e10ksb
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from: to |
Commission file number: 0-17363
LIFEWAY FOODS, INC.
(Name of small business issuer in its charter)
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Illinois
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36-3442829 |
(State or other jurisdiction of
incorporation or organization) |
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(IRS Employer
Identification No.) |
6431 West Oakton, Morton Grove, Illinois 60053
(Address of principal executive offices) (Zip Code)
Issuers telephone number:
(847) 967-1010
Securities registered under Section 12(b) of the
Exchange Act:
None
Securities registered under Section 12(g) of the
Exchange Act:
Common Stock, No Par Value
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the
past 90 days. Yes þ No o
Check if there is no disclosure of delinquent filers in response
to Item 405 of
Regulation S-B is
not contained in this form, and no disclosure will be contained,
to the best of registrants knowledge, in definitive proxy
or information statements incorporated by reference in
Part III of this
Form 10-KSB or any
amendment to this
Form 10-KSB. þ
The issuers revenues for its most recent fiscal year were:
$20,131,654
The aggregate market value of the voting and non-voting common
equity held by non-affiliates (approximately
2,266,719 shares) computed by reference to the price at
which the stock was sold as of December 31, 2005
($12.44 per share as quoted on the National Market System
of the Nasdaq Stock Market) was: $28,197,982
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 REGISTRANTS)
The number of shares outstanding of each of the issuers
classes of common equity, as of February 28, 2006 were:
8,396,187 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Notice of Annual Meeting and Proxy Statement, to
be filed no later than April 30, 2006, for the
Registrants 2006 Annual Meeting of Shareholders, scheduled
to be held [June 10], 2006, are incorporated by reference
in Part III.
Transitional Small Business Disclosure Format (check
one): Yes o No þ
LIFEWAY FOODS, INC.
Table of Contents
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PART I
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANYS ACTUAL RESULTS TO
DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, readers of
this document and any document incorporated by reference herein,
are advised that this document and documents incorporated by
reference into this document contain both statements of
historical facts and forward looking statements. Forward looking
statements are subject to certain risks and uncertainties, which
could cause actual results to differ materially from those
indicated by the forward looking statements. Examples of forward
looking statements include, but are not limited to
(i) projections of revenues, income or loss, earnings or
losses per share, capital expenditures, dividends, capital
structure and other financial items, (ii) statements of
Lifeway Foods, Inc.s plans and objectives, including the
introduction of new products, or estimates or predictions of
actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic
performance, and (iv) statements of assumptions underlying
other statements and statements about Lifeway Foods, Inc. or its
business.
This document and any documents incorporated by reference herein
also identify important factors which could cause actual results
to differ materially from those indicated by forward looking
statements. These risks and uncertainties include price
competition, the decisions of customers or consumers, the
actions of competitors, changes in the pricing of commodities,
the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products
and services, and other factors which are described herein
and/or in documents incorporated by reference herein.
The cautionary statements made pursuant to the Private
Litigation Securities Reform Act of 1995 above and elsewhere by
Lifeway Foods, Inc. (Lifeway or the
Company) should not be construed as exhaustive or as
any admission regarding the adequacy of disclosures made by
Lifeway prior to the effective date of such act. Forward looking
statements are beyond the ability of Lifeway to control and in
many cases we cannot predict what factors would cause results to
differ materially from those indicated by the forward looking
statements.
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ITEM 1. |
DESCRIPTION OF BUSINESS. |
BUSINESS DEVELOPMENT
Lifeway Foods, Inc. commenced operations in February 1986, and
was incorporated under the laws of the State of Illinois on
May 19, 1986. The Companys principal business
activity is the manufacturing of probiotic, cultured, functional
dairy and non-dairy health food products. Lifeways primary
products are kefir, a drinkable dairy beverage similar to but
distinct from yogurt, in several flavors sold under the name
Lifeway Kefir; a line of various drinkable yogurts
sold under the La Fruta and Tuscan
brands; and BasicsPlus, a dairy based
immune-supporting dietary supplement beverage. The Company also
produces several soy-based kefir beverages under the
SoyTreat trademark. In addition to the drinkable
products, Lifeway manufactures Lifeway Farmer
Cheese, a line of various farmer cheeses; Sweet
Kiss, a fruit sugar-flavored spreadable cheese similar in
consistency to cream cheese; and a line of assorted fruit and
vegetable flavored cream cheese under the brand Cream
Cheese Gourmet. The Company also manufactures and markets
a vegetable-based seasoning under the Golden Zesta
brand. In the Chicago metropolitan area, Lifeway distributes its
products on its own trucks and via one distributor. The Company
distributes Cream Cheese Gourmet branded cream
cheese products in the Philadelphia metropolitan area using its
own trucks. Lifeway manufactures all of its products at
Company-owned facilities and distributes its products primarily
throughout the United States.
SUBSIDIARY ENTITIES
On September 30, 1992, Lifeway formed a wholly-owned
subsidiary, LFI Enterprises, Inc. (LFIE),
incorporated in the State of Illinois. Until
August 1, 2001, LFIE operated a Russian
theme restaurant
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and supper club facility. On August 1, 2001, Lifeway ceased
operations at the facility after condemnation proceedings were
initiated by the Village of Niles, Illinois, which sought to
control the property for municipal purposes. This property was
sold in January 2003 for a capital gain of approximately
$1.2 million.
On March 19, 2004, LFIE formed Lifeway Foods Canada, LLC,
an Illinois limited liability company (LFC), to
serve as a holding company for prospective operations within
Canada. LFIE is the manager and sole member of LFC.
On July 26, 2004, Lifeway, by its subsidiary, LFIE,
acquired certain assets and inventory of Ilyas Farms,
Inc., a twelve year old, privately-held gourmet cream cheese
producer based in the Philadelphia metropolitan area. No prior
relationship existed between Ilyas Farms, Inc. or its
principal, Michael Kofman, and either the Company or LFIE.
The total cash purchase consideration of $575,600 for the assets
and inventory of Ilyas Farms, Inc. was paid by LFIE in
cash from Company funds without financing. Additionally, there
are certain royalty payments to be made in connection therewith.
The Company provided a guaranty of payment for the transaction.
The acquisition included approximately $64,000 of tangible
assets (including certain manufacturing equipment and a delivery
truck) and inventory as well as the brand name Ilyas
Farms and other trademarks and the recipes and
manufacturing processes previously used by Ilyas Farms,
Inc. The equipment acquired by LFIE from Ilyas Farms, Inc.
was previously used to manufacture cream cheese products. The
inventory which was purchased by LFIE consisted entirely of
different varieties of cream cheese. The founder of Ilyas
Farms, Inc., Michael Kofman, assisted LFIE over a one-month
transition period and is available, if needed, on a consulting
basis going forward. Additionally, LFIE has hired the 10
employees formerly employed by Ilyas Farms, Inc.
BUSINESS OF ISSUER
Lifeways primary product is kefir, which, like the
better-known product of yogurt, is a fermented dairy product.
Kefir has a slightly effervescent quality, with a taste similar
to yogurt and a consistency similar to buttermilk. It is a
product distinct from yogurt because it incorporates the unique
microorganisms of kefir as the cultures to ferment the milk.
Lifeways Kefir is a drinkable product intended for use as
a breakfast meal or a snack, or as a base for lower-calorie
dressings, dips, soups or sauces. Kefir is also used as the base
of Lifeways plain farmers cheese, a cheese made
without salt, sugar or animal rennet. In addition, kefir is the
primary ingredient of Lifeways Sweet Kiss
product, a fruit sugar-flavored, cream cheese-like spread which
is intended to be used as a dessert spread or frosting.
Kefir contains a unique mixture of several live microorganisms
and nutrients such as proteins, minerals and vitamins. Kefir is
highly digestible and, due to its acidity and enzymes,
stimulates digestion of other foods. Kefir is considered to be
the most favorable milk product for people suffering from
genetically-based lactose intolerance. A study published in the
May 2003 issue of the Journal of the American Dietetic
Association suggests that kefir improves lactose digestion and
tolerance in adults with lactose maldigestion. Studies also
indicate that kefir may stimulate protein digestion and
appetite, decrease the cholesterol content in blood, improve
salivation and excretion of stomach and pancreatic enzymes and
peristalsis. As compared to yogurt, many naturopathic
practitioners consider kefir to be the best remedy for digestive
troubles because it has a very low curd tension (the curd breaks
up very easily into small particles). The curd of yogurt, on the
other hand, holds together or breaks into lumps. The small size
of the kefir curd facilitates digestion by presenting a large
surface area on which digestive agents may work.
Kefir is a good source of calcium, protein, and Vitamin
B-complex. In addition, because the fermentation process
produces a less sour tasting product than yogurt, less sugar is
required to make a desirable product, and the end product
contains fewer calories than regular yogurt.
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Lifeway currently sells some or all of the products listed
below, except as specifically noted, to various retail
establishments including supermarkets, grocery stores, gourmet
shops, delicatessens and convenience stores.
LIFEWAYS KEFIR. Lifeways Kefir is
a drinkable kefir product manufactured in ten regular and
low-fat varieties, including plain, raspberry, blueberry,
strawberry, cherry, peach, banana-strawberry, cappuccino,
chocolate and vanilla, and sold in 32 ounce containers featuring
color-coded caps and labels describing nutritional information.
In March 1996, Lifeway began marketing its non-fat, low
cholesterol kefir in six flavors plain, raspberry,
strawberry, strawberry-banana, peach and blueberry. The kefir
product is currently marketed under the name
Lifeways Kefir, and is typically sold by
retailers from their dairy sections.
LIFEWAYS ORGANIC SOYTREAT. SoyTreat is
a soy alternative to dairy kefir and is made from organic soy
milk, which is derived from non-genetically modified soybeans.
SoyTreat can be consumed by those who desire the benefits of
kefir, but are lactose intolerant or interested in a soy-based
alternative to milk. SoyTreat also provides 6.25g of soy protein
per serving, and features the United States Food and Drug
Administration-approved health claim, 25g of soy protein a
day as part of a diet low in saturated fat can help lower
cholesterol and reduce the risk of heart disease. At
present SoyTreat is manufactured in five flavors: strawberry,
apple, peach, coconut and coffee latte.
LIFEWAYS ORGANIC KEFIR. Lifeways
Organic Kefir meets the organic standards and
specifications of the United States Department of Agriculture
for organic products and is manufactured in four flavors: plain,
raspberry, strawberry and peach. Lifeways Organic Kefir is
sweetened with organic cane juice.
LIFEWAYS SLIM6. Lifeways Slim6 is
a line of low-fat kefir beverages with no added sugar designed
for consumers who follow low-carbohydrate diets. Lifeways
Slim6 has only 8 grams of carbohydrates and 2.5 grams of fat per
8-ounce serving and is available in five flavors:
strawberries n cream, mixed berry, tropical fruit,
strawberry-banana and an original, unsweetened version.
