LIFEWAY FOODS, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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R
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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, 2012
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£
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from: __________ to __________
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Commission file number: 000-17363
LIFEWAY FOODS, INC.
(Name of registrant as specified in its charter)
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Illinois
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36-3442829
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(State or other jurisdiction of
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(IRS Employer
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incorporation or organization)
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Identification No.)
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6431 West Oakton St., Morton Grove, Illinois 60053
(Address of principal executive offices) (Zip Code)
(847) 967-1010
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
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Title of Each Class
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Name of each exchange on which registered
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Common Stock, No Par Value
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Nasdaq Global Market
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Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
o
No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
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No
£
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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No
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The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the stock was last sold as of June 29, 2012 ($10.37 per share as quoted on the Nasdaq Global Market) was $51,043,898.
As of March 9, 2013, 16,346,017 shares of the registrant’s common stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
LIFEWAY FOODS, INC.
Table of Contents
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PART I
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Item 1.
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Business
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2 | |
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Item 2.
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Properties
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12 | |
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Item 3.
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Legal Proceedings
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13 | |
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Item 4.
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Mine Safety Disclosures
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13 | |
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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13 | |
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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14 | |
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Item 8.
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Financial Statements and Supplementary Data
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16 | |
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Item 9.
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
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35 | |
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Item 9A.
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Controls and Procedures
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35 | |
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Item 9B.
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Other Information
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36 | |
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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37 | |
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Item 11.
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Executive Compensation
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39 | |
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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40 | |
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Item 13.
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Certain Relationships and Related Transactions and Director Independence
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42 | |
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Item 14.
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Principal Accountant Fees and Services
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42 | |
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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44 | |
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Signatures
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46 | ||
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Index of Exhibits
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47 | ||
- i -
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS
TO DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, readers of this document and any document incorporated by reference herein, are advised that this document and documents incorporated by reference into this document contain both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to, (i) projections of revenues, income or loss, earnings or losses per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of Lifeway Foods, Inc.’s (“Lifeway” or the “Company”) 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 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 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.
BUSINESS DEVELOPMENT
Lifeway Foods, Inc. (the “Company” or “Lifeway”), an Illinois corporation, commenced operations in February 1986, and was incorporated under the laws of the State of Illinois on May 19, 1986. The Company’s principal business activity is the manufacturing of probiotic, cultured, functional dairy and non-dairy health food products. Lifeway’s primary products are kefir, a drinkable dairy beverage similar to but distinct from yogurt, in several flavors sold under the name “Lifeway Kefir” and “Helios Nutrition Organic Kefir”; a line of yogurts sold under the “Lassi” brand; and “BasicsPlus,” a dairy based immune-supporting dietary supplement beverage. In addition to the drinkable products, Lifeway manufactures “Lifeway Farmer Cheese,” a line of various farmer cheeses, a line of gourmet cream cheeses, and “Sweet Kiss,” a fruit sugar-flavored spreadable cheese similar in consistency to cream cheese. The Company also manufactures and markets a vegetable-based seasoning under the “Golden Zesta” brand. Lifeway manufactures all of its products at Company-owned facilities and distributes its products throughout the United States. In the Chicago metropolitan area, Lifeway distributes its products on its own trucks and via one distributor. The Company directly distributes its products in the Philadelphia and Tri State metropolitan areas using its own trucks
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SUBSIDIARY ENTITIES
On August 3, 2006, the Company acquired all of the issued and outstanding stock of Helios Nutrition, Ltd. (“Helios”). Pride of Main Street Dairy, L.L.C., a Minnesota limited liability company, is 100% owned by Helios.
Starfruit, L.L.C. and Starfruit Franchisor, L.L.C. are both wholly-owned subsidiaries formed on March 26, 2007 and July 15, 2008, respectively, in connection with the Company’s Starfruit cafe activities.
On February 6, 2009, the Company acquired all of the issued and outstanding stock of Fresh Made, Inc., a Pennsylvania corporation (“Fresh Made”).
On October 14, 2010, Lifeway First Juice, Inc., an Illinois corporation and a wholly-owned subsidiary of the Company (“Lifeway First Juice”) acquired substantially all of the assets of First Juice, Inc., a Delaware corporation (“First Juice”).
BUSINESS OF ISSUER
PRODUCTS
Lifeway’s primary product is kefir, which, like the better-known product of yogurt, is a fermented dairy product. Kefir has a slightly effervescent quality, with a taste similar to yogurt and a consistency similar to buttermilk. It is a product distinct from yogurt because it incorporates the unique microorganisms of kefir as the cultures to ferment the milk. Lifeway’s Kefir is a drinkable product intended for use as a breakfast meal or a snack, or as a base for lower-calorie dressings, dips, soups or sauces. Kefir is also used as the base of Lifeway’s plain farmer’s cheese, a cheese made without salt, sugar or animal rennet. In addition, kefir is the primary ingredient of Lifeway’s “Sweet Kiss” product, a fruit sugar-flavored, cream cheese-like spread which is intended to be used as a dessert spread or frosting.
Kefir contains a unique mixture of several live microorganisms and nutrients such as proteins, minerals and vitamins. Kefir is a good source of calcium, protein and B Vitamins. In addition, because the fermentation process does not produce a highly sour-tasting product, the end product has fewer calories than some similar products in the dairy category.
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.
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LIFEWAY’S KEFIR.
“Lifeway’s Kefir” is a drinkable kefir product manufactured in ten regular and low-fat varieties, including plain, pomegranate, raspberry, blueberry, strawberry, cherry, peach, banana-strawberry, cappuccino and vanilla, and sold in 32-ounce containers and 8-ounce single serving containers featuring color-coded caps and labels describing nutritional information. In March 1996, Lifeway began marketing its non-fat, low-cholesterol kefir in six flavors — plain, raspberry, strawberry, strawberry-banana, peach and blueberry. The kefir product is currently marketed under the name “Lifeway’s Kefir,” and is typically sold by retailers from their dairy sections.
LIFEWAY’S ORGANIC KEFIR.
“Lifeway’s Organic Kefir” meets the organic standards and specifications of the United States Department of Agriculture for organic products and is manufactured in five flavors: plain, wildberry, raspberry, strawberry and peach. Lifeway’s Organic Kefir is sweetened with organic cane juice.
LIFEWAY’S SLIM6.
“Lifeway’s Slim6” is a line of low-fat kefir beverages with no added sugar designed for consumers who follow low-carbohydrate diets. Lifeway’s Slim6 has only 8 grams of carbohydrates and 2.5 grams of fat per 8-ounce serving and is available in five flavors: strawberries n’ cream, mixed berry, tropical fruit, strawberry-banana and an original, unsweetened version.
PROBUGS.
“ProBugs” is a kefir product that contains ten live and active kefir cultures. Aimed at children ages 2-9, ProBugscomes in three flavors, “Sublime Slime Lime®,” “Orange Creamy Crawler®” and “Goo-Berry Pie®” and is packaged in no spill spout pouches designed as cartoon bug characters Peter, Polly and Penelope ProBug®.
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.
BASICS PLUS.
“Basics Plus” is a kefir-based beverage product designed to support gastrointestinal functions and the immune system. This product contains certain “passive immunity products” purchased from GalaGen, Inc. prior to its 2002 bankruptcy. 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 this product via the internet.
LASSI.
“Lassi” is a cultured drink inspired by the traditions of India. Sold in 8-ounce containers in two flavors, strawberry and mango.
GOLDEN ZESTA.
“Golden Zesta” is a vegetable-based seasoning, which, because of its low sodium content, may also be used as a salt substitute and is marketed to delicatessens, gourmet shops and ethnic grocers.
HELIOS NUTRITION ORGANIC KEFIR.
“Helios Nutrition Organic Kefir” is a kefir product made from organic milk and manufactured with a unique blend of active cultures. It is sold in 8 and 32 ounce bottles and made in five flavors: peach, plain, strawberry, vanilla and raspberry.
Lifeway intends to continue to develop new products based on kefir and Farmer Cheese. There is no assurance that such products or any other new products can be developed successfully or marketed profitably.
DISTRIBUTION
With its seventeen Company-owned trucks, Lifeway distributes its products directly and extensively in the State of Illinois, primarily in the Chicago metropolitan area. Lifeway also directly distributes its products in the Philadelphia and Tri State metropolitan area.
- 3 -
In addition to the Chicago, Philadelphia and Tri State metropolitan areas, Lifeway’s products are distributed to stores throughout the United States. Lifeway has verbal distribution arrangements with various distributors throughout the United States. Lifeway believes these verbal distribution arrangements allow management the necessary latitude to expand into new areas and markets and establish new relationships with distributors on an ongoing basis. Lifeway has not offered any exclusive territories to any distributors.
