstances.
Factors that we consider in determining whether an other-than-temporary decline
in value has occurred include: the market value of the security in relation to
its cost basis; the financial condition of the investee; and the intent and
ability to retain the investment for a sufficient period of time to allow for
possible recovery in the market value of the investment.
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.
- 9
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 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
|
- 10
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 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 nine months ended September 30, 2008 and 2007,
approximately $1,642,114, $1,241,442 and $1,356,850 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 nine months ended September 30, 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.
- 11
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2008 and 2007
and
December 31, 2007
Note
3 – INTANGIBLE ASSETS
Intangible
assets, and the related accumulated amortization, consist of the
following:
|
September
30, 2008
|
September
30, 2007
|
December
31, 2007
|
||||||||||||||||||||||
|
Cost
|
Accumulated
Amortization
|
Cost
|
Accumulated
Amortization
|
Cost
|
Accumulated
Amortization
|
|||||||||||||||||||
|
Recipes
|
$ | 43,600 | $ | 42,009 | $ | 43,600 | $ | 34,517 | $ | 43,600 | $ | 37,242 | ||||||||||||
|
Customer
lists and other customer related intangibles
|
305,200 | 172,583 | 305,200 | 131,163 | 305,200 | 141,518 | ||||||||||||||||||
|
Lease
acquisition
|
87,200 | 51,904 | 87,200 | 39,448 | 87,200 | 42,562 | ||||||||||||||||||
|
Other
|
6,638 | 4,317 | 12,496 | 2,987 | 6,638 | 3,319 | ||||||||||||||||||
|
Customer
relationship
|
985,000 | 177,848 | 985,000 | 95,764 | 985,000 | 116,285 | ||||||||||||||||||
|
Contractual
backlog
|
12,000 | 12,000 | 12,000 | 12,000 | 12,000 | 12,000 | ||||||||||||||||||
|
Trade
names
|
1,980,000 | 286,000 | 1,980,000 | 154,000 | 1,980,000 | 187,000 | ||||||||||||||||||
|
Formula
|
438,000 | 94,900 | 438,000 | 51,100 | 438,000 | 62,050 | ||||||||||||||||||
| $ | 3,857,638 | $ | 841,561 | $ | 3,863,496 | $ | 520,979 | $ | 3,857,638 | $ | 601,976 | |||||||||||||
Amortization
expense is expected to be as follows for the 12 months ending September
30:
|
2009
|
$ |
313,225
|
||||
|
2010
|
312,756
|
|||||
|
2011
|
300,964
|
|||||
|
2012
|
285,133
|
|||||
|
2013
|
257,883
|
|||||
|
Thereafter
|
1,546,116
|
|||||
| $ |
3,016,077
|
Amortization
expense during the nine months September 30, 2008 and 2007 and for the year
ended December 31, 2007 was $239,585, $242,269 and $323,266,
respectively.
- 12
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2008 and 2007
and
December 31, 2007
Note
4 – MARKETABLE SECURITIES
The cost
and fair value of marketable securities classified as available for sale and
trading are as follows:
|
September 30, 2008
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Equities
|
$ | 3,077,340 | $ | 55,002 | $ | ( 639,374 | ) | $ | 2,492,968 | |||||||
|
Mutual
Funds
|
940,322 | — | ( 287,919 | ) | 652,403 | |||||||||||
|
Preferred
Securities
|
1,714,758 | — | ( 509,150 | ) | 1,205,608 | |||||||||||
|
Corporate
Bonds
|
917,990 | — | ( 75,144 | ) | 842,846 | |||||||||||
|
Municipal
Bonds
|
4,586 | 374 | — | 4,960 | ||||||||||||
|
Government
agency Obligations
|
478,507 | — | ( 8,352 | ) | 470,155 | |||||||||||
|
Total
|
$ | 7,133,503 | $ | 55,376 | $ | ( 1,519,939 | ) | $ | 5,668,940 | |||||||
|
September 30, 2007
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Equities
|
$ | 2,323,985 | $ | 318,165 | $ | ( 168,993 | ) | $ | 2,473,157 | |||||||
|
Mutual
Funds
|
1,146,517 | 10,889 | ( 67,705 | ) | 1,089,701 | |||||||||||
|
Preferred
Securities
|
1,417,978 | 6,570 | ( 84,438 | ) | 1,340,110 | |||||||||||
|
Certificates
of Deposit
|
75,000 | — | ( 395 | ) | 74,605 | |||||||||||
|
Corporate
Bonds
|
1,580,768 | 971 | ( 105,851 | ) | 1,475,888 | |||||||||||
|
Municipal
Bonds
|
4,586 | 187 | — | 4,773 | ||||||||||||
|
Government
agency
|
100,000 | — | ( 393 | ) | 99,607 | |||||||||||
|
Total
|
$ | 6,648,834 | $ | 336,782 | $ | ( 427,775 | ) | $ | 6,557,841 | |||||||
|
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, $4,659,350 and
$6,652,670 during the year ended December 31, 2007 and for the nine months ended
September 30, 2008 and 2007, respectively.