LA FRUTA DRINKABLE YOGURT. La Fruta is a
yogurt like drink similar to a milkshake or smoothie that is
specifically formulated to accommodate the Hispanic market, the
fastest growing demographic in the U.S. La Fruta is
manufactured in six flavors: strawberry, mango, pina colada,
banana-strawberry, horchata and tres leches.
LA FRUTA CHEESE. La Fruta Cheese is a
cheese product similar to cream cheese that is specifically
formulated to accommodate the Hispanic market, the fastest
growing demographic in the United States. La Fruta Cheese
is manufactured in a tres leches flavor.
TUSCAN BRAND DRINKABLE YOGURT. Tuscan Brand
Drinkable Yogurt is a cultured dairy beverage mainly
marketed on the East Coast and manufactured in a variety of
flavors which vary depending upon distributor demand.
FARMER CHEESE. Farmer Cheese is based on a
cultured soft cheese and is intended to be used in a variety of
recipes as a low fat, low-cholesterol, low-calorie substitute
for cream cheese or ricotta, and is available in various styles.
SWEET KISS. Sweet Kiss is a sweet cheese
probiotic spread available in five flavors: plain, plain with
raisins, apple, peach and chocolate.
ELITA; BAMBINO. Elita and Bambino
cheeses are low-fat, low-cholesterol kefir based cheese spreads
which are marketed as an alternative to cream cheese.
KRESTYANSKI TWOROG. Krestyanski Tworog is a
European-style kefir-based soft style cheese which can also be
used in a variety of recipes, eaten with a spoon, used as a
cheese spread, or substituted in recipes for cream cheese,
ricotta cheese or cottage cheese and is marketed to consumers of
various Eastern European ethnicities.
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CREAM CHEESE GOURMET. Lifeway produces a line of over 40
flavors of cream cheeses under the Cream Cheese
Gourmet brand name. The different flavors are manufactured
in original and low-fat varieties and include such flavors as
plain, strawberry, horseradish, lox & onion, bleu
cheese, pesto, cinnamon & raisin, and vegetable. The
Cream Cheese Gourmet line of cream cheeses was acquired by
Lifeway in the acquisition of substantially all of the assets of
Ilyas Farms, Inc. described elsewhere in this report and
is marketed primarily to smaller and ethnic grocers,
delicatessens and coffee shops.
BASICS PLUS. Basics Plus is a patented
kefir-based beverage product designed to improve
gastrointestinal functions, enhancing the immune system. This
product contains certain passive immunity products
purchased from GalaGen, Inc. prior to its 2002 bankruptcy as
described elsewhere in this report. Lifeway is currently engaged
in discussion with several potential new suppliers of passive
immunity products and is not currently manufacturing this
beverage.
KEFIR STARTER. Kefir Starter is a powdered
form of kefir that is sold in envelope packets and allows a
consumer to make his or her own drinkable kefir at home by
adding milk. Lifeway continues to develop sales of the product
internationally and via the internet.
GOLDEN ZESTA. Golden Zesta is a
vegetable-based seasoning, which, because of its low sodium
content, may also be used as a salt substitute and is marketed
to delicatessens, gourmet shops and ethnic grocers.
ITS PUDDING. Its Pudding! is the
only organic pudding, produced in the following flavors,
Chocolate, Vanilla, Banana and Tapioca.
Lifeway intends to continue to develop new products based on
kefir and Farmer Cheese. There is no assurance that such
products or any other new products can be developed successfully
or marketed profitably.
With its twelve company-owned trucks, Lifeway distributes its
products directly and extensively in the State of Illinois,
primarily in the Chicago metropolitan area, including major
retail chains such as Jewel Food Stores, Dominicks Finer
Foods, Treasure Island Food Marts, Whole Foods and independent
retailers. Lifeway also distributes over 40 different assorted
cream cheese products under the Cream Cheese Gourmet brand name
in the Philadelphia metropolitan area.
In addition to the Chicago and Philadelphia metropolitan areas,
Lifeways products are distributed to stores throughout the
United States. Lifeway has verbal distribution arrangements with
various distributors throughout the United States. These verbal
distribution arrangements, in the opinion of Lifeway, allow
management the necessary latitude to expand into new areas and
markets and establish new relationships with distributors on an
ongoing basis. Lifeway has not offered any exclusive territories
to any distributors.
Distributors are provided Lifeway products at wholesale prices
for distribution to their retail accounts. Lifeway believes that
the price at which its products are sold to its distributors is
competitive with the prices generally paid by distributors for
similar products in the markets served. In all areas served,
distributors currently deliver the products directly to the
refrigerated cases of dairy sections of their retail customers.
Each distributor carries a line of Lifeways products on
its trucks, checks the retail stores for space allocated to
Lifeways products, determines inventory requirements of
the store and places Lifeway products directly into the
retailers dairy cases. Lifeway believes this method of
distribution best serves the needs of each retail store, and is
the best available means to ensure consistency and quality of
product handling, quality control, flavor selection and
favorable retail display. Under the distribution arrangements,
each distributor must meet certain prescribed product handling,
service and administrative requirements including, among others,
frequency of delivery, replacement of damaged, old or
substandard packages, and delivery of products directly to the
refrigerated case.
Additionally, Lifeway has attempted international distribution
of certain of its products by attempting to export to
distributors operating in the Canadian provinces of Ontario and
Quebec. Lifeways products
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are subject to strict import quotas imposed by the Trade Control
Policy Division of the Department of Foreign Affairs and
International Trade of Canada. In an attempt to address this
situation, management is exploring various alternatives to
permit expansion of Lifeways product line in Canada.
Lifeway believes that it currently is in compliance with all
applicable Canadian regulations.
Lifeway continues to promote the verifiable nutritional
characteristics, purity and good taste of its kefir and
kefir-based products. Lifeway primarily advertises its products
through local radio stations, which advertisements are directed
to both users and non-users of cultured milk products of all
kinds. In addition, through newspaper and magazine advertising,
Lifeway provides educational information on its products and
appeals to the common perception that the products may be of
particular benefit for a wide range of ills, including
intestinal disorders, and continues to educate the public on the
possible health benefits which could be derived from the use of
kefir and kefir-based products. Lifeway believes that the
potential for healthful benefits as suggested by the educational
information it has obtained properly serves as the basis for
such an advertising strategy.
In addition to local radio stations, newspapers and magazines,
Lifeway promotes further exposure of its products through the
internet, catalog advertising and promotion, store
demonstrations throughout the United States, and participation
in various trade shows. Lifeway also sponsors several different
sporting events in the Chicago metropolitan area as an
additional marketing tool.
Lifeway does not promote products manufactured under the LaFruta
and Tuscan brand names with any marketing or advertising.
Although Lifeway faces a small amount of direct competition in
the United States and Canadian markets for kefir products,
Lifeways kefir-based products compete with all other
yogurt and other dairy products. Many producers of yogurt and
other dairy products are well-established and have significantly
greater financial resources than Lifeway to promote their
products.
In connection with the certain Stockholders Agreement, as
amended, between Lifeway, Danone Foods, Inc. and other parties,
as well as certain other transactions between these two
foregoing companies described elsewhere in this report, the
parties agreed that they would not compete with each other
during the term of the Stockholders Agreement, as
extended, with respect to certain yogurt, cheese and kefir
products. Specifically, Lifeway agreed not to produce or sell in
the United States or Western Europe any type of yogurt, fromage
frais, Italian style cheese, chilled desserts or any soy-based
products, other than those that are kefir-based or those that
were already being produced and sold by Lifeway as of
December 24, 1999; and Danone agreed not to produce or sell
any type of kefir-based products in the United States. The term
of the current non-competition covenant between Lifeway and
Danone expired on December 30, 2005.
Lifeway purchases its raw materials, such as milk, sugar and
fruit from unaffiliated suppliers, and is not limited or
contractually bound to any supplier. Lifeway has ready access to
multiple suppliers for all of its raw materials and packaging
requirements. Prior to making any purchase, Lifeway determines
which supplier can offer the lowest price for the highest
quality of product. The raw and packaging materials purchased by
Lifeway are considered commodity items and are widely available
on the open market with the exception of the licensed ingredient
in BasicsPlus. Lifeway owns and operates the means of production
of all of its products.
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Lifeway distributes its products to numerous accounts throughout
the United States. Concentrations of credit with regard to trade
accounts receivable and sales are limited due to the fact that
Lifeways customers are spread across different geographic
areas. The customers are concentrated in the retail food
industry. In 2005, Lifeways largest customer represented
approximately 9% of sales and reflected sales in various regions
of the United States outside the Chicago, Illinois metropolitan
area.
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TRANSACTIONS WITH GROUPE DANONE SA |
All share amounts and prices in this subsection are historical
and have not been adjusted for the stock split which occurred in
the first quarter of 2004. On October 1, 1999, Lifeway and
certain members of the Smolyansky family sold shares of
restricted common stock to Danone at $10.00 per share.
Later in 1999, Danone purchased additional shares of common
stock from certain individuals, including shares purchased in
transactions with certain Company affiliates, including
Lifeways founder Michael Smolyansky, Val Nikolenko, Vice
President of Production and Pol Sikar, a director, and his
affiliates. As a result of these transactions, Danone became the
beneficial owner of 20% of the outstanding common stock of
Lifeway. Pursuant to the terms and conditions of the
transaction, Lifeway granted certain limited rights to Danone,
which include a right to nominate one director, anti-dilutive
rights relating to future offerings and limited registration
rights. In addition, as described above, Lifeway and Danone are
parties to a Stockholders Agreement dated October 1,
1999, pursuant to which the parties agreed that they would not
compete with each other through December 30, 2005 with
respect to certain yogurt, cheese and kefir products. The
Stockholders Agreement also provides that Danone may not
own more than 20% of the outstanding common stock of Lifeway as
a result of direct or indirect acquisition of shares.
Danones interest as of December 31, 2005 was
approximately 20.4% due to reductions in Lifeways shares
outstanding, primarily due to share repurchases by Lifeway. The
term of the Stockholders Agreement terminated on
December 30, 2005. The ability of Danone to sell such a
large stake in Lifeway could have a negative effect on the
Companys stock price.
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PATENTS, TRADEMARKS, LICENSES, ROYALTY AGREEMENTS |
All trademark registrations have been granted by the United
States Patent and Trademark Office (USPTO), unless
otherwise noted below. Each trademark registration may be
renewed upon expiration. Lifeway intends to make all timely
filings as required for all trademarks listed.