Distributors are provided Lifeway products at wholesale prices for distribution to their retail accounts. Lifeway believes that the price at which its products are sold to its distributors is competitive with the prices generally paid by distributors for similar products in the markets served. In all areas served, distributors currently deliver the products directly to the refrigerated cases of dairy sections of their retail customers. Each distributor carries a line of Lifeway’s products on its trucks, checks the retail stores for space allocated to Lifeway’s products, determines inventory requirements of the store and places Lifeway products directly into the retailers’ dairy cases. Lifeway believes this method of distribution best serves the needs of each retail store, and is the best available means to ensure consistency and quality of product handling, quality control, flavor selection and favorable retail display. The Company expects customers, either distributors who go into third party retail stores to sell the product they have purchased from us, or the direct retail customer that may service their own stores, as general good business practice to rotate the perishable products, make or obtain frequent delivery of products, replacement of damaged, old or substandard packages and deliver or have deliveries made directly to the refrigerated case. It is to the benefit of the distributor or retailer, as well as the Company, not to have spoiled, out dated, or substandard product on the shelf. However, due to the perishable nature of the product, the Company’s distributors and retailers have no right to return any product to the Company.
MARKETING
Lifeway continues to promote the verifiable nutritional characteristics, purity and good taste of its kefir and kefir-based products. Lifeway primarily advertises its products through local radio stations, which advertisements are directed to both users and non-users of cultured milk products of all kinds. In addition, through newspaper and magazine advertising, Lifeway provides educational information on its products and appeals to the common perception that the products may be of particular health benefit, including promoting digestion, and continues to educate the public on the possible health benefits which could be derived from the use of kefir and kefir-based products.
In addition to local radio stations, newspapers and magazines, Lifeway promotes further exposure of its products through the internet (via our website, social media and blogs), 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.
COMPETITION
Although Lifeway faces a small amount of direct competition for kefir products, Lifeway’s kefir-based products compete with all other yogurt and other dairy products. Many producers of yogurt and other dairy products are well-established and have significantly greater financial resources than Lifeway to promote their products.
In connection with the certain Stockholders’ Agreement, as amended, between Lifeway, Danone Foods, Inc. and other parties, as well as certain other transactions between the 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 with respect to certain yogurt, cheese and kefir products. The term of the non-compete obligation expired on December 31, 2010. The remaining provisions of the Stockholders’ Agreement are in full force and effect.
SUPPLIERS
Lifeway purchases its raw materials, such as milk, sugar and fruit from unaffiliated suppliers, and is not limited or contractually bound to any supplier. Lifeway has ready access to multiple suppliers for all of its raw materials and packaging requirements. Prior to making any purchase, Lifeway determines which supplier can offer the lowest price for the highest quality of product. The raw and packaging materials purchased by Lifeway are considered commodity items and are widely available on the open market with the exception of one ingredient in BasicsPlus which we are not currently manufacturing. Lifeway owns and operates the means of production of all of its products.
MAJOR CUSTOMERS
Lifeway distributes its products to numerous accounts throughout the United States. Concentrations of credit with regard to trade accounts receivable and sales are limited due to the fact that Lifeway’s customers are spread across different geographic areas. However, customers are concentrated in the retail food industry, for example, Trader Joe’s and United Natural Foods. In 2012, two customers represented approximately 31% of sales and reflected sales in various regions of the United States outside the Chicago 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 splits which occurred in the first quarter of 2004 and the second quarter of 2006. On October 1, 1999, Lifeway and certain members of the Smolyansky family sold shares of restricted common stock to Danone at $10.00 per share. Later in 1999, Danone purchased additional shares of common stock from certain individuals, including shares purchased in transactions with certain Company affiliates, including Lifeway’s founder Michael Smolyansky, Val Nikolenko, Vice President of Production and Pol Sikar, a director, and his affiliates. As a result of these transactions, Danone became the beneficial owner of approximately 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, as amended through extensions of certain provisions pursuant to which the parties agreed, among other things, that they would not compete with each other with respect to certain kefir products. The terms of the non-compete obligation expired on December 31, 2010. 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 during the standstill period, which expired on December 31, 2010. Danone’s interest as of December 31, 2012 was approximately 21.1% due to reductions in Lifeway’s shares outstanding, primarily due to share repurchases by Lifeway. The remaining provisions of the Stockholders’ Agreement are in full force and effect.
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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Mark/Reg. No.
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Goods/Services
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Date of
Registration
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Expiration of
Registration
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Comments
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ProBug Design 1,
Reg. No. 3266378
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dairy-based beverages; dairy- based food beverages; kefir; soy- based food beverage used as milk substitute
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July 17, 2007
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July 17, 2017
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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ProBug Design 2,
Reg. No. 3263130
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dairy-based beverages; dairy- based food beverages; kefir; soy- based food beverage used as milk substitute
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July 10, 2007
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July 10, 2017
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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Penelope ProBug Design, Reg. No. 3408792
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dairy-based beverages; dairy- based food beverages; kefir; soy- based food beverage used as milk substitute
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April 8, 2008
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April 8, 2018
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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BA3APHBIII (a Stylized
presentation of “bazarny” in Cyrillic characters),
Reg. No. 3590660
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cultured milk products, excluding ice cream, ice milk and frozen yogurt; cheeses and cottage cheese
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March 17, 2009
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March 17, 2019
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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BAMBINO,
Reg. No. 2770522
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cheeses, cottage cheeses and other dairy products, excluding ice cream, ice milk, and frozen yogurt
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October 7, 2003
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October 7, 2013
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An Affidavit of Continued Use was timely filed between the fifth and sixth anniversaries of the registration date. Registration is renewable between the ninth and tenth anniversaries of the registration date or the six-month grace period following the registration expiration date.
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BAZARNY,
Reg. No. 3597883
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cultured milk products, excluding ice cream, ice milk and frozen yogurt; cheeses and cottage cheese
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March 31, 2009
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March 31, 2019
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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BIO KEFIR,
Reg. No. 3886709
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yogurt, cheeses, cottage cheeses and other milk products, excluding ice cream, ice milk and frozen yogurt
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December 7, 2010
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December 7, 2020
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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CHANGING THE WORLD, ONE MOUTHFUL AT A TIME. (Stylized),
Reg. No. 3541999
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fruit juices
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December 2, 2008
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December 2, 2018
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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FRUIT JUICE (Stylized),
Reg. No. 3413276
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fruit juices
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April 15, 2008
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April 15, 2018
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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Fruit Juice Logo,
Reg. No. 3432421
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fruit juices
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May 20, 2008
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May 20, 2018
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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GOO-BERRY PIE,
Reg. No. 3405134
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dairy-based beverages; dairy- based food beverages; kefir; soy-based food beverages used as a milk substitute
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April 1, 2008
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April 1, 2018
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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HELIOS NUTRITION,
Reg. No. 2283716
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health foods, functional foods and medical foods, namely, dairy products excluding ice cream, ice milk and frozen yogurt
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October 5, 1999
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October 5, 2019
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Registration was timely renewed on April 2, 2010. Registration is renewable for ten year periods or during the six-month grace period following the registration expiration date or the six-month grace period following the sixth anniversary date.
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KOROVKA,
Reg. No. 2504027
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dairy-based spread
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November 6, 2001
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November 6, 2021
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Registration was timely renewed on November 6, 2011. Registration is renewable for ten year periods or during the six-month grace period following the registration expiration date.
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KPECTBRHCKNN (a Stylized presentation of “krestyanskiy” in Cyrillic characters-means “peasant”),
Reg. No. 2187363
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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, 2018
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Registration was timely renewed on August 23, 2008. Registration is renewable for ten year periods or during the six-month grace period following the registration expiration date.
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KWASHENKA,
Reg. No. 2135974
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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, 2018
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Registration was timely renewed on May 23, 2008. Registration is renewable for ten year periods or during the six-month grace period following the registration expiration date.
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LA FRUTA,
Reg. No. 2937061
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cultured milk products, excluding ice cream, ice milk and frozen yogurt
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March 29, 2005
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March 29, 2015
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An Affidavit of Continued Use was timely filed between the fifth and sixth anniversaries of the registration date. Registration is renewable between the ninth and tenth anniversaries of the registration date or the six-month grace period following the registration expiration date.
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LIFEWAY,
Reg. No. 1571136
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cheese and kefir
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December 12, 1989
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December 12, 2019
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Registration was timely renewed on December 12, 2009. Registration is renewable for ten year periods or during the six-month grace period following the registration expiration date.
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ORANGE CREAMY CRAWLER,
Reg. No. 3263128
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dairy-based beverages; dairy- based food beverages; kefir; soy- based food beverage used as milk substitute
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July 10, 2007
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July 10, 2017
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An Affidavit of Continued Use was timely filed between the fifth and sixth anniversaries of the registration date. Registration is renewable between the ninth and tenth anniversaries of the registration date or the six-month grace period following the registration expiration date.