- 13
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2008 and 2007
and
December 31, 2007
Note
4 – MARKETABLE SECURITIES - Continued
Gross
gains of $876,527, $376,751, and $665,067 and gross losses of $336,788,
$523,155, and $1,529 were realized on these sales during the year ended December
31, 2007 and for the nine months ended September 30, 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 September 30, 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
|
$ | 1,588,687 | $ | ( 496,916 | ) | $ | 309,164 | $ | ( 142,458 | ) | $ | 1,897,851 | $ | ( 639,374 | ) | |||||||||
|
Mutual
Funds
|
255,835 | ( 28,923 | ) | 253,461 | ( 258,996 | ) | 509,296 | ( 287,919 | ) | |||||||||||||||
|
Preferred
Securities
|
463,578 | ( 60,188 | ) | 660,720 | ( 448,962 | ) | 1,124,298 | ( 509,150 | ) | |||||||||||||||
|
Corporate
Bonds
|
474,208 | ( 34,858 | ) | 351,468 | ( 40,286 | ) | 825,676 | ( 75,144 | ) | |||||||||||||||
|
Government
Agency Obligations
|
470,155 | ( 8,352 | ) | — | — | 470,155 | ( 8,352 | ) | ||||||||||||||||
| $ | 3,252,463 | $ | ( 629,237 | ) | $ | 1,574,813 | $ | (890,702 | ) | $ | 4,827,276 | $ | ( 1,519,939 | ) | ||||||||||
During
the third quarter of 2008, we recorded other than temporary impairments related
to investment in marketable securities in certain equity and corporate bonds of
$270,908. The impairments recognized during the third quarter of 2008 related to
securities that were in an unrealized loss position at the balance sheet date
that have subsequently been sold and equity and corporate bonds that we consider
other than temporarily impaired due to the recent performance of the issuers of
those securities.
Equities,
Mutual Funds, 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,
other than the impairment noted in the preceding paragraph, the Company
does not consider any material investments to be other-than-temporarily impaired
at September 30, 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 September 30, 2008.
- 14
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2008 and 2007
and
December 31, 2007
Note
5 – INVENTORIES
Inventories
consist of the following:
|
September
30,
|
December
31,
|
|||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Finished
goods
|
$ | 1,375,304 | $ | 1,835,452 | $ | 1,296,985 | ||||||
|
Production
supplies
|
1,604,106 | 1,318,991 | 1,383,384 | |||||||||
|
Raw
materials
|
1,227,684 | 906,746 | 826,185 | |||||||||
|
Total
inventories
|
$ | 4,207,094 | $ | 4,061,189 | $ | 3,506,554 | ||||||
Note
6 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
September
30,
|
December
31
|
|||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Land
|
$ | 969,232 | $ | 969,232 | $ | 969,232 | ||||||
|
Buildings
and improvements
|
7,102,608 | 6,813,045 | 6,743,647 | |||||||||
|
Machinery
and equipment
|
8,227,558 | 8,127,460 | 8,159,199 | |||||||||
|
Vehicles
|
610,558 | 581,458 | 581,458 | |||||||||
|
Office
equipment
|
137,120 | 101,583 | 101,583 | |||||||||
|
Construction
in process
|
2,120,346 | 719,830 | ||||||||||
| 19,167,422 | 16,592,778 | 17,274,949 | ||||||||||
|
Less
accumulated depreciation
|
8,177,922 | 7,416,299 | 7,596,001 | |||||||||
|
Total
property and equipment
|
$ | 10,989,500 | $ | 9,176,479 | $ | 9,678,948 | ||||||
Depreciation
expense during the years ended December 31, 2007 and for the nine months ended
September 30, 2008 and 2007 was $726,647, $581,920 and $546,946,
respectively.