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Expiration of |
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Mark |
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Use |
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Date of Registration |
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Registration |
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Comments |
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Lifeway
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Cheese and kefir |
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December 12, 1989 |
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December 12, 2009 |
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Registration was timely renewed for a 10 year period on
December 12, 1999. Registration is renewable between the
19th and
20
th anniversaries
of the registration date or the six-month grace period following
the registration expiration date. |
Lifeways (Canada)
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Cheese and kefir |
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January 10, 1992 |
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January 10, 2007 |
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This registration was granted by the Canadian Intellectual
Property Office based upon the use of the mark in Canada since
September 9, 1988. |
Golden Zesta
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Dehydrated vegetable soup mix; and spices, seasonings, food for
non-nutritional purposes for use as a flavoring |
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August 19, 1997 |
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August 19, 2007 |
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An Affidavit of Continued Use was timely filed between the
5th and
6th anniversaries
of the registration date. Registration is renewable between the
9th and
10th anniversaries
of the registration date or the six-month grace period following
the registration expiration date. |
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Expiration of |
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Mark |
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Use |
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Date of Registration |
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Registration |
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Comments |
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Sweet Kiss
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Cheese, cottage cheese and other milk products, excluding ice
cream, ice milk and frozen yogurt |
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February 10, 1998 |
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February 10, 2008 |
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An Affidavit of Continued Use was timely filed between the 5
th and
6th anniversaries
of the registration date. Registration is renewable between the
9th and
10th anniversaries
of the registration date or the six-month grace period following
the registration expiration date. |
Kwashenka
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Kefir, yogurt, cheeses, cottage cheeses and other milk products,
excluding ice cream, ice milk and frozen yogurt |
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February 10, 1998 |
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February 10, 2008 |
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An Affidavit of Continued Use was timely filed between the 5
th and
6th anniversaries
of the registration date. Registration is renewable between the
9th and
10th anniversaries
of the registration date or the six-month grace period following
the registration expiration date. |
Bambino
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Cheeses, cottage cheeses and other milk products |
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October 7, 2003 |
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October 7, 2013 |
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Registration is renewable at the time of expiration provided
mandatory documents are filed with the USPTO between the 5
th and
6th anniversaries
of the registration date or the six-month grace period following
the sixth anniversary date. |
KPECTBRHCKNN
(A stylized presentation of Krestyanskiy in Cyrillac
characters)
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Cheeses, cottage cheeses and other milk products excluding ice
cream, ice milk and frozen yogurt |
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September 8, 1998 |
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September 8, 2008 |
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An Affidavit of Continued Use was timely filed between the 5
th and
6th anniversaries
of the registration date. Registration is renewable between the
9th and
10th anniversaries
of the registration date or the six-month grace period following
the registration expiration date. |
BasicsPlus
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Dairy-based food beverages for use as a dietary supplement |
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September 7, 1999 |
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September 7, 2009 |
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In May 1998, GalaGen, Inc., assigned the entire interest,
including the goodwill, of this mark to Lifeway. An Affidavit of
Continued Use was timely filed between the
5th and
6th anniversaries
of the registration date. Registration is renewable between the
9th and
10th anniversaries
of the registration date or the six-month grace period following
the registration expiration date. |
BA3APHBIII
(A stylized presentation of Bazarniy in Cyrillic
characters)
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Pressed unripened cheese |
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July 25, 2000 |
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July 25, 2010 |
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Registration is renewable at the time of expiration provided
mandatory documents are filed with the USPTO between the 5
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6th anniversaries
of the registration date or the six-month grace period following
the sixth anniversary date. |
SoyTreat
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Soy-based food beverage intended for use as cultured milk
substitute |
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December 19, 2000 |
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December 19, 2010 |
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Registration is renewable at the time of expiration provided
mandatory documents are filed with the USPTO between the 5
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6th anniversaries
of the registration date or the six-month grace period following
the sixth anniversary date. |
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Expiration of |
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Mark |
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Use |
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Date of Registration |
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Registration |
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Comments |
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|
|
|
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|
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|
Garden Harmony
|
|
Unripened cheese-based spread |
|
March 20, 2001 |
|
March 20, 2011 |
|
Registration is renewable at the time of expiration provided
mandatory documents are filed with the USPTO between the 5
th and
6th anniversaries
of the registration date or the six-month grace period following
the sixth anniversary date. |
Korovka
|
|
Dairy-based spread |
|
November 6, 2001 |
|
November 6, 2011 |
|
Registration is renewable at the time of expiration provided
mandatory documents are filed with the USPTO between the 5
th and
6th anniversaries
of the registration date or the six-month grace period following
the sixth anniversary date. |
La Fruta
|
|
Cultured milk products, excluding ice cream, ice milk and frozen
yogurt |
|
March 29, 2005 |
|
March 29, 2015 |
|
Registration is renewable at the time of expiration provided
mandatory documents are filed with the USPTO between the 5
th and
6th anniversaries
of the registration date or the six-month grace period following
the sixth anniversary date. |
PTICHYE MOLOKO (a stylized presentation of Ptichye
Moloko in Cyrillic characters)
|
|
Kefir, yogurt, cheeses, cottage cheeses and other milk products,
excluding ice cream, ice milk and frozen yogurt |
|
October 18, 2005 |
|
October 18, 2015 |
|
Registration is renewable at the time of expiration provided
mandatory documents are filed with the USPTO between the 5
th and
6th anniversaries
of the registration date or the six-month grace period following
the sixth anniversary date. |
BIOKEFIR
|
|
yogurt, cheeses, cottage cheeses and other milk products,
excluding ice cream, ice milk and frozen yogurt |
|
|
|
|
|
Application filed September 23, 2004 on an intent-to-use
basis. A Notice of Allowance was issued on November 29,
2005. A Statement of Use is due on May 29, 2006 or within
the 3 year extension period following the Notice of
Allowance date. After acceptance of the Statement of Use,
registration will precede in due course. |
FRUIT N FIT
|
|
Dairy-based beverages |
|
|
|
|
|
Application filed March 15, 2006 on an intent-to-use basis. |
FRUIT N FIT
|
|
Fruit beverages; smoothies |
|
|
|
|
|
Application filed March 15, 2006 on an intent-to-use basis. |
SUBLIME SLIME LIME
|
|
Dairy-based beverages; dairy-based food beverages; kefir; soy-
based food beverage used as milk substitute |
|
|
|
|
|
Application filed February 3, 2006 on an intent-to-use
basis. |
PROBUGS
|
|
Dairy-based beverages; dairy-based food beverages; kefir; soy-
based food beverage used as milk substitute |
|
|
|
|
|
Application filed February 3, 2006 on an intent-to-use
basis. |
ORANGE CREAMY CRAWLER
|
|
Dairy-based beverages; dairy-based food beverages; kefir; soy-
based food beverage used as milk substitute |
|
|
|
|
|
Application filed February 3, 2006 on an intent-to-use
basis. |
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of |
|
|
Mark |
|
Use |
|
Date of Registration |
|
Registration |
|
Comments |
|
|
|
|
|
|
|
|
|
|
|
Dairy-based beverages; dairy-based food beverages; kefir; soy-
based food beverage used as milk substitute |
|
|
|
|
|
Application filed February 3, 2006 on an intent-to-use
basis. |
|
|
Dairy-based beverages; dairy-based food beverages; kefir; soy-
based food beverage used as milk substitute |
|
|
|
|
|
Application filed February 3, 2006 on an intent-to-use
basis. |
|
|
|
PATENTS, TRADEMARKS, LICENSES, ROYALTY AGREEMENTS |
Lifeway also uses the following unregistered trademarks, and
claims common law rights to: Elita, Healthy
Foods Today for a Better Life Tomorrow, Milkshake
Smoothie, Toplenka, White Cheese,
Drink It to Be Beautiful Inside and Out, and
Cream Cheese Gourmet.
On December 27, 1990, Lifeway purchased the Tuscan
brand-name liquid drinkable yogurt customer list along with a
limited license of the trademark and use of the Tuscan liquid
yogurt U.P.C. codes from a third party.
In October 1998 Lifeway entered into a sublicense agreement with
GalaGen, Inc. and Metagenics, Inc. with an effective date
of May 1, 1998 (Lifeway sublicense), wherein
GalaGen sublicensed patent rights of Metagenics for kefir-based
products containing natural immune components exclusively to
Lifeway. Under the rights granted to it by the Lifeway
sublicense, Lifeway manufactures and sells products using the
Basics Plus trademark. GalaGen had acquired the primary license
for such patent rights in an agreement executed with Metagenics
in April 1998. The terms of the Lifeway sublicense provide that
Metagenics will permit Lifeway to continue to have the exclusive
patent rights to produce or sell kefir-based products containing
natural immune components in the event the original license
between GalaGen and Metagenics is terminated, and such
termination was not caused by Lifeway. On February 25,
2002, GalaGen filed a petition for bankruptcy in the Unites
States Bankruptcy Court, District of Minnesota, which terminated
both its primary license with Metagenics and its participation
in the Lifeway sublicense. The license and sublicense were
excluded from the sale of assets of GalaGen pursuant to an order
of the Bankruptcy Court. Lifeway has not received any indication
that Metagenics will not permit Lifeway to continue to have the
exclusive patent rights to produce or sell kefir-based products
containing natural immune components. Thus, Lifeway believes
that it continues to have the exclusive patent rights licensed
directly from Metagenics. Either party may terminate the license
agreement for cause. The term of the license agreement expires
when the last valid claim of the patent rights expires, which
currently is July 2, 2013, however, this term can be
extended in accordance with the terms of the license agreement.
In connection with the purchase of Ilyas Farm, Inc., the
Company has undertaken a royalty obligation of 5% of all sale of
Ilyas Farm, Incs products, which is paid quarterly,
in arrears.
Lifeway is subject to regulation by federal, state and local
governmental authorities regarding the distribution and sale of
food products. Although Lifeway believes that it currently has
all material government permits, licenses, qualifications and
approvals for its operations, there can be no assurance that
Lifeway will be able to maintain its existing licenses and
permits or to obtain any future licenses, permits,
qualifications or approvals which may be required for the
operation of Lifeways business.
11
Lifeway believes that it is currently in compliance with all
applicable environmental laws and that the cost of such
compliance was not material to the financial position of Lifeway.
In addition, any Lifeway products exported to Canada would be
subject to strict quotas imposed by the Trade Control Policy
Division of the Department of Foreign Affairs and International
Trade of Canada. Lifeway believes that it currently is in
compliance with all applicable Canadian regulations. The Company
exported $24,860 in products to Canada in 2005.
Lifeway continues its program of new product development,
centered around the nutritional and low calorie
features of its proprietary kefir formulas.
Lifeway conducts primarily all of its research internally, but
at times will employ the services of an outside testing
facility. During 2005, the amount Lifeway expended for research
and new product development was not material to the financial
position of Lifeway.
Lifeway currently employs approximately 86 employees, all of
whom are full-time employees. Substantially all of these
employees are engaged in the manufacturing of the Companys
products. None of Lifeways employees are covered by
collective bargaining agreements.
|
|
ITEM 2. |
DESCRIPTION OF PROPERTY. |
On May 16, 1988, Lifeway purchased an approximately
26,000 square foot parcel of real property, including an
approximately 8,500 square foot one-story brick building in
good condition, located at 7625 N. Austin Avenue,
Skokie, Illinois. Lifeway uses this facility for manufacturing
and storage and has no plans to improve or renovate this
property. The acquisition loan to Lifeway from 1st National
Bank of Morton Grove, collateralized by the real estate, was
refinanced in 1998 by Lifeway and paid off in full on
February 21, 2002. Lifeway is the only occupant of this
property and presently holds fee simple title free and clear of
all encumbrances thereto. The value of this property may be
subject to real estate market forces that typically affect
industrial real estate in the area immediately surrounding the
property. The Companys book value for this property is
approximately $529,172.