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PHYTOBOOST,
Reg. No. 3982487
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dairy-based beverages; dairy- based food beverages; kefir; soy-based food beverage used as a milk substitute
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June 21, 2011
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June 21, 2021
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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PLAYGROUP PACK,
Reg. No. 3634999
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fruit juices
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June 9, 2009
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June 9, 2019
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Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
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PRIDE OF MAIN STREET, MN Reg. No. 12947
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dairy product
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November 9, 1987
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November 9, 2017
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Only for the State of Minnesota, not in US – Registration was renewed in 2007. Registration is renewable for ten years.
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|
PRO2O,
Reg. No. 4226923
|
dairy-based beverages; dairy-based food beverages; kefir; soy-based food beverage used as a milk substitute beverages, namely, water and fruit and vegetable juices and fruit juices flavored with tea
|
October 16, 2012
|
October 16, 2022
|
Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
|
|
PROBUGS,
Reg. No. 3263129
|
dairy-based beverages; dairy- based food beverages; kefir; soy- based food beverage used as milk substitute
|
July 10, 2007
|
July 10, 2017
|
An Affidavit of Continued Use was timely filed between the fifth and sixth anniversaries of the registration date. Registration is renewable between the ninth and tenth anniversaries of the registration date or the six-month grace period following the registration expiration date.
|
|
SOYTREAT,
Reg. No. 3530754
|
soy-based food beverage intended for use as cultured milk substitute
|
November 11, 2008
|
November 11, 2018
|
Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
|
- 9 -
|
STARFRUIT,
Reg. No. 3513252
|
franchise services, namely, offering technical and business management assistance in the establishment and operation of restaurants
|
October 7, 2008
|
October 7, 2018
|
Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
|
|
STARFRUIT,
Reg. No. 3454746
|
restaurant services
|
June 24, 2008
|
June 24, 2018
|
Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
|
|
STARFRUIT (Stylized), Reg. No. 3879939
|
kefir
|
November 23, 2010
|
November 23, 2020
|
Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
|
|
SUBLIME SLIME LIME,
Reg. No. 3263134
|
dairy-based beverages; dairy- based food beverages; kefir; soy- based food beverage used as milk substitute
|
July 10, 2007
|
July 10, 2017
|
An Affidavit of Continued Use was timely filed between the fifth and sixth anniversaries of the registration date. Registration is renewable between the ninth and tenth anniversaries of the registration date or the six-month grace period following the registration expiration date.
|
|
SWEET KISS,
Reg. No. 2135975
|
cheeses, cottage cheeses and other milk products, excluding ice cream, ice milk and frozen yogurt
|
February 10, 1998
|
February 10, 2018
|
Registration was timely renewed on May 23, 2008. Registration is renewable for ten year periods or during the six-month grace period following the registration expiration date.
|
- 10 -
|
TODDLER TASTEBUD TRAINING (Stylized), Reg. No. 3542008
|
fruit juices
|
December 2, 2008
|
December 2, 2018
|
Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
|
|
TRAINING WHEELS FOR HEALTHY EATING (Stylized), Reg. No. 3412314
|
fruit juices
|
April 15, 2008
|
April 15, 2018
|
Registration is renewable at the time of expiration provided mandatory documents are filed with the USPTO between the fifth and sixth anniversaries of the registration date or the six-month grace period following the sixth anniversary date.
|
|
FIRST SMOOTHIE,
Ser. No. 85111072
|
fruit beverages, namely, smoothies
|
Pending – Application filed August 19, 2010
|
Notice of Allowance (NOA) issued September 20, 2011. Applicant must file a Statement of Use or first Extension Request by March 20, 2012.
|
Lifeway also uses, and claims common law rights to, the following unregistered trademarks: “Elita,” “Healthy Foods Today for a Better Life Tomorrow,” “Milkshake Smoothie,” “Toplenka,” “White Cheese,” “Drink It to Be Beautiful Inside and Out,” “Golden Zesta” and “Pride of Main Street.”
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 United 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. The licensed patent protected an ingredient in BasicPlus which Lifeway no longer produces. However, going forward, Lifeway may resume production of BasicPlus without constraint of the expiring patent.
REGULATION
Lifeway is subject to regulation by federal, state and local governmental authorities regarding the distribution and sale of food products. Although Lifeway believes that it currently has all material government permits, licenses, qualifications and approvals for its operations, there can be no assurance that Lifeway will be able to maintain its existing licenses and permits or to obtain any future licenses, permits, qualifications or approvals which may be required for the operation of Lifeway’s business.
- 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.
RESEARCH AND DEVELOPMENT
Lifeway continues its program of new product development, centered around the nutritional and “low calorie” features of its proprietary kefir formulas.
Lifeway conducts primarily all of its research internally, but at times will employ the services of an outside testing facility. During 2011 and 2012, the amount Lifeway expended for research and new product development was not material to the financial position of Lifeway and no amount was customer supported.
EMPLOYEES
Lifeway currently employs approximately 330 employees, all of whom are full-time employees. Substantially all of these employees are engaged in the manufacturing of the Company’s products. None of Lifeway’s employees are covered by collective bargaining agreements. The Company only has distributor relationships with third party distributors. No distributors are considered to be employees. Company-owned vehicles are used by Company employees for local same day deliveries only and revenue is recognized on the date of delivery to the end retail customers. Drivers of those vehicles are employees of the Company and all payroll, withholdings, and income taxes are accounted for in the same manner.
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. 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 certain loans to Lifeway from The Private Bank & Trust as discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation (the “Loans”). The Loans are secured by all of the assets of Lifeway, including a first mortgage on Lifeway’s real property located in Skokie, Illinois, Niles, Illinois and Morton Grove, Illinois. A portion of the proceeds of the Loans was used to pay off previously existing mortgage loans. 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.
On October 16, 1996, Lifeway purchased a 110,000 square foot commercially-zoned parcel of real property, including an approximately 50,000 square foot one-story brick building in good condition, located at 6431 Oakton Avenue, Morton Grove, Illinois. This property is used as Lifeway’s corporate headquarters and main manufacturing facility. This property has been improved every year since the time of purchase by the addition of custom-built refrigerated storage space and the addition of various machinery and equipment used to manufacture, package and store Lifeway’s products. Lifeway is the only occupant of this property and presently holds fee simple title subject to a mortgage which secures the property as collateral for the Loans discussed above. 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.
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, approximately 50,000 square foot building, less than a mile away. The additional space at the Company’s main plant is being used to expand production capacity for the Company’s kefir and other probiotic products. Lifeway is the only occupant of this property and presently holds fee simple title subject to a mortgage which secures the property as collateral for the Loans discussed above. 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.
Included in the purchase of Pride of Main Street Dairy on August 3, 2006, Lifeway acquired an approximately 35,000 square foot commercially-zoned parcel of real estate located at 214 Main Street S. Sauk Centre, Minnesota, including a 16,000 square foot two-story brick building used for production, and a 5,600 square foot storage facility. This property is used as the main headquarters and main production facility for Pride of Main Street Dairy. The building was built in the 1920’s with an addition in 1990. The facility is being used to produce all of the Pride of Main Street Dairy products, and approximately 70% of the Helios Nutrition Organic Kefir, with the remaining 30% being produced in Lifeway’s main production facility in Morton Grove, Illinois. Lifeway is the only occupant of this property and presently holds fee simple title subject to negative mortgage pledge as part of the collateral package for the Loans discussed above. 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.
- 12 -
On February 6, 2009, in connection with the Company’s acquisition of Fresh Made, Inc., Lifeway also acquired 1.135 acres of land in Philadelphia. This facility is used to store raw materials and finished goods. Lifeway is the only occupant of this property and presently holds fee simple title subject to a negative mortgage pledge as part of the collateral package for the Loans discussed above. 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.
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 it properties.
Lifeway is not party to any material pending legal proceedings. Lifeway is from time to time engaged in litigation matters arising in the ordinary course of business none of which presently is expected to have a material adverse effect on its business results or operations.
Not applicable.
MARKET INFORMATION
Lifeway’s Common Stock, no par value, the only class of common equity of Lifeway, is traded on The Nasdaq Global Market under the symbol “LWAY.” Trading commenced on March 29, 1988.
The high and low sales prices for Lifeway’s Common Stock for the quarterly periods within the two most recent fiscal years, as reported by The Nasdaq Global Market, is set forth in the following table:
|
Low Bid
|
High Bid
|
|
|
First Qtr. 2011
|
$ 8.42
|
$10.48
|
|
Second Qtr. 2011
|
$ 9.03
|
$11.24
|
|
Third Qtr. 2011
|
$ 9.45
|
$11.90
|
|
Fourth Qtr. 2011
|
$ 8.80
|
$11.20
|
|
First Qtr. 2012
|
$ 8.81
|
$ 9.91
|
|
Second Qtr. 2012
|
$ 8.03
|
$10.40
|
|
Third Qtr. 2012
|
$ 9.10
|
$11.10
|
|
Fourth Qtr. 2012
|
$ 7.90
|
$ 9.88
|
As of March 9, 2013, there were approximately 90 holders of record of Lifeway’s Common Stock. The Company has no information regarding beneficial owners whose shares are held in street name.