Note 7 – ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
September
30,
|
December
31,
|
|||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Accrued
payroll and payroll taxes
|
$ | 111,631 | $ | 82,981 | $ | 58,395 | ||||||
|
Accrued
property tax
|
363,699 | 340,717 | 285,279 | |||||||||
|
Other
|
57,359 | 17,370 | 70,365 | |||||||||
| $ | 532,689 | $ | 441,068 | $ | 414,039 | |||||||
- 15
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2008 and 2007
and
December 31, 2007
Note
8 – NOTES PAYABLE
Notes
payable consist of the following:
|
September
30,
|
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.
|
$ | 440,874 | $ | 448,269 | $ | 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.
|
2,779,572 | 2,853,203 | 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
|
1,124,500 | 2,257,697 | 1,951,503 | |||||||||
|
Note
payable to officer, payable on demand
|
— | 300,000 | ||||||||||
|
Total
notes payable
|
4,344,946 | 5,859,169 | 5,232,923 | |||||||||
|
Less
current maturities
|
1,125,608 | 1,434,903 | 1,136,126 | |||||||||
|
Total
long-term portion
|
$ | 3,219,338 | $ | 4,424,266 | $ | 4,096,797 | ||||||
Maturities
of notes payables are as follows:
|
For
the Year Ended September 30,
|
||||
|
2009
|
$ | 1,125,608 | ||
|
2010
|
2,786,472 | |||
|
2011
|
432,866 | |||
|
Total
|
$ | 4,344,946 | ||
Note
9 – PROVISION FOR INCOME TAXES
The
provision for income taxes consists of the following:
|
For
the
|
||||||||||||
|
For
the Nine Months Ended
|
Year
Ended
|
|||||||||||
|
September
30,
|
December
31,
|
|||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 1,267,998 | $ | 1,465,229 | $ | 1,699,408 | ||||||
|
State
and local
|
235,855 | 286,145 | 336,848 | |||||||||
|
Total
current
|
1,503,853 | 1,751,374 | 2,036,256 | |||||||||
|
Deferred
|
(125,221 | ) | 12,418 | (223,717 | ) | |||||||
|
Provision
for income taxes
|
$ | 1,378,632 | $ | 1,763,792 | $ | 1,812,539 | ||||||
- 16
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 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 Nine Months Ended
|
Year
Ended
|
|||||||||||
|
September
30,
|
December
31,
|
|||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Federal
income tax expense
computed
at the statutory rate
|
$ | 1,463,625 | $ | 1,619,535 | $ | 1,688,168 | ||||||
|
State
and local tax expense, net
|
206,629 | 228,640 | 238,330 | |||||||||
|
Permanent
differences
|
(291,622 | ) | (84,383 | ) | (113,959 | ) | ||||||
|
Provision
for income taxes
|
$ | 1,378,632 | $ | 1,763,792 | $ | 1,812,539 | ||||||
Amounts
for deferred tax assets and liabilities are as follows:
|
September
30,
|
December
|
|||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Non-current
deferred tax liabilities
arising
from:
Temporary
differences -
|
||||||||||||
|
accumulated
depreciation and amortization
|
$ | (1,615,421 | ) | $ | (510,000 | ) | $ | (1,712,795 | ) | |||
|
Current
deferred tax assets (liabilities) arising from:
|
||||||||||||
|
Unrealized
losses (gains) on marketable securities
|
716,749 | 37,418 | 147,077 | |||||||||
|
Inventory
|
178,271 | 172,088 | 148,586 | |||||||||
|
Allowance
for doubtful accounts
|
14,459 | 16,297 | 16,297 | |||||||||
|
Total
current deferred tax assets
(liabilities)
|
909,479 | 225,803 | 311,960 | |||||||||
|
Net
deferred tax liability
|
$ | (705,942 | ) | $ | (284,197 | ) | $ | (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
|
|||||||||||
|
September
30,
|
December
31,
|
|||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Interest
|
$ | 222,166 | $ | 313,215 | $ | 430,098 | ||||||
|
Income
taxes
|
$ | 937,967 | $ | 1,626,031 | $ | 2,026,031 | ||||||
- 17
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 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 September 30, 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 September 30, 2008 and 2007, there were no stock
options outstanding or exercisable.
On June
13, 2008, Lifeway’s Board of Directors approved awards of an aggregate amount
of 10,500 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 13,
2008 and have vesting periods of one year. The expense for the awards is
measured as of July 1, 2008 at $11.87 per share for 10,500 shares, or
a total stock award expense of $124,634. This expense will be recognized as the
stock awards vest in 12 equal portions of $10,386, or 875 shares per month
for one year.