On October 9, 1992, Lifeway purchased an approximately
75,000 square foot commercially zoned parcel of real
property, including an approximately 7,750 square foot
one-story building, located at 7800 N. Caldwell,
Niles, Illinois. Until its closing on August 1, 2001, this
property was the site of the Moscow Nights facility
operated by LFIE. The acquisition loan to Lifeway from American
National Bank and Trust Company of Chicago, collateralized by
the real estate, was refinanced by Lifeway in 1998 and paid off
in full on September 30, 2002. Lifeway held fee simple
title to this property free and clear of all encumbrances until
this property was transferred to the Niles Park District in
January 2003 in exchange for approximately $1.8 million
paid in settlement of a condemnation lawsuit previously reported.
On October 16, 1996, Lifeway purchased a
110,000 square foot commercially-zoned parcel of real
property, including a 46,000 square foot one-story brick
building in good condition, located at 6431 Oakton Avenue,
Morton Grove, Illinois. This property is used as Lifeways
corporate headquarters and main manufacturing facility. This
property has been improved every year since the time of purchase
by the addition of custom-built refrigerated storage space and
the addition of various machinery and equipment used to
manufacture, package and store Lifeways products. Lifeway
is the only occupant of this property and presently holds fee
simple title subject to a mortgage which secures the property as
collateral for the acquisition loan to Lifeway from MB Financial
Bank of Morton Grove. The acquisition loan was refinanced in
September 2002 at a rate of 6.25% and is payable in monthly
principal and interest installments of $3,273, with a balloon
payment of $454,275 due in September 2006. At December 31,
2005, the loan had a balance of $462,695. The value of this
property may be subject to real estate market
12
forces that typically affect industrial real estate in the area
immediately surrounding the property. The Companys book
value for this property is approximately $1,229,054.
In June, 2005 the Company purchased a 100,000-square-foot
distribution and warehousing facility that is equipped with
40,000 square feet of refrigeration. The facility, located at
6101 Gross Point Road in Niles, Illinois, will be used to store
raw materials and finished goods in order to relieve space
pressures at the Companys existing 50,000-square foot
building, less than a mile away. The additional space at the
Companys main plant will be used to expand production
capacity for the Companys kefir and other probiotic
products. Lifeway is the only occupant of this property and
presently holds fee simple title subject to a mortgage which
secures the property as collateral for the acquisition loan to
Lifeway from Harris Bank at a rate of 5.6% and is payable in
monthly principal and interest installments of $19,513, with a
balloon payment of $2,652,142.70 due July 14, 2010. At
December 31, 2005, the loan had a balance of $2,973,107.85.
The value of this property may be subject to real estate market
forces that typically affect industrial real estate in the area
immediately surrounding the property. The Companys book
value for this property is approximately $4,324,309.00.
For financial statement and tax purposes, Lifeway depreciates
its buildings and improvements on a straight line basis over 31
and 39 years.
Management believes that Lifeway has adequate insurance coverage
for all its properties.
ITEM 3. LEGAL
PROCEEDINGS.
On December 4, 2004 a former employee requested a Motion
for Summary Judgment on the issue of liability in a lawsuit
filed against the Company by the former employee. The motion was
granted on February 10, 2005 and on February 18, 2005
the case was referred to a Magistrate Judge for a settlement
conference. The lawsuit alleges non payment of overtime wages in
violation of federal employment laws, with an estimated amount
between $7,500 and $15,000. The suit was filed in the United
States District Court for the Northern District of Illinois on
behalf of all employees who were classified as non-exempt during
2001 through 2003. The case was settled on December 2, 2005
for approximately $95,000.
In addition to the foregoing, Lifeway is from time to time
engaged in other litigation matters arising in the ordinary
course of business none of which presently is expected to have a
material adverse effect on its business results or operations.
|
|
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS. |
No matter was submitted during the fourth quarter of the fiscal
year ended December 31, 2005, to a vote of security holders
through the solicitation of proxies or otherwise.
13
PART II
|
|
ITEM 5. |
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS. |
MARKET INFORMATION
Lifeways Common Stock, no par value, the only class of
common equity of Lifeway, is traded on The Nasdaq Stock Market
National Market System under the symbol LWAY.
Trading commenced on March 29, 1988.
The range of high and low bid quotations for Lifeways
Common Stock for the quarterly periods within the two most
recent fiscal years, as reported by The Nasdaq Stock Market
National Market System, is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
Low Bid | |
|
High Bid | |
|
|
| |
|
| |
1st Qtr. 2004
|
|
$ |
6.42 |
|
|
$ |
23.80 |
|
2nd Qtr. 2004
|
|
$ |
9.86 |
|
|
$ |
28.24 |
|
3rd Qtr. 2004
|
|
$ |
8.66 |
|
|
$ |
20.31 |
|
4th Qtr. 2004
|
|
$ |
8.77 |
|
|
$ |
11.19 |
|
1st Qtr. 2005
|
|
$ |
7.11 |
|
|
$ |
9.37 |
|
2nd Qtr. 2005
|
|
$ |
7.69 |
|
|
$ |
15.40 |
|
3rd Qtr. 2005
|
|
$ |
11.50 |
|
|
$ |
18.17 |
|
4th Qtr. 2005
|
|
$ |
10.23 |
|
|
$ |
14.00 |
|
Note: The foregoing quotations have been adjusted for the
March 8, 2004 two-for-one Company stock split.
As of March 1, 2006, there were approximately 83 holders of
record of Lifeways Common Stock. The Company has no
information regarding beneficial owners whose shares are held in
street name.
DIVIDENDS
Lifeway has paid no cash dividends on its Common Stock and
management does not anticipate that such dividends will be paid
in the foreseeable future.
SALES OF UNREGISTERED SECURITIES
There were no sales of unregistered securities in 2005, 2004 or
2003.
PURCHASES OF THE COMPANYS SECURITIES
Pursuant to an approved share repurchase program announced on
January 13, 2005, Lifeway purchased approximately
50,000 shares of the Companys securities in 2005 at a
total cost of $401,594.
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum | |
|
|
|
|
|
|
|
|
Number (or | |
|
|
|
|
|
|
(c) Total Number | |
|
Approximate | |
|
|
|
|
|
|
of Shares (or | |
|
Dollar Value) of | |
|
|
|
|
|
|
Units) Purchased | |
|
Shares (or Units) | |
|
|
(a) Total | |
|
|
|
as Part of | |
|
that May Yet Be | |
|
|
Numbers of | |
|
(b) Average Price | |
|
Publicly | |
|
Purchased Under | |
|
|
Shares (or Units) | |
|
Paid per Share | |
|
Announced Plans | |
|
the Plans or | |
Period |
|
Purchased | |
|
(or Unit) | |
|
or Programs | |
|
Programs | |
|
|
| |
|
| |
|
| |
|
| |
March (3/3/05 to 3/15/05)
|
|
|
29,600 |
|
|
$ |
7.62 |
|
|
|
29,600 |
|
|
|
20,400 |
|
April (4/22/05 to 4/28/05)
|
|
|
20,400 |
|
|
$ |
8.62 |
|
|
|
20,400 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
50,000 |
|
|
$ |
8.03 |
|
|
|
50,000 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
EQUITY COMPENSATION PLAN INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities Remaining | |
|
|
|
|
|
|
Available for Future Issuance | |
|
|
Number of Securities to be | |
|
Weighted-Average Exercise | |
|
Under Equity Compensation | |
|
|
Issued Upon Exercise of | |
|
Price of Outstanding | |
|
Plans (Excluding Securities | |
|
|
Outstanding Options, Warrants | |
|
Options, Warrants and | |
|
Warrants and Rights Reflected | |
Plan Category |
|
and Rights | |
|
Rights | |
|
in Column (a)) | |
|
|
| |
|
| |
|
| |
Equity compensation plans approved by security holders
|
|
|
0 |
|
|
$ |
0.00 |
|
|
|
468,000 |
|
Equity compensation plans not approved by security holders*
|
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0.00 |
|
Total
|
|
|
0 |
|
|
|
0 |
|
|
|
468,000 |
|
|
|
* |
All of Lifeways equity compensation plans have been
approved by shareholders. |
|
|
ITEM 6. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION. |
|
|
|
Comparison of Quarter Ended December 31, 2005 to
Quarter Ended December 31, 2004 |
The following analysis should be read in conjunction with the
audited financial statements of the Company and related notes
included elsewhere in this annual report and the unaudited
financial statements and Managements Discussion and
Analysis contained in our
Form 10-QSB, for
the fiscal quarters ended March 31, 2005, June 30,
2005, and September 30, 2005.
RESULTS OF OPERATIONS
Sales increased by $964,146,(approximately 23%) to $5,207,578
during the three month period ended December 31, 2005 from
$4,243,432 during the same three month period in 2004. This
increase is primarily attributable to increased sales and
awareness of Lifeways existing drinkable dairy products
including La Fruta, and its flagship line, Kefir.
Lifeways wholly-owned subsidiary, LFI Enterprises, Inc.
(LFIE) accounted for $280,727 of total sales
revenues during the fourth quarter of 2005. Of the total
$280,727 revenues from LFIE, $120,804 was earned due to sales of
Lifeways Kefir and Farmer Cheese products sent from our
Morton Grove, Illinois facility to Philadelphia, Pennsylvania
for distribution in the tri-state area of Pennsylvania, New
Jersey and New York. The remaining $159,922 of LFIE revenues for
the fourth quarter of 2005 was earned from sales of the Cream
Cheese Gourmet line of products acquired from Ilyas Farms,
Inc. in the third quarter of 2004. Sales of LFIE in the fourth
quarter 2004 were $261,588. This represents a 7% increase in
sales for the LFIE in the fourth quarter 2005 when compared to
the same period in 2004.
Cost of goods sold as a percentage of sales was approximately
59% during the fourth quarter 2005, compared to about 57% during
the same period in 2004. The average cost of milk,
Lifeways largest cost of goods sold component, was similar
in the fourth quarter 2005 compared to the same period in 2004.
Beginning January 1, 2005, the minimum wage payable to
Companys employees in Illinois increased 18%. This higher
wage increase (and indirect pressure for additional increases)
has had a negative impact on our gross margins in 2005, when
compared to 2004. We intend to primarily offset these wage
increases by continuing to invest in the automation of our
production processes.
As we increased our shipments, the rise in fuel and
transportation costs in the fourth quarter, when compared to the
same period a year ago, had a negative impact on our gross
margins. In addition, the rise
15
in other oil related costs such as sugar and plastics, when
compared to the same period a year ago, further negatively
impacted our gross margins. We were able to mostly offset a
portion of these oil related cost increases by making prudent
investments in energy related securities, as is evident in our
total other income.