DIVIDENDS
Lifeway declared a cash dividend of $0.07 per share during the fiscal year ended December 31, 2012 and no dividends in the year ended December 31, 2011. We intend to pay regular annual distributions to our common shareholders, the amount of which may change from time to time. Future distributions will be declared and paid at the discretion of our Board of Directors, and will depend upon cash generated by operating activities, our financial condition, capital requirements, and such other factors as our Board of Directors deem relevant.
SALES OF UNREGISTERED SECURITIES
None.
- 13 -
PURCHASES OF THE COMPANY’S SECURITIES
|
Period
|
(a) Total Numbers of Shares (or
Units) Purchased
|
(b) Average Price Paid per
Share (or Unit)
|
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs
|
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased
Under the
Plans or Programs
|
||||
|
October 1 to October 31, 2012
|
0
|
$0
|
0
|
159,200
|
||||
|
November 1 to November 30, 2012
|
11,000
|
$8.45
|
11,000
|
148,200
|
||||
|
December 1 to December 31, 2012
|
2,000
|
$8.22
|
2,000
|
146,200
|
||||
|
Total
|
13,000
|
$8.34
|
13,000
|
146,200
|
* On January 20, 2011, the Company approved a share repurchase program for up to 250,000 shares with a plan expiration date of one year from the date of the first purchase. On February 6, 2012, the Company approved a new share repurchase program for up to 200,000 shares with a plan expiration date of one year from the date of the first purchase. Lifeway repurchased 63,300 shares of the Company’s securities in 2012 pursuant to these programs at a total cost of $580,708. As of the date of this filing these plans were both expired. A new share repurchase program has not been approved for 2013.
EQUITY COMPENSATION PLAN INFORMATION
See Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this Annual Report on Form 10-K for information regarding securities authorized for issuance under our equity compensation plans.
Comparison of Quarter Ended December 31, 2012 to Quarter Ended December 31, 2011
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 financial statements and Management’s Discussion and Analysis contained in our quarterly reports on Form 10-Q, for the fiscal quarters ended March 31, 2012, June 30, 2012, and September 30, 2012.
On March 29, 2013, management concluded that the consolidated statements of income for the year to date periods of March 31, 2012 and 2011, June 30, 2012 and 2011, and September 30, 2012 and 2011, should be restated. This restatement is a result of changing classification of various expenses from operating activities to cost of goods sold. This change did not cause any changes in net income for any of the periods presented. See Note 2 and Note 14 in the financial statements for further information.
Results of Operations
Total consolidated gross sales increased by $4,137,824 (approximately 22%) to $22,877,021 during the three-month period ended December 31, 2012 from $18,739,197 during the same three-month period in 2011. This increase is primarily attributable to increased sales and awareness of the Company’s flagship line, Kefir, as well as ProBugs®
Organic Kefir for kids and BioKefir™.
Total consolidated net sales increased by $4,013,970 (approximately 24%) to $20,780,954 during the three-month period ended December 31, 2012 from $16,766,984 during the same three-month period in 2011. Net sales are recorded as gross sales less promotional activities such as slotting fees paid, couponing, spoilage and promotional allowances as well as early payment terms given to customers. The total allowance for promotions and discounts during the three-month period ended December 31, 2012 was $2,096,067 or 10% of gross sales, compared to the total allowance for promotions and discounts during the three-month period ended December 31, 2011 of $1,972,213 or 10.5% of gross sales.
Cost of goods sold as a percentage of net sales, excluding depreciation expense, were approximately 65% during the fourth quarter of 2012, compared to approximately 76% during the same period in 2011. The decrease was primarily attributable a lower costs of transportation and other petroleum-based production supplies, and by the decreased cost of conventional and organic milk, the Company’s largest raw material. The total cost of milk was approximately 5% lower during the fourth quarter 2012 when compared to the same period in 2011.
- 14 -
Operating expenses as a percentage of net sales were approximately 24% during the fourth quarter of 2012, compared to approximately 25% during the same period in 2011. This was primarily attributable to an
increase in selling expenses, which increased by $636,234 (approximately 25%) to $3,205,897 during the fourth quarter of 2012, from $2,569,663 during the same period in 2011.
The company reported income from operations of $1,768,219 during the fourth quarter of 2012, an increase of $2,225,269 from a loss of $457,050 during the same period in 2011.
Provision for income tax was $721,860, or a 40% effective rate for the fourth quarter of 2012 compared to a benefit of $137,528 during the same period in 2011.
Total net income was $1,073,502 or $
0.07
per diluted share for the three-month period ended December 31, 2012 compared to a net loss of $365,933 or a loss of $0.02 per diluted share in the same period in 2011.
Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011
The consolidated statement of income for the year ended December 31, 2011 has been restated due to reclassification of approximately $1.285 million of various expenses from operating activities to cost of goods sold. There was no change in net income from what was previously presented. See Note 2 and Note 14 in the financial statements for further information.
Total consolidated gross sales increased by $12,631,008 (approximately 16%) to $89,754,007 during the twelve- month period ended December 31, 2012 from $77,122,999 during the same twelve-month period in 2011. This increase is primarily attributable to increased sales and awareness of the Company’s flagship line, Kefir, as well as ProBugs® Organic Kefir for kids and BioKefir™.
Total consolidated net sales increased by $11,380,856 (approximately 16%) to $81,351,265 during the twelve-month period ended December 31, 2012 from $69,970,409 during the same twelve-month period in 2011. Net sales are recorded as gross sales less promotional activities such as slotting fees paid, couponing, spoilage and promotional allowances as well as early payment terms given to customers.
Cost of goods sold as a percentage of net sales, excluding depreciation expense, were approximately 64% during the twelve-month period ended December 31, 2012, compared to approximately 67% during the same period in 2011. The decrease was primarily attributable to the cost of conventional and organic milk, the Company’s largest raw material. The total cost of milk was approximately 5% lower during the twelve-month period ended December 31, 2012 when compared to the same period in 2011.
Operating expenses as a percentage of net sales were approximately 23% during the twelve-month period ended December 31, 2012 compared to approximately 23% during the same period in 2011. Selling expenses increased by $1,391,805 (approximately 14%) to $11,506,707 during the twelve-month period ended December 31, 2012 when compared to the same period in 2011.
Total operating income increased by $3,768,216 (approximately 74%) to $8,844,707 during the twelve-month period ended December 31, 2012, from $5,076,491 during the same period in 2011.
Provision for income taxes was $3,205,076 or a 36% effective tax rate, for the twelve-month period ended December 31, 2012 compared with $1,977,837 or a 41% effective tax rate, during the same period in 2011. The decline in the effective tax rate is primarily the result of changes in permanent differences such as the manufacturers' deductions, and changes in prior year estimates reflected in the current period. Income taxes are discussed in Note 10 of the Notes to Consolidated Financial Statements.
Total net income was $5,619,798 or $
0.34
per share for the twelve-month period ended December 31, 2012 compared to $2,855,421 or $0.17 per share in the same period in 2011.
Liquidity and Capital Resources
Sources and Uses of Cash
Net cash provided by operating activities was $6,627,684 during the twelve-months ended December 31, 2012 compared to net cash provided by operating activities of $4,042,021 the same period in 2011. This increase is primarily attributable to the increase in net income of $2,764,377 in 2012.
- 15 -
Net cash used in investing activities was $1,555,914 during the twelve months ended December 31, 2012 compared to net cash used in investing activities of $2,112,657 in the same period in 2011. This decrease is primarily due to a decrease in purchases of investments of 981,668 compared to 2011.
The Company had a net increase of cash and cash equivalents of $1,171,076 during the twelve-month period ended December 31, 2012 compared to a net decrease in cash and cash equivalents of $2,114,789 during the same period in 2011. The Company had cash and cash equivalents of $2,286,226 as of December 31, 2012 compared to cash and cash equivalents of $1,115,150 as of December 31, 2011.
Assets and Liabilities
Total assets were $53,506,626 as of December 31, 2012, which is an increase of $2,033,318 when compared to December 31, 2011. This is primarily due to cash and cash equivalents of $2,286,226 as of December 31, 2012, which is an increase of of $1,171,076, when compared to December 31, 2011.
Total current liabilities were $6,209,694 as of December 31, 2012, which is a decrease of $863,026 when compared to December 31, 2011. This is primarily due to a $997,735 decrease in current maturities of notes payable.
Notes payable decreased by $583,891 as of December 31, 2012, when compared to December 31, 2011. The balance of the notes payable as of December 31, 2012 was $4,955,945.
Total stockholder’s equity was $39,312,469 as of December 31, 2012, which is an increase of $3,955,312 when compared to December 31, 2011. This is primarily due the increase in retained earnings of $4,473,481 when compared to December 31, 2011.
We previously held significant portions of our assets in investment securities. All of our marketable securities are classified as available-for-sale on our balance sheet. All of these securities are stated thereon at market value as of the end of the applicable period. Gains and losses on the portfolio are determined by the specific identification method.