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.
- 18
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2008 and 2007
and
December 31, 2007
Note
12 – FAIR VALUE MEASUREMENTS - Continued
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.
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
September
30,
2008
|
|||||||
|
Assets
|
||||||||||
|
Investment
securities- available - for - sale
|
$ | 5,668,940 | $ | 5,668,940 | ||||||
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.
- 19
-
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2008 and 2007
and
December 31, 2007
Note
13 – RECENT ACCOUNTING PRONOUNCEMENTS - Continued
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.
- 20
-
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Comparison of Quarter Ended
September 30, 2008 to Quarter Ended September 30, 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, and in the Management’s Discussion and Analysis contained in our Form
10-QSB, for the fiscal quarters ended March 31, 2008, and June 30,
2008.
Results
of Operations
Total
sales increased by $1,422,804, (approximately 15%) to $11,240,282 during the
three-month period ended September 30, 2008 from $9,817,478 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 Lifeway’s kids
Kefir drink, ProBugs®.
Cost of
goods sold as a percentage of sales, excluding depreciation expense, for the
Lifeway Foods line was approximately 67% during the third quarter 2008, compared
to approximately 70% during the same period in 2007. The decrease was primarily
attributable to the decreased cost of conventional milk, our largest raw
material. As of September 30, 2008, oil related production supplies
and fuel surcharges on product deliveries were at record highs, but have
subsequently begun to decrease as the price of oil has decreased since the
record highs in experienced in August 2008.
Gross
profit increased by $816,463, (approximately 30%) to $3,537,122 during the
three-month period ended September 30, 2008 from $2,720,659 during the same
three-month period in 2007.
Total
operating expenses as a percentage of sales for Lifeway Foods were approximately
18% during the third quarter 2008, compared to about 22% during the same period
in 2007. This decrease is primarily attributable to a decrease in
selling related expenses and operating synergies gained by the consolidation of
the 2006 Helios Nutrition acquisition into our overall operations, as well as
our continuing efforts to maximize efficiency through capital
investments.
Operating
income increased by $886,196, (approximately 153%) to $1,467,239 during the
three-month period ended September 30, 2008 from $581,043 during the same
three-month period in 2007.
Total
other expenses for the third quarter 2008 were $344,406, compared with total
other income of $201,659 during the same period in 2007. This
decrease is primarily attributable to a higher gain on the sale of marketable
securities in 2007, when compared to the same period in
2008. Marketable securities are discussed in Note 4 of the Notes to
Consolidated Financial Statements.
Pre-tax
income increased by $340,131, (approximately 43%) to $1,122,833 during the
three-month period ended September 30, 2008 from $782,702 during the same
three-month period in 2007.
Provision
for income taxes was $267,917, or a 20% tax rate during the third quarter 2008
compared with $314,508 or a 40% 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 for the group was $854,916 or $.05 per weighted average share for the
third quarter ended September 30, 2008, compared with $468,194 or $.03 per
weighted average share in the same period in 2007. This
represents an 83% year over year increase.
- 21
-
Comparison of Nine-Month
Period Ended September 30, 2008 to Nine Month Period Ended September 30,
2007
Results
of Operations
Total
sales increased by $5,330,928, (approximately 19%) to $33,885,912 during the
nine-month period ended September 30, 2008 from $28,554,984 during the same
nine-month period in 2007. This increase is primarily attributable to increased
sales and awareness of Lifeway’s flagship line, Kefir, as well as Lifeway’s kids
Kefir drink, ProBugs®.
Cost of
goods sold as a percentage of sales, excluding depreciation expense, for the
Lifeway Foods line was approximately 66% during the nine month period ended
September 30, 2008, compared to about 63% during the same period in 2007. The
increase was primarily attributable to the higher cost, on average of
conventional milk, our largest raw material during the first six months of 2008
when compared to the same period in 2007. Additionally, the cost of
freight to deliver products, utilities, and all oil related production supplies
and raw materials were significantly higher during the first nine months of 2008
when compared to the same period in 2007.
Total
operating expenses as a percentage of sales for Lifeway Foods were approximately
19% during the nine-month period ending September 30, 2008, compared to about
21% during the same period in 2007. This decrease is primarily
attributable to a decrease in selling related expenses and operating synergies
gained by the consolidation of the 2006 Helios Nutrition acquisition into our
overall operations, as well as our continuing efforts to maximize efficiency
through capital investments.