Operating expenses as a percentage of sales was approximately
24% during the fourth quarter 2005, compared to about 29% during
the same period in 2004. This decrease is primarily attributable
to our continuing efforts to improve our production automation,
through capital investments, thereby improving our overall
operating income.
Income from operations increased by $309,655(approximately 55%)
to $878,218 during the three- month period ended
December 31, 2005 from $568,563 during the same three-
month period in 2004. Operating income margins also increased to
17% during the three- month period ended December 31, 2005,
from 13% during the same three- month period in 2004.
Net Income increased by $367,645(approximately 108%) to $707,288
during the three- month period ended December 31, 2005 from
$339,643 during the same three- month period in 2004.
|
|
|
Comparison of Year Ended December 31, 2005 to Year
Ended December 31, 2004 |
Sales increased by $3,812,444 (approximately 23%) to $20,131,654
during year ended December 31, 2005 from $16,319,210 during
the year ended December 31, 2004. This increase is
primarily attributable to increased sales and awareness of
Lifeways existing drinkable dairy products including
La Fruta, and its flagship line, Kefir. During 2005,
Lifeway increased its distribution to some of the countrys
largest retailers, including Walmart, Target, and Costco. In
addition, Lifeway began selling to a health care setting, the
first time in the Companys history.
Cost of goods sold as a percentage of sales was approximately
58% in 2005, compared to about 55% in 2003. The average cost of
milk, Lifeways largest cost of goods sold component, was
similar in 2005 compared to 2004. Beginning January 1,
2005, the minimum wage payable to Companys employees in
Illinois increased 18%. This higher wage increase (and indirect
pressure for additional increases) has had a negative impact on
our gross margins in 2005, when compared to 2004. We intend to
primarily offset these wage increases by continuing to invest in
the automation of our production processes.
As we increased our shipments, the rise in fuel and
transportation costs in the fourth quarter, when compared to the
same period a year ago, had a negative impact on our gross
margins. In addition, the rise in other oil related costs such
as sugar and plastics, when compared to the same period a year
ago, further negatively impacted our gross margins. We were able
to offset a portion of these oil related cost increases by
making prudent investments in energy related securities, as is
evident in our total other income.
Operating expenses as a percentage of sales in was approximately
25% in 2005, compared to about 27% in 2004. Also, the
Companys advertising cost increased to $909,179 in 2004 as
compared to $629,500 in 2003.
Total other income for 2005 was $681,703, compared with $491,775
during the same period in 2004. This increase is primarily
attributable to the company earning more interest and dividends
in 2005, when compared to the same period in 2004.
Provision for income taxes was $1,534,592, or a 37.6% tax rate
in 2005 compared with $1,390,167, or a 40.4% tax rate in 2004.
Income taxes are discussed in Note 10 of the Notes to
Consolidated Financial Statements.
16
SOURCES AND USES OF CASH IN 2005
Net cash used in investing activities was $5,566,981 during
2005, which is an increase of $4,555,751 compared to 2004. This
increase is primarily due to the Companys purchase of a
storage and distribution facility.
Net cash provided by financing activities was $2,555,286 during
2005, which is an increase of $2,568,759 compared to 2004. This
increase is primarily attributable to the Company financing the
purchase of the above-mentioned facility. The Company borrowed
$3,000,000, with maturity of 5 years, at an interest rate
of 5.6%. The Company also purchased 50,000 shares of its
treasury stock at a cost of $401,554 in 2005.
A significant portion 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 Companys 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.
On May 23, 2005, Lifeways Board of Directors approved
awards of an aggregate amount of 5,600 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, 2005 and
have vesting periods of one year. The expense for the awards is
measured as of June 1, 2005 at $12.50 per share
for 5,600 shares, or a total stock award expense of
$70,000. This expense will be recognized as the stock awards
vest in 12 equal portions of $5,833, or 466 shares per
month for one year.
|
|
|
Off-Balance Sheet Arrangements |
We have never entered into any off-balance sheet financing
arrangements and have never established any special purpose
entities. We have not guaranteed any debt or commitments of
other entities or entered into any options on non-financial
assets.
|
|
|
Critical Accounting Policies |
Lifeways 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 Lifeways
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.
17
|
|
|
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 Companys new products; |
|
|
|
Significant changes in the competitive environment; |
|
|
|
Changes in laws, regulations, and tax rates; and |
|
|
|
Managements 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. |
|
|
ITEM 7. |
FINANCIAL STATEMENTS. |
The annotated consolidated financial statements of the Company
that constitute Item 7 of this report commence on the pages
that follow this page.
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
LIFEWAY FOODS, INC. AND SUBSIDIARY
We have audited the accompanying consolidated statements of
financial condition of LIFEWAY FOODS, INC. AND SUBSIDIARY (the
Company) as of December 31, 2005 and 2004 and
the related consolidated statements of income and comprehensive
income, changes in stockholders equity and cash flows for
the year ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of LIFEWAY FOODS, INC. AND SUBSIDIARY as of December 31,
2005 and 2004 and the results of its operations and its cash
flows for the year then ended in conformity with generally
accepted accounting principles in the United States of America.
Plante & Moran, PLLC
ELGIN, IL
February 24, 2006
19
LIFEWAY FOODS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 and 2004
20
LIFEWAY FOODS, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
ASSETS |
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
4,354,081 |
|
|
$ |
5,773,285 |
|
|
Marketable securities
|
|
|
7,478,697 |
|
|
|
6,741,987 |
|
|
Inventories
|
|
|
1,716,999 |
|
|
|
905,697 |
|
|
Accounts receivable, net of allowance for doubtful accounts of
$35,000 and $15,000 at December 31, 2005 and 2004
|
|
|
2,517,615 |
|
|
|
2,024,036 |
|
|
Prepaid expenses and other current assets
|
|
|
9,144 |
|
|
|
7,260 |
|
|
Other receivables
|
|
|
56,435 |
|
|
|
72,137 |
|
|
Deferred income taxes
|
|
|
142,772 |
|
|
|
|
|
|
Refundable income taxes
|
|
|
11,562 |
|
|
|
258,617 |
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,287,305 |
|
|
|
15,783,019 |
|
Property and equipment, net
|
|
|
7,751,446 |
|
|
|
3,420,138 |
|
Intangible assets
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
75,800 |
|
|
|
75,800 |
|
|
Other intangible assets, net of accumulated amortization of
$92,432 and $26,990 at December 31, 2005 and 2004
|
|
|
350,206 |
|
|
|
409,010 |
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
426,006 |
|
|
|
484,810 |
|
Total assets
|
|
$ |
24,464,757 |
|
|
$ |
19,687,967 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities
|
|
|
|
|
|
|
|
|
|
Current maturities of notes payable
|
|
$ |
532,454 |
|
|
$ |
8,784 |
|
|
Accounts payable
|
|
|
426,253 |
|
|
|
641,651 |
|
|
Accrued expenses
|
|
|
355,011 |
|
|
|
195,541 |
|
|
Deferred income taxes
|
|
|
|
|
|
|
36,214 |
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,313,718 |
|
|
|
882,190 |
|
Notes payable
|
|
|
2,903,349 |
|
|
|
463,541 |
|
Deferred income taxes
|
|
|
348,923 |
|
|
|
424,039 |
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
6,509,267 |
|
|
|
6,509,267 |
|
|
Paid-in-capital
|
|
|
90,725 |
|
|
|
64,314 |
|
|
Treasury stock, at cost
|
|
|
(1,024,659 |
) |
|
|
(649,039 |
) |
|
Retained earnings
|
|
|
14,422,948 |
|
|
|
11,874,475 |
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
(99,514 |
) |
|
|
119,180 |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
19,898,767 |
|
|
|
17,918,197 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
24,464,757 |
|
|
$ |
19,687,967 |
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
21
LIFEWAY FOODS, INC. AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Sales
|
|
$ |
20,131,654 |
|
|
$ |
16,319,210 |
|
Cost of goods sold
|
|
|
11,664,065 |
|
|
|
9,034,971 |
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,467,589 |
|
|
|
7,284,239 |
|
Operating expenses
|
|
|
5,066,227 |
|
|
|
4,333,788 |
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,401,362 |
|
|
|
2,950,451 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
323,365 |
|
|
|
185,575 |
|
|
Interest expense
|
|
|
(100,762 |
) |
|
|
(31,441 |
) |
|
Gain on sale of marketable securities, net
|
|
|
445,327 |
|
|
|
354,128 |
|
|
Gain (loss) on marketable securities classified as trading
|
|
|
13,773 |
|
|
|
(16,487 |
) |
|
|
|
|
|
|
|
|
Total other income
|
|
|
681,703 |
|
|
|
491,775 |
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
4,083,065 |
|
|
|
3,442,226 |
|
Provision for income taxes
|
|
|
1,534,592 |
|
|
|
1,390,167 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2,548,473 |
|
|
$ |
2,052,059 |
|
|
|
|
|
|
|
|
Basic and diluted earnings per common share
|
|
|
0.30 |
|
|
|
0.24 |
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
8,404,496 |
|
|
|
8,439,159 |
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2,548,473 |
|
|
$ |
2,052,059 |
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on marketable securities (net of tax
benefits)
|
|
|
42,708 |
|
|
|
170,107 |
|
|
Less reclassification adjustment for gains (losses) included in
net income (net of taxes)
|
|
|
(261,402 |
) |
|
|
(207,164 |
) |
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
2,329,779 |
|
|
$ |
2,015,002 |
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
22
LIFEWAY FOODS, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders
Equity
For the Years Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, No Par | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value 10,000,000 Shares | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Authorized | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
| |
|
# of Shares | |
|
|
|
|
|
Stock | |
|
|
|
|
|
Comprehensive | |
|
|
|
|
# of Shares | |
|
# of Shares | |
|
of Treasury | |
|
Common | |
|
Paid In | |
|
Subscription | |
|
Treasury | |
|
Retained | |
|
Income (Loss), | |
|
|
|
|
Issued | |
|
Outstanding | |
|
Stock | |
|
Stock | |
|
Capital | |
|
Receivable | |
|
Stock | |
|
Earnings | |
|
Net of Tax | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balances at December 31, 2003
|
|
|
8,636,888 |
|
|
|
8,436,888 |
|
|
|
200,000 |
|
|
$ |
6,509,267 |
|
|
$ |
|
|
|
$ |
(15,000 |
) |
|
$ |
(679,956 |
) |
|
$ |
9,822,416 |
|
|
$ |
156,237 |
|
|
$ |
15,792,964 |
|
Issuance of treasury stock
|
|
|
|
|
|
|
4,550 |
|
|
|
(4,550 |
) |
|
|
|
|
|
|
64,314 |
|
|
|
|
|
|
|
30,917 |
|
|
|
|
|
|
|
|
|
|
|
95,231 |
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities, net of taxes and
reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,057 |
) |
|
|
(37,057 |
) |
Payment on subscription receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
Net income for the year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,052,059 |
|
|
|
|
|
|
|
2,052,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
8,636,888 |
|
|
|
8,441,438 |
|
|
|
195,450 |
|
|
$ |
6,509,267 |
|
|
$ |
64,314 |
|
|
$ |
|
|
|
$ |
(649,039 |
) |
|
$ |
11,874,475 |
|
|
$ |
119,180 |
|
|
$ |
17,918,197 |
|
Issuance of treasury stock
|
|
|
|
|
|
|
3,817 |
|
|
|
(3,817 |
) |
|
|
|
|
|
|
26,411 |
|
|
|
|
|
|
|
25,934 |
|
|
|
|
|
|
|
|
|
|
|
52,345 |
|
Redemption of stock
|
|
|
|
|
|
|
(50,000 |
) |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(401,554 |
) |
|
|
|
|
|
|
|
|
|
|
(401,554 |
) |
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities, net of taxes and
reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(218,694 |
) |
|
|
(218,694 |
) |
Net income for the year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,548,473 |
|
|
|
|
|
|
|
2,548,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
8,636,888 |
|
|
|
8,395,255 |
|
|
|
241,633 |
|
|
$ |
6,509,267 |
|
|
$ |
90,725 |
|
|
$ |
|
|
|
$ |
(1,024,659 |
) |
|
$ |
14,422,948 |
|
|
$ |
(99,514 |
) |
|
$ |
19,898,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
23
LIFEWAY FOODS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2,548,473 |
|
|
$ |
2,052,059 |
|
|
Adjustments to reconcile net income to net cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
650,945 |
|
|
|
669,994 |
|
|
|
Gain on sale of marketable securities, net
|
|
|
(445,327 |
) |
|
|
(354,128 |
) |
|
|
(Gain)Loss on marketable securities classified as trading
|
|
|
(13,773 |
) |
|
|
16,487 |
|
|
|
Deferred income taxes
|
|
|
(100,236 |
) |
|
|
45,560 |
|
|
|
Treasury stock issued for services
|
|
|
52,345 |
|
|
|
95,231 |
|
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(493,579 |
) |
|
|
(223,895 |
) |
|
|
|
Other receivables
|
|
|
15,702 |
|
|
|
93,630 |
|
|
|
|
Inventories
|
|
|
(811,302 |
) |
|
|
(94,125 |
) |
|
|
|
Refundable income taxes
|
|
|
247,055 |
|
|
|
47,554 |
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(1,884 |
) |
|
|
(6,469 |
) |
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(215,398 |
) |
|
|
(153,670 |
) |
|
|
|
Accrued expenses
|
|
|
159,470 |
|
|
|
11,941 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,592,491 |
|
|
|
2,200,169 |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(6,460,561 |
) |
|
|
(6,265,671 |
) |
|
Sale of marketable securities
|
|
|
5,810,391 |
|
|
|
6,096,652 |
|
|
Purchases of property and equipment
|
|
|
(4,916,811 |
) |
|
|
(330,411 |
) |
|
Acquisition of Ilyas Farms, Inc. net of assets acquired
|
|
|
|
|
|
|
(511,800 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,566,981 |
) |
|
|
(1,011,230 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from stock subscription receivable
|
|
|
|
|
|
|
15,000 |
|
|
Proceeds from note payable
|
|
|
3,000,000 |
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
(401,554 |
) |
|
|
|
|
|
Repayment of notes payable
|
|
|
(36,522 |
) |
|
|
(28,473 |
) |
|
Loan costs
|
|
|
(6,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,555,286 |
|
|
|
(13,473 |
) |
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
(1,419,204 |
) |
|
|
1,175,466 |
|
Cash and cash equivalents at the beginning of the period
|
|
|
5,773,285 |
|
|
|
4,597,819 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$ |
4,354,081 |
|
|
$ |
5,773,285 |
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
24
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
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 Companys
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 Lifeways Kefir; a plain
farmers cheese sold under the name Lifeways
Farmers 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 subsidiary, LFI Enterprises,
Inc. All significant intercompany accounts and transactions have
been eliminated.
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.
Sales represent sales of Company produced dairy products that
are recorded at the time of shipment. 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.
25
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements (Continued)
Bank balances of amounts reported by financial institutions are
categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Amounts insured
|
|
$ |
462,571 |
|
|
$ |
472,341 |
|
Uninsured and uncollateralized amounts
|
|
|
4,331,179 |
|
|
|
5,456,188 |
|
|
|
|
|
|
|
|
Total bank balances
|
|
$ |
4,793,750 |
|
|
$ |
5,928,529 |
|
|
|
|
|
|
|
|
We classify all investment securities as available-for-sale or
trading, carried at fair value or quoted market prices. We
report unrealized gains and losses as a separate component of
stockholders equity. We include amortization, accretion,
interest and dividends, realized gains and losses and declines
in value judged to be other-than-temporary on available-for-sale
securities in other income. Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB) 59,
Accounting for Noncurrent Marketable Equity Securities,
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.
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 Companys 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 Companys credit terms. Accounts
considered uncollectible are charged against the allowance.
Inventories are stated at the lower of cost or market, cost
being determined by the
first-in, first-out
method.
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.
26
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements (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 |
|
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. The Company amortizes other intangible assets
over their estimated useful lives, as disclosed in the table
below.
Goodwill is reviewed for impairment at least annually. Since the
Company only has one reporting unit, the test is based on a fair
value approach applied to the entire company.
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
Companys products or changes in the size of the market for
the Companys products.
If the estimate of an intangible assets 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
|
|
|
8 |
|
Lease agreement
|
|
|
7 |
|
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.
27
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements (Continued)
Treasury stock is recorded using the cost method.
The Company expenses advertising costs as incurred. During the
years ended December 31, 2005 and 2004, approximately
$1,176,440 and $909,179, of such costs respectively, were
expensed.
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 2005 and
2004, diluted and basic earnings per share were the same, as the
effect of dilutive securities options outstanding was not
significant.
Note 3 ACQUISITION OF ILYAS FARMS,
INC.
On July 23, 2004, LFI Enterprises, Inc. (LFIE),
an Illinois corporation and wholly owned subsidiary of Lifeway,
acquired certain assets of Ilyas Farms, Inc., a
Pennsylvania corporation. The aggregate purchase price was
$575,600, paid by LFIE in cash from its current assets.
As a result of the acquisition LFIE now manufactures and
distributes certain cream cheese products under the brand name
Ilyas Farms in the Philadelphia, Pennsylvania
metropolitan area. The results of operations of the acquired
business have been included in the consolidated financial
statements since the acquisition date.
The following table summarizes the values of the assets and
inventory acquired at the date of acquisition, July 23,
2004.
|
|
|
|
|
Assets and Inventory Acquired |
|
Value | |
|
|
| |
Machinery and equipment
|
|
$ |
38,200 |
|
Inventory
|
|
|
25,600 |
|
Intangible assets
|
|
|
511,800 |
|
|
|
|
|
Total aggregate purchase price
|
|
$ |
575,600 |
|
|
|
|
|
Note 4 INTANGIBLE ASSETS
Intangible assets, and the related accumulated amortization,
consist of the following as of December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
Accumulated | |
|
|
|
Accumulated | |
|
|
Cost | |
|
Amortization | |
|
Cost | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
Recipes
|
|
$ |
43,600 |
|
|
$ |
15,442 |
|
|
$ |
43,600 |
|
|
$ |
4,542 |
|
Customer lists and other customer related intangibles
|
|
|
305,200 |
|
|
|
58,678 |
|
|
|
305,200 |
|
|
|
17,258 |
|
Lease acquisition
|
|
|
87,200 |
|
|
|
17,648 |
|
|
|
87,200 |
|
|
|
5,190 |
|
Goodwill
|
|
|
75,800 |
|
|
|
|
|
|
|
75,800 |
|
|
|
|
|
Loan acquisition costs
|
|
|
6,638 |
|
|
|
664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
518,438 |
|
|
$ |
92,432 |
|
|
$ |
511,800 |
|
|
$ |
26,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements (Continued)
Amortization expense is expected to be as follows for the years
ending December 31:
|
|
|
|
|
|
|
2006
|
|
$ |
66,105 |
|
|
2007
|
|
|
66,105 |
|
|
2008
|
|
|
61,563 |
|
|
2009
|
|
|
51,572 |
|
|
2010
|
|
|
45,819 |
|
Thereafter
|
|
|
59,042 |
|
|
|
|
|
|
|
$ |
350,206 |
|
|
|
|
|
Amortization expense during the year ended December 31,
2005 and 2004 was $65,442 and $26,990, respectively.