We anticipate being able to fund the Company’s foreseeable liquidity requirements internally. We continue to explore potential acquisition opportunities in our industry in order to boost sales while leveraging our distribution system to consolidate and lower costs.
Off-Balance Sheet Arrangements
We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Critical Accounting Policies
Lifeway’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. Lifeway chooses accounting policies within US GAAP that management believes are appropriate to accurately and fairly report Lifeway’s operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions and has discussed the development and selection of critical accounting policies with its audit committee of the Board of Directors. For further information concerning accounting policies, refer to Note 2 — Nature of Business and Significant Accounting Policies in the notes to the consolidated financial statements.
The annotated consolidated financial statements of the Company that constitute Item 8 of this report commence on the pages that follow this page.
- 16 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 and 2011
- 17 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
LIFEWAY FOODS, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of LIFEWAY FOODS, INC. AND SUBSIDIARIES (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LIFEWAY FOODS, INC. AND SUBSIDIARIES as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
/s/ Plante & Moran, PLLC
Chicago, IL
April 1, 2013
- 18 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
December 31, 2012 and 2011
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
ASSETS
|
||||||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
$ | 2,286,226 | $ | 1,115,150 | ||||
|
Investments
|
1,869,888 | 1,695,044 | ||||||
|
Certificates of deposits in financial institutions
|
450,000 | 300,000 | ||||||
|
Inventories
|
5,939,186 | 4,954,475 | ||||||
|
Accounts receivable, net of allowance for doubtful
|
||||||||
|
accounts and discounts
|
8,723,737 | 7,950,276 | ||||||
|
Prepaid expenses and other current assets
|
97,138 | 79,630 | ||||||
|
Other receivables
|
8,825 | 224,204 | ||||||
|
Deferred income taxes
|
234,687 | 338,690 | ||||||
|
Refundable income taxes
|
84,828 | 41,316 | ||||||
|
Total current assets
|
$ | 19,694,515 | 16,698,785 | |||||
|
Property and equipment, net
|
14,986,776 | 15,198,822 | ||||||
|
Intangible assets
|
||||||||
|
Goodwill and other non-amortizable brand assets
|
14,068,091 | 14,068,091 | ||||||
|
Other intangible assets, net of accumulated amortization of
|
||||||||
|
$3,842,756 and 3,087,940 at December 31, 2012 and 2011,
|
||||||||
|
respectively
|
4,463,242 | 5,218,060 | ||||||
|
Total intangible assets
|
18,531,333 | 19,286,151 | ||||||
|
Other Assets
|
||||||||
|
Long-term accounts receivable net of current portion
|
294,000 | 289,550 | ||||||
|
Total assets
|
$ | 53,506,624 | $ | 51,473,308 | ||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current liabilities
|
||||||||
|
Checks written in excess of bank balances
|
$ | 0 | $ | 592,040 | ||||
|
Current maturities of notes payable
|
542,981 | 1,540,716 | ||||||
|
Accounts payable
|
4,256,725 | 4,386,239 | ||||||
|
Accrued expenses
|
1,155,677 | 553,725 | ||||||
|
Accrued income taxes
|
254,311 | 0 | ||||||
|
Total current liabilities
|
6,209,694 | 7,072,720 | ||||||
|
Notes payable
|
4,955,945 | 5,539,836 | ||||||
|
Deferred income taxes
|
3,028,518 | 3,503,595 | ||||||
|
Total liabilities
|
14,194,157 | 16,116,151 | ||||||
|
Stockholders' equity
|
||||||||
|
Common stock, no par value; 20,000,000 shares authorized;
|
||||||||
|
17,273,776 shares issued; 16,346,017 shares outstanding at
|
||||||||
|
December 31, 2012; 17,273,776 shares issued; 16,409,317 shares
|
||||||||
|
outstanding at December 31, 2011
|
6,509,267 | 6,509,267 | ||||||
|
Paid-in-capital
|
2,032,516 | 2,032,516 | ||||||
|
Treasury stock, at cost
|
( 8,187,682 | ) | ( 7,606,974 | ) | ||||
|
Retained earnings
|
38,904,777 | 34,431,296 | ||||||
|
Accumulated other comprehensive income (loss), net of taxes
|
53,591 | ( 8,948 | ) | |||||
|
Total stockholders' equity
|
39,312,469 | 35,357,157 | ||||||
|
Total liabilities and stockholders' equity
|
$ | 53,506,626 | $ | 51,473,308 | ||||
- 19 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
For the Years Ended December 31, 2012 and 2011
|
Years Ended
|
||||||||||||||||
|
December 31,
|
||||||||||||||||
|
2012
|
2011
|
|||||||||||||||
|
Sales
|
$ | 89,754,007 | $ | 77,122,999 | ||||||||||||
|
Less: discounts and allowances
|
(8,402,742 | ) | ( 7,152,590 | ) | ||||||||||||
|
Net sales
|
81,351,265 | 81,351,265 | 69,970,409 | 69,970,409 | ||||||||||||
|
Cost of goods sold
|
52,295,464 | 47,151,776 | ||||||||||||||
|
Depreciation expense
|
1,629,594 | 1,552,961 | ||||||||||||||
|
Total cost of goods sold
|
53,925,058 | 48,704,737 | ||||||||||||||
|
Gross profit
|
27,426,207 | 21,265,672 | ||||||||||||||
|
Selling expenses
|
11,506,707 | 10,114,902 | ||||||||||||||
|
General and administrative
|
6,319,972 | 5,290,446 | ||||||||||||||
|
Amortization expense
|
754,817 | 783,833 | ||||||||||||||
|
Total operating expenses
|
18,581,496 | 16,189,181 | ||||||||||||||
|
Income from operations
|
8,844,711 | 5,076,491 | ||||||||||||||
|
Other income (expense):
|
||||||||||||||||
|
Interest and dividend income
|
85,383 | 70,611 | ||||||||||||||
|
Rental income
|
12,285 | 7,150 | ||||||||||||||
|
Interest expense
|
(177,622 | ) | (247,342 | ) | ||||||||||||
|
Impairment of Investment
|
0 | (36,032 | ) | |||||||||||||
|
Gain (loss) on sale of investments, net
|
71,286 | (29,256 | ) | |||||||||||||
|
Other Expense
|
(11,169 | ) | (8,364 | ) | ||||||||||||
|
Total other income (expense)
|
(19,837 | ) | (243,233 | ) | ||||||||||||
|
Income before provision for
|
||||||||||||||||
|
income taxes
|
8,824,874 | 4,833,258 | ||||||||||||||
|
Provision for income taxes
|
3,205,076 | 1,977,837 | ||||||||||||||
|
Net income
|
$ | 5,619,798 | $ | 2,855,421 | ||||||||||||
|
Basic and diluted earnings
|
||||||||||||||||
|
per common share
|
.34 | 0.17 | ||||||||||||||
|
Weighted average number of
|
||||||||||||||||
|
shares outstanding
|
16,373,224 | 16,442,948 | ||||||||||||||
|
COMPREHENSIVE INCOME
|
||||||||||||||||
|
Net income
|
5,619,798 | $ | 2,855,421 | |||||||||||||
|
Other comprehensive income
|
||||||||||||||||
|
(loss), net of tax:
|
||||||||||||||||
|
Unrealized gains on
|
||||||||||||||||
|
investments (net of tax)
|
102,816 | 17,616 | ||||||||||||||
|
Less reclassification adjustment for (gains)
|
||||||||||||||||
|
losses included in
|
||||||||||||||||
|
net income (net of taxes)
|
( 40,277 | ) | 16,530 | |||||||||||||
|
Comprehensive income
|
$ | 5,682,337 | $ | 2,889,567 | ||||||||||||
- 20 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2012 and 2011
|
|
|
|||||||||||||||||||||||||||||||||||
|
Common Stock, No Par Value
20,000,000 Shares
|
# of Shares
|
Accumulated
Other
|
||||||||||||||||||||||||||||||||||
|
Authorized
|
of
|
Comprehensive
|
||||||||||||||||||||||||||||||||||
|
# of Shares
|
# of Shares
|
Treasury
|
Common
|
Paid In
|
Treasury
|
Retained
|
Income (Loss),
|
|||||||||||||||||||||||||||||
|
Issued
|
Outstanding
|
Stock
|
Stock
|
Capital
|
Stock
|
Earnings
|
Net of Tax
|
Total
|
||||||||||||||||||||||||||||
|
Balances at December 31, 2010
|
17,273,776 | 16,536,657 | 737,119 | $ | 6,509,267 | $ | 2,032,516 | $ | (6,425,546 | ) | $ | 31,575,875 | $ | (43,094 | ) | $ | 33,649,018 | |||||||||||||||||||
|
Redemption of stock
|
0 | (127,340 | ) | 127,340 | 0 | 0 | (1,181,428 | ) | 0 | 0 | (1,181,428 | ) | ||||||||||||||||||||||||
|
Issuance of treasury stock for compensation
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
|
Other comprehensive income (loss):
|
||||||||||||||||||||||||||||||||||||
|
Unrealized gains on securities, net of taxes
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 34,146 | 34,146 | |||||||||||||||||||||||||||
|
Net income for the year ended
|
||||||||||||||||||||||||||||||||||||
|
December 31, 2011
|
0 | 0 | 0 | 0 | 0 | 0 | 2,855,421 | 0 | 2,855,421 | |||||||||||||||||||||||||||
|
Balances at December 31, 2011
|
17,273,776 | 16,409,317 | 864,459 | $ | 6,509,267 | $ | 2,032,516 | $ | (7,606,974 | ) | $ | 34,431,296 | $ | (8,948 | ) | $ | 35,357,157 | |||||||||||||||||||
|
Redemption of stock
|
0 | (63,300 | ) | 63,300 | 0 | 0 | (580,708 | ) | 0 | 0 | (580,708 | ) | ||||||||||||||||||||||||
|
Other comprehensive income (loss):
|
||||||||||||||||||||||||||||||||||||
|
Unrealized gains on securities, net of taxes
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 62,539 | 62,539 | |||||||||||||||||||||||||||