Total
other expenses during the nine-month period ending September 30, 2008 were
$346,186, compared with total other income of $619,523 during the same period in
2007. This decrease is primarily attributable to a higher gain on the
sale of marketable securities in 2007, when compared to the same period in
2008. Marketable securities are discussed in Note 4 of the Notes to
Consolidated Financial Statements.
Total net
income for the group was $2,655,240, or $.16 per split adjusted share for the
nine-months ended September 30, 2008, compared with $2,999,551 or $.18 per split
adjusted share in the same period in 2007.
Sources
and Uses of Cash
Net cash
provided by operating activities increased $2,385,538 to $3,631,989 during the
nine-month period ended September 30, 2008 from $1,246,451 during the same
period in 2007. This increase is primarily attributable to the
increase in net income as well as a decrease in inventories during the first
nine months of 2008.
Net cash
provided used in investing activities was $1,669,044 during the nine months
ended September 30, 2008, which is an increase of $2,270,835 compared to
$601,791 of net cash provided by investing activities during the same period in
2007. This increase is primarily due to the Company’s purchase of
$1,892,472 of equipment during the nine-month period ended September 30, 2008
compared to equipment purchases of $1,142,709 during the same period in
2007.
Significant
portions of our assets are held in marketable securities. All of our marketable
securities are classified as available-for-sale on our balance sheet. 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.
- 22
-
Other
Developments
On June
13, 2008, Lifeway’s Board of Directors approved awards of an aggregate amount
of 10,500 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 13,
2008 and have vesting periods of one year. The expense for the awards is
measured as of July 1, 2007 at $11.87 per share for 10,500 shares, or
a total stock award expense of $124,634. This expense will be recognized as the
stock awards vest in 12 equal portions of $10,386, or 875 shares per month
for one year.
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 monthly in 12
equal portions of $6,930, based upon the vesting of 700 shares per
month.
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.
|
- 23
-
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable.
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of
September 30, 2008, 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 September 30, 2008 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 as disclosed in our Form 10-KSB filed on March 31, 2008. 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-Q fairly
present, in all material respects, our financial condition, results of
operations and cash flows for the periods presented.
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.
PART
II — OTHER INFORMATION
None.
ITEM
1A. RISK FACTORS
Not
applicable.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
- 24
-
ITEM
5. OTHER INFORMATION
On
November 14, 2008, the Company announced its financial results for the fiscal
quarter ended September 30, 2008 and certain other information. A copy of the
Company’s press release announcing these financial results and certain other
information is attached as Exhibit 99.1 hereto. The information contained in
Exhibit 99.1 hereto is being furnished, and should not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liabilities imposed by that Section. The information
contained in Exhibit 99.1 shall not be incorporated by reference into any
registration statement or other document or filing under the Securities Act of
1933, as amended, except as may be expressly set forth in a specific filing. The
press release filed as an exhibit to this report includes “safe harbor” language
pursuant to the Private Securities Litigation Reform Act of 1995, as amended,
indicating that certain statements about the Company’s business and other
matters contained in the press release are “forward-looking.” The press release
also cautions investors that “forward-looking” statements may be different from
actual operating results. Finally, the press release states that a more thorough
discussion of risks and uncertainties which may affect the Company’s operating
results is included in the Company’s reports on file with the Securities and
Exchange Commission.
ITEM
6. EXHIBITS
|
Exhibit
Number
|
Description
of Document
|
|
|
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
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
99.1
|
Press
Release dated November 14, 2008. “Lifeway Foods Reports Record
3rd Quarter 2008 Results.”
|
- 25
-
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LIFEWAY
FOODS, INC.
(Registrant)
|
Date:
|
November
14, 2008
|
By:
|
/s/
Julie Smolyansky
|
||
|
Julie
Smolyansky
Chief
Executive Officer, President and Director
|
|||||
|
Date:
|
November
14 , 2008
|
By:
|
/s/
Edward P. Smolyansky
|
||
|
Edward
P. Smolyansky
Chief
Financial and Accounting Officer and Treasurer
|
|||||
- 26
-
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
of Document
|
|
|
31.1
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
99.1
|
Press
Release dated November 14, 2008. “Lifeway Foods Reports Record
3rd Quarter 2008 Results.”
|
- 27
-