Note 5 MARKETABLE SECURITIES
The cost and fair value of marketable securities classified as
available for sale and trading are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on | |
|
|
|
|
|
|
|
|
|
|
Marketable | |
|
|
|
|
|
|
|
|
|
|
Securities | |
|
|
|
|
|
|
Unrealized | |
|
Unrealized | |
|
Classified | |
|
|
December 31, 2005 |
|
Cost | |
|
Gains | |
|
Losses | |
|
as Trading | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Equities
|
|
$ |
2,432,964 |
|
|
$ |
212,336 |
|
|
$ |
(198,478 |
) |
|
$ |
|
|
|
$ |
2,446,822 |
|
Mutual Funds
|
|
|
699,921 |
|
|
|
3,770 |
|
|
|
(74,148 |
) |
|
|
|
|
|
|
629,543 |
|
Preferred Securities
|
|
|
1,002,738 |
|
|
|
1,468 |
|
|
|
(30,892 |
) |
|
|
|
|
|
|
973,314 |
|
Private Investment LP
|
|
|
600,000 |
|
|
|
|
|
|
|
(5,146 |
) |
|
|
|
|
|
|
594,854 |
|
Certificates of Deposit
|
|
|
240,000 |
|
|
|
|
|
|
|
(1,125 |
) |
|
|
|
|
|
|
238,875 |
|
Corporate Bonds
|
|
|
2,514,044 |
|
|
|
809 |
|
|
|
(77,888 |
) |
|
|
|
|
|
|
2,436,965 |
|
Municipal Bonds, maturing within five years
|
|
|
61,275 |
|
|
|
957 |
|
|
|
(1,195 |
) |
|
|
|
|
|
|
61,037 |
|
Government agency obligations, maturing after five years
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
(2,713 |
) |
|
|
97,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,650,942 |
|
|
$ |
219,340 |
|
|
$ |
(388,872 |
) |
|
$ |
(2,713 |
) |
|
$ |
7,478,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on | |
|
|
|
|
|
|
|
|
|
|
Marketable | |
|
|
|
|
|
|
|
|
|
|
Securities | |
|
|
|
|
|
|
Unrealized | |
|
Unrealized | |
|
Classified | |
|
|
December 31, 2004 |
|
Cost | |
|
Gains | |
|
Losses | |
|
as Trading | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Equities
|
|
$ |
2,242,831 |
|
|
$ |
390,510 |
|
|
$ |
(154,533 |
) |
|
$ |
|
|
|
$ |
2,478,808 |
|
Mutual Funds
|
|
|
1,171,628 |
|
|
|
5,496 |
|
|
|
(21,234 |
) |
|
|
|
|
|
|
1,155,890 |
|
Preferred Securities
|
|
|
65,000 |
|
|
|
600 |
|
|
|
(4 |
) |
|
|
|
|
|
|
65,596 |
|
Certificates of Deposit
|
|
|
150,000 |
|
|
|
|
|
|
|
(4,935 |
) |
|
|
|
|
|
|
145,065 |
|
Corporate Bonds
|
|
|
1,639,275 |
|
|
|
2,163 |
|
|
|
(17,025 |
) |
|
|
|
|
|
|
1,624,413 |
|
Municipal Bonds, maturing within five years
|
|
|
132,226 |
|
|
|
1,992 |
|
|
|
|
|
|
|
|
|
|
|
134,218 |
|
Government agency obligations, maturing after five years
|
|
|
1,154,484 |
|
|
|
|
|
|
|
|
|
|
|
(16,487 |
) |
|
|
1,137,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,555,444 |
|
|
$ |
400,761 |
|
|
$ |
(197,731 |
) |
|
$ |
(16,487 |
) |
|
$ |
6,741,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the gross unrealized losses and fair
value of Companys investments with unrealized losses that
are not deemed to be other-than-temporarily impaired, aggregated
by investment category and length of time that individual
securities have been in a continuous unrealized loss position,
at December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months | |
|
12 Months or Greater | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Unrealized | |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
Description of Securities |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Equities
|
|
$ |
689,030 |
|
|
$ |
(73,763 |
) |
|
$ |
381,229 |
|
|
$ |
(124,715 |
) |
|
$ |
1,070,259 |
|
|
$ |
(198,478 |
) |
Mutual Funds
|
|
|
377,738 |
|
|
|
(67,337 |
) |
|
|
168,035 |
|
|
|
(6,811 |
) |
|
|
545,773 |
|
|
|
(74,148 |
) |
Preferred Securities
|
|
|
875,091 |
|
|
|
(30,142 |
) |
|
|
24,250 |
|
|
|
(750 |
) |
|
|
899,341 |
|
|
|
(30,892 |
) |
Private Investment LP
|
|
|
600,000 |
|
|
|
(5,146 |
) |
|
|
|
|
|
|
|
|
|
|
600,000 |
|
|
|
(5,146 |
) |
Certificates of Deposit
|
|
|
|
|
|
|
|
|
|
|
148,875 |
|
|
|
(1,125 |
) |
|
|
148,875 |
|
|
|
(1,125 |
) |
Corporate Bonds
|
|
|
961,056 |
|
|
|
(48,048 |
) |
|
|
985,100 |
|
|
|
(29,840 |
) |
|
|
1,946,156 |
|
|
|
(77,888 |
) |
Municipal Bonds
|
|
|
35,205 |
|
|
|
(1,195 |
) |
|
|
|
|
|
|
|
|
|
|
35,205 |
|
|
|
(1,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,538,120 |
|
|
$ |
(225,631 |
) |
|
$ |
1,707,489 |
|
|
$ |
(163,241 |
) |
|
$ |
5,245,609 |
|
|
$ |
(388,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities, Mutual Funds and Corporate Bonds
The Companys 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 Companys ability and intent to
hold these investments for a reasonable period of time
sufficient for a forecasted recovery of fair value, the Company
does not consider any material investments to be
other-than-temporarily impaired at December 31, 2005.
Preferred Securities The Companys
investments in preferred securities consist of investments in
preferred stock of companies in various industries. The Company
evaluated the near-term prospects of the fund in relation to the
severity and duration of the impairment. Based on that
evaluation and the Companys ability and intent to hold
these investments for a reasonable period of time sufficient for
a forecasted recovery of fair value, the Company does not
consider any material investments to be other-than-temporarily
impaired at December 31, 2005.
Private Investment Limited Partnership The
Companys investments in private limited partnerships
consist of one limited partnership interest. The partnership has
only had 2 months of activity at
30
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements (Continued)
December 31, 2005. Based on that evaluation and the
Companys 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 its
investment to be other-than-temporarily impaired at
December 31, 2005.
Certificates of Deposit The unrealized losses
on the Companys investments in certificates of deposit
were caused by interest rate increases since the date of
purchase. The contractual terms of these investments do not
permit the issuers to settle the securities at a price less than
the face value of the investment. 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 December 31, 2005.
Municipal Bonds The unrealized losses on the
Companys 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 December 31, 2005.
Proceeds from the sale of marketable securities were $5,810,391
and $6,096,652, during the years ended December 31, 2005
and 2004, respectively.
Gross gains of $445,327 and $354,128, were realized on these
sales during the years ended December 31, 2005 and 2004,
respectively.
Note 6 INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Finished goods
|
|
$ |
658,522 |
|
|
$ |
404,206 |
|
Production supplies
|
|
|
662,310 |
|
|
|
297,791 |
|
Raw materials
|
|
|
396,167 |
|
|
|
203,700 |
|
|
|
|
|
|
|
|
Total inventories
|
|
$ |
1,716,999 |
|
|
$ |
905,697 |
|
|
|
|
|
|
|
|
Note 7 PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Land
|
|
$ |
909,232 |
|
|
$ |
470,900 |
|
Buildings and improvements
|
|
|
6,443,043 |
|
|
|
2,481,257 |
|
Machinery and equipment
|
|
|
5,806,853 |
|
|
|
5,394,932 |
|
Vehicles
|
|
|
513,670 |
|
|
|
408,898 |
|
Office equipment
|
|
|
78,763 |
|
|
|
78,763 |
|
|
|
|
|
|
|
|
|
|
|
13,751,561 |
|
|
|
8,834,750 |
|
Less accumulated depreciation
|
|
|
6,000,115 |
|
|
|
5,414,612 |
|
|
|
|
|
|
|
|
Total property and equipment
|
|
$ |
7,751,446 |
|
|
$ |
3,420,138 |
|
|
|
|
|
|
|
|
Depreciation expense during the year ended December 31,
2005 and 2004 was $585,503 and $643,004, respectively.
31
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements (Continued)
Note 8 ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accrued payroll and payroll taxes
|
|
$ |
104,873 |
|
|
$ |
76,222 |
|
Accrued property tax
|
|
|
244,916 |
|
|
|
119,319 |
|
Other
|
|
|
5,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
355,011 |
|
|
$ |
195,541 |
|
|
|
|
|
|
|
|
Note 9 NOTES PAYABLE
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Mortgage note payable to a bank, payable in monthly installments
of $3,273 including interest at 6.25%, with a balloon payment of
$454,275 due September 25, 2006. Collateralized by real
estate
|
|
$ |
462,695 |
|
|
$ |
472,325 |
|
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
|
|
|
2,973,108 |
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
3,435,803 |
|
|
|
472,325 |
|
Less current maturities
|
|
|
532,454 |
|
|
|
8,784 |
|
|
|
|
|
|
|
|
Total long-term portion
|
|
$ |
2,903,349 |
|
|
$ |
463,541 |
|
|
|
|
|
|
|
|
Maturities of notes payables are as follows:
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
2006
|
|
$ |
532,454 |
|
|
2007
|
|
|
73,767 |
|
|
2008
|
|
|
78,005 |
|
|
2009
|
|
|
82,488 |
|
|
2010
|
|
|
2,669,089 |
|
|
|
|
|
|
Total
|
|
$ |
3,435,803 |
|
|
|
|
|
32
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements (Continued)
Note 10 PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
1,364,033 |
|
|
$ |
1,084,557 |
|
|
State and local
|
|
|
270,795 |
|
|
|
260,050 |
|
|
|
|
|
|
|
|
Total current
|
|
|
1,634,828 |
|
|
|
1,334,607 |
|
Deferred
|
|
|
(100,236 |
) |
|
|
45,560 |
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$ |
1,534,592 |
|
|
$ |
1,390,167 |
|
|
|
|
|
|
|
|
A reconciliation of the provision for income taxes and the
income tax computed at the statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Federal income tax expense computed at the statutory rate
|
|
$ |
1,388,242 |
|
|
$ |
1,170,368 |
|
State and local tax expense, net
|
|
|
195,987 |
|
|
|
165,847 |
|
Permanent differences
|
|
|
(49,637 |
) |
|
|
53,952 |
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$ |
1,534,592 |
|
|
$ |
1,390,167 |
|
|
|
|
|
|
|
|
Amounts for deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Non-current deferred tax liabilities arising from:
|
|
|
|
|
|
|
|
|
|
Temporary differences accumulated depreciation
|
|
$ |
(348,923 |
) |
|
$ |
(424,039 |
) |
Current deferred tax assets (liabilities) arising from:
|
|
|
|
|
|
|
|
|
|
Unrealized losses (gains) on marketable securities
|
|
|
70,016 |
|
|
|
(83,850 |
) |
|
Inventory
|
|
|
72,756 |
|
|
|
47,636 |
|
|
|
|
|
|
|
|
Total current deferred tax assets (liabilities)
|
|
|
142,772 |
|
|
|
(36,214 |
) |
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$ |
(206,151 |
) |
|
$ |
(460,253 |
) |
|
|
|
|
|
|
|
Note 11 SUPPLEMENTAL CASH FLOW
INFORMATION
Cash paid for interest and income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
For Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Interest
|
|
$ |
100,762 |
|
|
$ |
31,441 |
|
Income taxes
|
|
$ |
1,425,600 |
|
|
$ |
1,298,348 |
|
33
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements (Continued)
Note 12 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 Companys 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, 2005 and 2004. The
option price, number of shares, grant date, and vesting terms
are determined at the discretion of the Companys Board of
Directors.
As of December 31, 2005 and 2004, there were no stock
options outstanding or exercisable.
On February 12, 2004, Lifeways Board of Directors
approved awards of an aggregate amount of 5,100 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
April 1, 2004 and have vesting periods that vary from six
months to one year, depending upon the individual grantee. The
expense for the awards is measured as of April 1, 2004 at
$20.93 per share for 5,100 shares, or a total stock
award expense of $106,743. This expense is being recognized as
the stock awards vest beginning with the recognition of $41,860
for 2,000 shares vested on April 1, 2004. There were a
total of 4,550 vested shares resulting in a stock award expense
of $95,231 for 2004, and an additional 550 shares vested
during 2005 for an additional expense of $11,512.
On May 23, 2005, Lifeways Board of Directors approved
awards of an aggregate amount of 5,600 common shares to be
awarded under its Employee and Consulting Services and
Compensation Plan to certain employees and consultants for
services rendered to the Company. The stock awards were made on
June 1, 2005 and have vesting periods of one year. The
expense for the awards is measured as of June 1, 2005 at
$12.50 per share for 5,600 shares, or a total stock
award expense of $70,000. This expense will be recognized as the
stock awards vest in 12 equal portions of $5,833, or
466 shares per month for one year. During 2005,
3,267 shares vested and the Company recognized a related
expense of $40,833.
Note 13 STOCK SPLIT
On February 12, 2004, the Board of Directors of the Company
declared a two-for-one stock split of the common stock of the
Company payable on March 8, 2004 to all of the
Companys shareholders of record as of February 27,
2004.