|
Net income for the year ended
|
||||||||||||||||||||||||||||||||||||
|
December 31, 2012
|
0 | 0 | 0 | 0 | 0 | 0 | 5,619,798 | 0 | 5,619,798 | |||||||||||||||||||||||||||
|
Dividends ($.07) per share
|
0 | 0 | 0 | 0 | 0 | 0 | (1,146,317 | ) | 0 | (1,146,317 | ) | |||||||||||||||||||||||||
|
Balances at December 31, 2012
|
17,273,776 | 16,346,017 | 927,759 | $ | 6,509,267 | $ | 2,032,516 | $ | (8,187,682 | ) | $ | 38,904,777 | $ | 53,591 | $ | 39,312,469 | ||||||||||||||||||||
- 21 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
For the Years Ended December 31, 2012 and 2011
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net income
|
$ | 5,619,798 | $ | 2,855,421 | ||||
|
Adjustments to reconcile net income to net
|
||||||||
|
cash flows from operating activities:
|
||||||||
|
Depreciation and amortization
|
2,384,411 | 2,336,794 | ||||||
|
Loss (gain) on sale of investments, net
|
(71,286 | ) | 29,256 | |||||
|
Loss on disposition of equipment
|
11,169 | 20,135 | ||||||
|
Impairment of Investment
|
0 | 36,032 | ||||||
|
Deferred income taxes
|
(434,896 | ) | 68,217 | |||||
|
Bad Debt Expense
|
435,344 | 48,240 | ||||||
|
(Increase) decrease in operating assets:
|
||||||||
|
Accounts receivable
|
(1,213,253 | ) | (1,494,790 | ) | ||||
|
Other receivables
|
215,379 | (119,524 | ) | |||||
|
Inventories
|
(984,711 | ) | (969,101 | ) | ||||
|
Refundable income taxes
|
(43,512 | ) | 865,432 | |||||
|
Prepaid expenses and other current assets
|
(17,508 | ) | 78,685 | |||||
|
Increase (decrease) in operating liabilities:
|
||||||||
|
Accounts payable
|
(129,514 | ) | 202,758 | |||||
|
Accrued expenses
|
601,952 | 84,466 | ||||||
|
Income taxes payable
|
254,311 | 0 | ||||||
|
Net cash provided by operating activities
|
6,627,684 | 4,042,021 | ||||||
|
Cash flows from investing activities:
|
||||||||
|
Purchases of investments
|
(1,452,672 | ) | (2,434,340 | ) | ||||
|
Proceeds from sale of investments
|
1,475,730 | 1,810,816 | ||||||
|
Investments in certificates of deposits
|
(150,255 | ) | (50,000 | ) | ||||
|
Purchases of property and equipment
|
(1,428,717 | ) | (1,439,133 | ) | ||||
|
Net cash used in investing activities
|
(1,555,914 | ) | (2,112,657 | ) | ||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds of note payable
|
250,000 | 2,000,000 | ||||||
|
Checks written in excess of bank balances
|
(592,040 | ) | (749,170 | ) | ||||
|
Purchases of treasury stock
|
(580,708 | ) | (1,181,428 | ) | ||||
|
Dividends paid
|
(1,146,317 | ) | — | |||||
|
Repayment of notes payable
|
(1,831,626 | ) | (4,113,555 | ) | ||||
|
Net cash used in financing activities
|
(3,900,691 | ) | (4,044,153 | ) | ||||
|
Net (decrease) increase in cash and cash equivalents
|
1,171,079 | (2,114,789 | ) | |||||
|
Cash and cash equivalents at the beginning of the period
|
1,115,150 | 3,229,939 | ||||||
|
Cash and cash equivalents at the end of the period
|
$ | 2,286,226 | $ | 1,115,150 | ||||
- 22 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
Lifeway Foods, Inc. (the “Company” or “Lifeway”) commenced operations in February 1986 and incorporated under the laws of the state of Illinois on May 19, 1986. The Company’s principal business activity is the production of dairy products. Specifically, the Company produces Kefir, a drinkable product which is similar to but distinct from yogurt, in several flavors sold under the name “Lifeway’s Kefir;” a plain farmer’s cheese sold under the name “Lifeway’s Farmer’s Cheese;” a fruit sugar-flavored product similar in consistency to cream cheese sold under the name of “Sweet Kiss;” and a dairy beverage, similar to Kefir, with increased protein and calcium, sold under the name “Basics Plus.” The Company also produces a vegetable-based seasoning under the name “Golden Zesta.” The Company currently distributes its products throughout the Chicago Metropolitan area and various cities on the East Coast through local food stores. In addition, products are sold throughout the United States and Ontario, Canada by distributors. The Company also distributes some of its products to Eastern Europe.
A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows:
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Helios Nutrition, Ltd., Pride of Main Street, L.L.C., Starfruit, L.L.C., Fresh Made, Inc. and Starfruit Franchisor, L.L.C. All significant intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts, the valuation of investment securities, the valuation of goodwill, intangible assets, and deferred taxes.
Revenue Recognition
Sales of Company produced dairy products are recorded at the time of shipment and the following four criteria have been met: (i) The product has been shipped and the Company has no significant remaining obligations; (ii) Persuasive evidence of an agreement exists; (iii) The price to the buyer is fixed or determinable and (iv) Collection is probable. In addition, shipping costs invoiced to the customers are included in net sales and the related cost in cost of sales. Discounts and allowances are reported as a reduction of gross sales unless the allowance is attributable to an identifiable benefit separable from the purchase of the product, the value of which can be reasonably estimated, which would be charged to the appropriate expense account.
Customer Concentration
Sales are predominately to companies in the retail food industry, located within the United States of America. Two major customers accounted for approximately 31% percent and 29% percent of gross sales for the years ended December 31, 2012 and 2011, respectively. These customers accounted for approximately 30% percent and 20% percent of accounts receivable as of December 31, 2012 and December 31, 2011, respectively.
- 23 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
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.
Investments
All investment securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on available-for-sale securities are reported as a separate component of stockholders’ equity. Amortization, accretion, interest and dividends, realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are recorded in other income. All of the Company's securities are subject to a periodic impairment evaluation. This evaluation depends on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for possible recovery in the market value of the investment.
Accounts receivable
Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral. Balances expected to be paid beyond one year are classified as long-term.
Accounts receivable are recorded at invoice amounts, and reduced to their estimated net realizable value by recognition of an allowance for doubtful accounts and anticipated discounts. The Company’s estimate of the allowances for doubtful accounts and anticipated discounts are based upon historical experience, its evaluation of the current status and contract terms of specific receivables, and unusual circumstances, if any. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms. Accounts considered uncollectible are charged against the allowance.
Inventories
Inventories are stated at the lower of cost or market, cost being determined by the first-in, first-out method.
Property and equipment
Property and equipment is stated at depreciated cost or fair value where depreciated cost is not recoverable. Depreciation is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized.
Property and equipment is 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
|
- 24 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Intangible assets acquired in business combinations
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 identifiable intangible assets acquired. Goodwill is not amortized, but is reviewed for impairment at least annually. Brand assets represent the fair value of brands acquired. Brand assets have an indefinite life and therefore are not amortized, rather are reviewed periodically for impairment. The Company amortizes other intangible assets over their estimated useful lives, as disclosed in the table below.
The Company reviews intangible assets and their related useful lives at least once per year to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable. The Company conducts more frequent impairment assessments if certain conditions exist, including: a change in the competitive landscape, any internal decisions to pursue new or different strategies, a loss of a significant customer, or a significant change in the market place including changes in the prices paid for the Company’s products or changes in the size of the market for the Company’s products.
If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life.