As a result of the stock split, shareholders received two shares
of common stock for every one share held on the record date.
Upon completion of the split, the total number of shares of
common stock outstanding increased from 4,218,444 to 8,436,888.
The earnings per share calculations as presented on the
consolidated statements of income and comprehensive income and
the number of shares issued and outstanding per statement of
changes in stockholders equity have been adjusted to
reflect split adjusted share amounts.
Note 14 FAIR VALUE OF FINANCIAL
INSTRUMENTS
The estimated fair value of the Companys financial
instruments is as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Carrying | |
|
Fair | |
|
Carrying | |
|
Fair | |
|
|
Amount | |
|
Value | |
|
Amount | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
4,354,081 |
|
|
$ |
4,354,081 |
|
|
$ |
5,773,285 |
|
|
$ |
5,773,285 |
|
Marketable securities
|
|
$ |
7,478,697 |
|
|
$ |
7,478,697 |
|
|
$ |
6,741,987 |
|
|
$ |
6,741,987 |
|
Notes payable
|
|
$ |
3,435,803 |
|
|
$ |
3,416,969 |
|
|
$ |
472,325 |
|
|
$ |
469,696 |
|
34
LIFEWAY FOODS, INC. AND SUBSIDIARY
Notes to Consolidated Financial
Statements (Continued)
The carrying values of cash and cash equivalents, and marketable
securities approximate fair values. The fair value of the notes
payable is based on the discounted value of contractual cash
flows. The discount rate is estimated using rates currently
offered for debt with similar maturities.
Note 15 LITIGATION SETTLEMENT
During 2005, the Company agreed to pay $95,000 in the settlement
of a lawsuit regarding the alleged non payment of overtime wages.
Note 16 RECENT ACCOUNTING PRONOUNCEMENTS
In November 2005, FASB issued FSP FAS 115-1 and
FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
(FSP FAS 115-1), which provides guidance on
determining when investments in certain debt and equity
securities are considered impaired, whether that impairment is
other-than-temporary, and on measuring such impairment loss.
FSP FAS 115-1
also includes accounting considerations subsequent to the
recognition of an other-than temporary impairment and requires
certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. FSP
FAS 115-1 is required to be applied to reporting periods
beginning after December 15, 2005. We are required to adopt
FSP FAS 115-1 in 2006. The Company is in the process of
evaluating the impact of this FSP.
35
|
|
ITEM 8. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
ITEM 8A. |
CONTROLS AND PROCEDURES |
The Chief Executive Officer and the Chief Financial and
Accounting Officer conducted an evaluation of the effectiveness
of the Companys disclosure controls and procedures
pursuant to
Rule 13a-14 under
the Securities Exchange Act of 1934 as of December 31,
2005. While the Company operates on strictly monitored cost
constraints, based on that evaluation, the Chief Executive
Officer and the Chief Financial and Accounting Officer concluded
that the disclosure controls and procedures are effective in
ensuring that all material information required to be filed in
this annual report has been made known to her. As of the date of
this annual report, there have been no known significant changes
in internal controls or in other factors that could
significantly affect these controls subject to the date of such
evaluation.
|
|
ITEM 8B |
OTHER INFORMATION |
None.
PART III
Certain information required by Part III is omitted from
this report in that Lifeway intends to file a definitive proxy
statement pursuant to Regulation 14A (the Proxy
Statement) not later than 120 days after the end of
the fiscal year covered by this report, and certain information
included therein is incorporated herein by reference. Only those
sections of the Proxy Statement which specifically address the
items set forth herein are incorporated by reference.
|
|
ITEM 9. |
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT. |
DIRECTORS. The information regarding Lifeways
directors and certain other information required by this Item is
incorporated by reference to the Proxy Statement.
EXECUTIVE OFFICERS. The information regarding
Lifeways executive officers and certain other information
required by this Item is incorporated by reference to the Proxy
Statement.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE
ACT OF 1934
The information required by this Item regarding compliance with
Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to the Proxy Statement.
FAMILY RELATIONSHIPS
Julie Smolyansky, the President, CEO and director of Lifeway is
the daughter of Ludmila Smolyansky, Chairperson of the Board of
Directors of Lifeway and the sister of Edward P. Smolyansky.
Edward P. Smolyansky, the Chief Financial and Accounting Officer
and Treasurer of Lifeway is the son of Ludmila Smolyansky and
the brother of Julie Smolyansky.
CODE OF ETHICS
The Company has adopted a Code of Ethics which is incorporated
in this report by reference to this report as an exhibit hereto.
36
|
|
ITEM 10. |
EXECUTIVE COMPENSATION. |
The information required by this Item is incorporated by
reference to the Proxy Statement filed by Lifeway on
April 30, 2005.
|
|
ITEM 11. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. |
The information required by this Item is incorporated by
reference to the Proxy Statement.
|
|
ITEM 12. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. |
The information required by this Item is incorporated by
reference to the Proxy Statement.
|
|
ITEM 13. |
EXHIBITS AND REPORTS ON
FORM 8-K. |
FINANCIAL STATEMENTS AND SCHEDULES
A list of the Financial Statements and Financial Statement
Schedules filed as part of this Report is set forth in
Item 7, which list is incorporated herein by reference.
(a) EXHIBITS
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
3 |
.4 |
|
Amended and Restated By-laws (incorporated by reference to
Exhibit No. 3.5 of Lifeways 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 Lifeways
Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2000 and filed on August 8, 2000). (File
No. 000-17363) |
|
10 |
.1 |
|
Lifeway Foods, Inc. Consulting and Services Compensation Plan,
dated June 5, 1995 (incorporated by reference to
Lifeways Registration Statement on Form S-8, File
No. 33-93306). (File No. 000-17363) |
|
10 |
.10 |
|
Stock Purchase Agreement with Danone Foods, Inc., dated
October 1, 1999 (incorporated by reference to
Exhibit 10.10 of Lifeways Current Report on
Form 8-K dated October 1, 1999, and filed
October 12, 1999). (File No. 000-17363) |
|
10 |
.16 |
|
Employment Agreement, dated September 12, 2002, between
Lifeway Foods, Inc. and Julie Smolyansky (incorporated by
reference to Exhibit 10.14 of Amendment No. 2 filed
April 30, 2003 to Lifeways Quarterly Report on
Form 10-QSB/ A for the quarter ended September 30,
2002). (File No. 000-17363) |
|
11 |
|
|
Statement re: computation of per share earnings. (Incorporated
by reference to Note 2 of the Consolidated Financial
Statements). |
|
14 |
|
|
Code of Ethics (Incorporated by reference to Lifeways
Proxy Statement on Schedule 14A filed on April 29,
2004). (File No. 000-17363) |
|
21 |
|
|
List of Subsidiaries of the Registrant |
|
31 |
.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky. |
|
31 |
.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Edward P.
Smolyansky. |
|
32 |
.1 |
|
Section 1350 Certification of Julie Smolyansky. |
|
32 |
.2 |
|
Section 1350 Certification of Edward P. Smolyansky |
|
|
ITEM 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
AUDIT FEES
On May 13, 2004, the accounting firm of Gleeson Sklar,
Sawyers and Cumpata, merged with and into Plante &
Moran, PLLC. In 2004, Gleeson Sklar, Sawyers and Cumpata, and
its successor in interest, Plante & Moran, PLLC,
Lifeways principal accountant, billed approximately
$70,000 for professional services rendered for the audit of
Lifeways annual financial statements and review of
financial statements
37
included in the registrants
Form 10-Q
(17 CFR 249.308a)
or 10-QSB
(17 CFR 249.308b) or services that are normally provided in
connection with statutory and regulatory filings or engagements
in 2004.
In 2005, Plante & Moran, PLLC, Lifeways principal
accountant, billed approximately $70,000 for professional
services rendered for the audit of Lifeways annual
financial statements and review of financial statements included
in the registrants
Form 10-QSB
(17 CFR 249.308b) or services that are normally provided in
connection with statutory and regulatory filings or engagements
in 2005.
AUDIT-RELATED FEES
In 2004, Lifeways principal accountant billed
approximately $8,900 for assurance and related services that are
reasonably related to performance of the audit or review of the
registrants financial statements.
In 2005, Lifeways principal accountant billed
approximately $12,000 for assurance and related services that
are reasonably related to the performance of the audit or review
of the registrants financial statements.
TAX FEES
No professional services were rendered by the principal
accountant for tax advice, tax compliance and tax planning.
ALL OTHER FEES
No other fees were billed by the principal accountant other than
those described in this report.
No hours expended on Lifeways principal accountants
engagement to audit Lifeways financial statements for the
most recent fiscal year that were attributed to work performed
by persons other than the principal accountants full-time
permanent employees.
38
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be
signed on its behalf by the undersigned, thereunder duly
authorized.
|
|
|
|
|
Julie Smolyansky |
|
Chief Executive Officer, |
|
President, and Director |
|
|
|
|
By: |
/s/ Edward P. Smolyansky |
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Edward P. Smolyansky |
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Chief Financial and Accounting Officer |
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and Treasurer |
Date: March 31, 2006
KNOW ALL MEN BY THESE PRESENTS, that each individual whose
signature appears below hereby constitutes and appoints Julie
Smolyansky and Edward P. Smolyansky, and each of them
individually, his or her true and lawful agent, proxy and
attorney-in-fact, with
full power of substitution and resubstitution, for him or her
and in his or her name, place and stead, in any and all
capacities, to (i) act on, sign and file with the
Securities and Exchange Commission any and all amendments to
this Report together with all schedules and exhibits thereto,
(ii) act on, sign and file with the Securities and Exchange
Commission any and all exhibits to this Report and any and all
exhibits and schedules thereto, (iii) act on, sign and file
any and all such certificates, notices, communications, reports,
instruments, agreements and other documents as may be necessary
or appropriate in connection therewith and (iv) take any
and all such actions which may be necessary or appropriate in
connection therewith, granting unto such agents, proxies and
attorneys-in-fact, and
each of them individually, full power and authority to do and
perform each and every act and thing necessary or appropriate to
be done, as fully for all intents and purposes as he or she
might or could do in person, and hereby approving, ratifying and
confirming all that such agents, proxies and
attorneys-in-fact, any
of them or any of his, her or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates
indicated.
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|
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/s/ Julie Smolyansky |
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|
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Julie Smolyansky |
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Chief Executive Officer, |
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President, and Director |
Date: March 31, 2006
39
|
|
|
Ludmila Smolyansky |
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Chairperson of the Board of |
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Directors |
Date: March 31, 2006
Date: March 31, 2006
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|
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Juan Carlos Dalto |
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Director |
Date: March 31, 2006
Date: March 31, 2006
40
INDEX OF EXHIBITS
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21 |
|
|
List of Subsidiaries |
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31 |
.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky. |
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31 |
.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Edward P.
Smolyansky. |
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32 |
.1 |
|
Section 1350 Certification of Julie Smolyansky. |
|
32 |
.2 |
|
Section 1350 Certification of Edward P. Smolyansky. |
41