Intangible assets are being amortized over the following useful lives:
|
Category
|
Years
|
|
|
Recipes
|
4
|
|
|
Customer lists and other
customer related intangibles
|
7-10
|
|
|
Lease agreement
|
7
|
|
|
Trade names
|
15
|
|
|
Formula
|
10
|
|
|
Customer relationships
|
12
|
Income taxes
Deferred income taxes are the result of temporary differences that arise 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 investments, capitalization of indirect costs for tax purposes, purchase price adjustments, and the recognition of an allowance for doubtful accounts for financial statement purposes.
The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal returns are the 2010 and 2011 tax years. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded.
- 25 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
Treasury stock
Treasury stock is recorded using the cost method.
Advertising and promotional costs
The Company expenses advertising costs as incurred. For the years ended December 31, 2012 and 2011 total advertising expenses were $2,679,798 and $3,156,096, respectively.
Earnings per common share
Earnings per common share were computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. For the years ended December 31, 2012 and 2011, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant.
Correction of Prior Year Amounts
Management has revised the consolidated statement of income and comprehensive income for the year ended December 31, 2011 to correct an immaterial error. During 2011, amounts related to production of inventory were not presented as part of cost of goods sold at December 31, 2011 and were erroneously included as general and administrative operating expenses in our previously issued financial statements. This revision resulted in a $1.285 million increase in cost of goods sold and a corresponding decrease in the general and administrative operating expenses.
Additionally, Management has restated the unaudited statements of income and comprehensive income for interim periods during the years ended December 31, 2012 and 2011 for similar errors in our presentation of cost of goods sold and general and administrative operating expenses. (see Note 14).
There was no impact on previously reported net income, consolidated balance sheets or consolidated statements of cash flows.
Intangible assets, and the related accumulated amortization, consist of the following:
|
December 31, 2012
|
December 31, 2011
|
|||||||||||||||
|
Cost
|
Accumulated Amortization
|
Cost
|
Accumulated Amortization
|
|||||||||||||
|
Recipes
|
$ | 43,600 | $ | 43,600 | $ | 43,600 | $ | 43,600 | ||||||||
|
Customer lists and other customer related intangibles
|
4,504,200 | 2,025,736 | 4,504,200 | 1,546,671 | ||||||||||||
|
Lease acquisition
|
87,200 | 87,200 | 87,200 | 87,200 | ||||||||||||
|
Customer relationship
|
985,000 | 526,701 | 985,000 | 444,618 | ||||||||||||
|
Trade names
|
2,248,000 | 878,469 | 2,248,000 | 728,601 | ||||||||||||
|
Formula
|
438,000 | 281,050 | 438,000 | 237,250 | ||||||||||||
| $ | 8,306,000 | $ | 3,842,756 | $ | 8,306,000 | $ | 3,087,940 | |||||||||
Amortization expense is expected to be approximately the following for the 12 months ending December 31:
|
2013
|
$ |
711,366
|
||
|
2014
|
711,366
|
|||
|
2015
|
711,367
|
|||
|
2016
|
693,117
|
|||
|
2017
|
667,566
|
|||
|
Thereafter
|
968,460
|
|||
| $ |
4,463,242
|
Amortization expense during the years ended December 31, 2012 and 2011 was $754,817 and $783,833, respectively.
- 26 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
The cost and fair value of investments classified as available for sale are as follows:
|
December 31, 2012
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Equities
|
$ | 639,974 | $ | 90,875 | $ | ( 5,190 | ) | $ | 725,659 | |||||||
|
Corporate Bonds
|
1,135,064 | 16,212 | ( 7,047 | ) | 1,144,229 | |||||||||||
|
Total
|
$ | 1,775,038 | $ | 107,087 | $ | ( 12,237 | ) | $ | 1,869,888 | |||||||
|
December 31, 2011
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Equities
|
$ | 682,569 | $ | 55,244 | $ | ( 23,211 | ) | $ | 714,602 | |||||||
|
Mutual Funds
|
64,563 | 3,275 | ( 713 | ) | 67,125 | |||||||||||
|
Preferred Securities
|
64,452 | 0 | ( 17,702 | ) | 46,750 | |||||||||||
|
Corporate Bonds
|
899,298 | 1,019 | ( 33,750 | ) | 866,567 | |||||||||||
|
Total
|
$ | 1,710,882 | $ | 59,538 | $ | ( 75,376 | ) | $ | 1,695,044 | |||||||
Proceeds from the sale of investments were $1,475,730 and $1,810,816 for the years ended December 31, 2012 and 2011, respectively.
Gross gains of $88,713 and $33,278 and gross losses of $17,427 and $62,534 were realized on these sales during the years ended December 31, 2012 and 2011 respectively.
The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2012 and 2011:
|
Less Than 12 Months
|
12 Months or Greater
|
Total
|
||||||||||||||||||||||
|
December 31, 2012
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
||||||||||||||||||
|
Equities
|
$ | 63,620 | $ | ( 3,745 | ) | $ | 21,910 | $ | ( 1,445 | ) | $ | 85,530 | $ | ( 5,190 | ) | |||||||||
|
Corporate Bonds
|
301,229 | ( 2,721 | ) | 193,930 | ( 4,326 | ) | 495,159 | ( 7,047 | ) | |||||||||||||||
| $ | 364,849 | $ | ( 6,466 | ) | $ | 215,840 | $ | ( 5,771 | ) | $ | 580,689 | $ | ( 12,237 | ) | ||||||||||
|
Less Than 12 Months
|
12 Months or Greater
|
Total
|
||||||||||||||||||||||
|
December 31, 2011
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
||||||||||||||||||
|
Equities
|
$ | 176,966 | $ | ( 23,211 | ) | $ | 0 | $ | 0 | $ | 176,966 | $ | ( 23,211 | ) | ||||||||||
|
Mutual Funds
|
0 | 0 | 10,585 | ( 713 | ) | 10,585 | ( 713 | ) | ||||||||||||||||
|
Preferred Securities
|
0 | 0 | 46,750 | ( 17,702 | ) | 46,750 | ( 17,702 | ) | ||||||||||||||||
|
Corporate Bonds
|
626,292 | ( 24,000 | ) | 90,250 | ( 9,750 | ) | 716,542 | ( 33,750 | ) | |||||||||||||||
| $ | 803,258 | $ | ( 47,211 | ) | $ | 147,585 | $ | ( 28,165 | ) | $ | 950,843 | $ | ( 75,376 | ) | ||||||||||
- 27 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
Equities, Mutual Funds, Preferred Securities, and Corporate Bonds -
The Company's investments in equity securities, mutual funds, preferred securities, and corporate bonds consist of investments in common stock, preferred stock and debt securities of companies in various industries. As of December 31, 2012, there were two equity securities, one option on equity securities, and four corporate bond securities that had unrealized losses. The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Based on that evaluation and the Company's ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company did not consider any material investments to be other-than-temporarily impaired at December 31, 2012.
Inventories consist of the following:
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
Finished goods
|
$ | 2,462,548 | $ | 1,976,050 | ||||
|
Production supplies
|
2,599,668 | 2,042,611 | ||||||
|
Raw materials
|
876,970 | 935,814 | ||||||
|
Total inventories
|
$ | 5,939,186 | $ | 4,954,475 | ||||
Property and equipment consist of the following:
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
Land
|
$ | 1,178,160 | $ | 1,178,160 | ||||
|
Buildings and improvements
|
11,904,919 | 11,633,077 | ||||||
|
Machinery and equipment
|
15,185,204 | 14,697,024 | ||||||
|
Vehicles
|
1,346,078 | 1,334,628 | ||||||
|
Office equipment
|
411,773 | 383,099 | ||||||
|
Construction in process
|
612,468 | 17,410 | ||||||
| 30,638,602 | 29,243,398 | |||||||
|
Less accumulated depreciation
|
15,651,826 | 14,044,576 | ||||||
|
Total property and equipment
|
$ | 14,986,776 | $ | 15,198,822 | ||||
Depreciation expense during the years ended December 31, 2012 and 2011 was $1,629,594 and $1,552,961, respectively.
Accrued expenses consist of the following:
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
Accrued payroll and payroll taxes
|
$ | 356,280 | $ | 209,395 | ||||
|
Accrued property tax
|
302,573 | 323,885 | ||||||
|
Other
|
496,824 | 20,445 | ||||||
| $ | 1,155,677 | $ | 553,725 | |||||
- 28 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
Notes payable consist of the following:
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
Note payable to Private Bank in monthly installments of $42,222, plus variable interest rate, currently at 2.709%, with a balloon payment for the remaining balance due February 6, 2014. Collateralized by substantially all assets of the Company.
|
$ | 5,365,556 | $ | 5,914,445 | ||||
|
Line of credit with Private Bank at variable interest rate, currently at 3.25%. The agreement has been extended with terms allowing borrowings up to $2.0 million, maturing on May 31, 2013. Collateralized by substantially all assets of the Company.
|
0 | 1,000,000 | ||||||
|
Notes payable to Ford Credit Corp. payable in monthly installments of $1,778.23 at 5.99%, due July 2015, secured by transportation equipment.
|
50,871 | 68,509 | ||||||
|
Note payable to Fletcher Jones of Chicago, Ltd LLC in monthly installments of $1,768.57 at 6.653%, due May 24, 2017, secured by transportation equipment.
|
82,499 | 97,598 | ||||||
|
Total notes payable
|
5,498,926 | 7,080,552 | ||||||
|
Less current maturities
|
542,981 | 1,540,716 | ||||||
|
Total long-term portion
|
$ | 4,955,945 | $ | 5,539,836 | ||||
In accordance with the Private Bank agreements referenced above, the Company is subject to minimum fixed charged ratio and tangible net worth thresholds.
Maturities of notes payables are as follows:
|
For the Period Ended December 31,
|
||||
|
2013
|
$ | 542,981 | ||
|
2014
|
4,896,199 | |||
|
2015
|
30,787 | |||
|
2016
|
19,875 | |||
|
2017
|
9,084 | |||
|
Total
|
$ | 5,498,926 | ||
- 29 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
The Company leases four stores for its Starfruit subsidiary. Total expense for these leases was approximately $379,348 and $240,723 for the years ended December 31, 2012 and 2011, respectively. The Company is also responsible for additional rent equal to real estate taxes and other operating expenses. Future annual minimum base rental payments for the leases as of December 31, 2012 are approximately as follows:
|
2013
|
$ | 147,318 | ||
|
2014
|
69,106 | |||
|
2015
|
45,461 | |||
|
2016
|
46,825 | |||
|
2017
|
48,229 | |||
|
Thereafter
|
49,676 | |||
|
Total
|
$ | 406,615 | ||
The provision for income taxes consists of the following:
|
For the Years Ended
|
||||||||
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
Current:
|
||||||||
|
Federal
|
$ | 2,757,332 | $ | 1,059,336 | ||||
|
State and local
|
882,640 | 850,284 | ||||||
|
Total current
|
3,639,972 | 1,909,620 | ||||||
|
Deferred
|
( 434,896 | ) | 68,217 | |||||
|
Provision for income taxes
|
$ | 3,205,076 | $ | 1,977,837 | ||||
A reconciliation of the provision for income taxes and the income tax computed at the statutory rate is as follows:
|
For the Years Ended
|
||||||||||||||||
|
December 31,
|
||||||||||||||||
|
2012
|
2011
|
|||||||||||||||
|
Amount
|
Percentage
|
Amount
|
Percentage
|
|||||||||||||
|
Federal income tax expense
computed at the statutory rate
|
$ | 3,000,457 | 34.0 | % | $ | 1,643,308 | 34.0 | % | ||||||||
|
State and local tax expense, net
|
838,363 | 9.5 | % | 561,187 | 11.6 | % | ||||||||||
|
U.S. domestic manufacturers’ deduction
& other permanent differences
|
( 427,525 | ) | (4.9 | )% | (122,837 | ) | (2.5 | )% | ||||||||
|
Change in tax estimate
|
( 206,219 | ) | (2.2 | )% | (103,821 | ) | (2.2 | )% | ||||||||
|
Provision for income taxes
|
$ | 3,205,076 | 36.4 | % | $ | 1,977,837 | 40.9 | % | ||||||||
- 30 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
Amounts for deferred tax assets and liabilities are as follows:
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
Non-current deferred tax assets (liabilities)
arising from:
Temporary differences -
|
||||||||
|
Accumulated depreciation and amortization
|
||||||||
|
from purchase accounting adjustments
|
$ | ( 3,164,716 | ) | $ | ( 3,671,285 | ) | ||
|
Capital loss carry-forwards
|
136,198 | 167,690 | ||||||
|
Total non-current net deferred tax liabilities
|
( 3,028,518 | ) | ( 3,503,595 | ) | ||||
|
Current deferred tax assets arising from:
|
||||||||
|
Unrealized losses (gain) on investments
|
( 41,260 | ) | 6,890 | |||||
|
Impairment of investments
|
0 | 15,673 | ||||||
|
Inventory
|
265,072 | 220,408 | ||||||
|
Allowance for doubtful accounts and discounts
|
10,875 | 4,350 | ||||||
|
Capital loss carry-back
|
0 | 91,369 | ||||||
|
Total current deferred tax assets
|
234,687 | 338,690 | ||||||
|
Net deferred tax liability
|
$ | ( 2,793,831 | ) | $ | ( 3,164,905 | ) | ||
Cash paid for interest and income taxes are as follows:
|
For the Years Ended
|
||||||||
|
December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
Interest
|
$ | 191,277 | $ | 232,429 | ||||
|
Income taxes
|
$ | 3,413,687 | $ | 1,169,334 | ||||
The Company has a registration statement filed with the Securities and Exchange Commission in connection with a Consulting Service Compensation Plan covering up to 1,200,000 of the Company’s common stock shares. Pursuant to such Plan, the Company may issue common stock or options to purchase common stock to certain consultants, service providers, and employees of the Company. The option price, number of shares, grant date, and vesting terms are determined at the discretion of the Company’s Board of Directors.
As of December 31, 2012 and 2011, there were no stock options outstanding or exercisable. There were approximately 940,000 shares available for issuance under the Plan at December 31, 2012.
- 31 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification
(“ASC”) 820,
Fair Value Measurements
and Disclosures
, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described as follows:
Level 1.
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2.
Inputs to the valuation methodology include the following:
| ● |
Quoted prices for similar assets or liabilities in active markets;
|
|
●
|
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
●
|
Inputs other than quoted prices that are observable for the asset or liability;
|
|
●
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3.
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used as of December 31, 2012 and 2011.
The majority of the Company’s short-term investments are classified within Level 1 or Level 2 of the fair value hierarchy. The Company’s valuation of its Level 1 investments, which include mutual funds, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include certificates of deposits, is based on other observable inputs, specifically a valuation model which utilized vendor pricing for similar securities.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
- 32 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
The following table sets forth by level, within the fair value hierarchy, the Company’s financial assets at fair value as of December 31, 2012 and 2011. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
|
Assets and Liabilities at Fair Value as of December 31, 2012
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Cash
|
$ | 2,286,226 | $ | 0 | $ | 0 | $ | 2,286,226 | ||||||||
|
Certificate of Deposits
|
0 | 439,982 | 0 | 439,982 | ||||||||||||
|
Stocks
|
725,670 | 0 | 0 | 725,670 | ||||||||||||
|
Corporate Bonds
|
0 | 1,144,229 | 0 | 1,144,229 | ||||||||||||
|
Notes Payable
|
0 | 5,498,926 | 0 | 5,498,926 | ||||||||||||
|
Assets and Liabilities at Fair Value as of December 31, 2011
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Cash
|
$ | 1,115,150 | $ | 0 | $ | 0 | $ | 1,115,150 | ||||||||
|
Mutual Funds:
|
||||||||||||||||
|
Equity Income
|
64,075 | 0 | 0 | 64,075 | ||||||||||||
|
Bonds
|
3,050 | 0 | 0 | 3,050 | ||||||||||||
|
Certificate of Deposits
|
0 | 277,363 | 0 | 277,363 | ||||||||||||
|
Stocks
|
714,602 | 0 | 0 | 714,602 | ||||||||||||
|
Preferred Stock
|
46,750 | 0 | 0 | 46,750 | ||||||||||||
|
Corporate Bonds
|
0 | 866,566 | 0 | 866,566 | ||||||||||||
|
Notes Payable
|
0 | 7,080,552 | 0 | 7,080,552 | ||||||||||||
The Company’s financial assets and liabilities also include accounts receivable, other receivables and, accounts payable for which carrying value approximates fair value. All such assets are valued using level 2 inputs.
- 33 -
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
Management concluded that the consolidated statements of income for the year-to-date periods ended March 31, 2012, June 30, 2012 and September 30, 2012, including comparatively presented periods, that were previously included in our Quarterly Reports on Forms 10-Q filed in 2012 should be restated as a result of erroneous presentation of production activity within general and administrative operating expenses.
These restatements result in increases in cost of goods sold and corresponding decreases in general and administrative operating expenses. These restatements had no impact on our previously reported net income, condensed consolidated balance sheets or consolidated statements of cash flows.
As detailed in the tables below, these restatements impact the following consolidated statement of income line items:
|
(Unaudited)
Three Months Ended
March 31, 2012
|
(Unaudited)
Six Months Ended
June 30, 2012
|
(Unaudited)
Nine Months Ended
September 30, 2012
|
||||||||||||||||||||||||||||||||||
|
As Previously Reported
|
Adjustment
|
As Restated
|
As Previously Reported
|
Adjustment
|
As Restated
|
As Previously Reported
|
Adjustment
|
As Restated
|
||||||||||||||||||||||||||||
|
Income Statement
|
||||||||||||||||||||||||||||||||||||
|
Net Sales
|
$ | 19,397,197 | $ | — | $ | 19,397,197 | $ | 39,950,578 | $ | — | $ | 39,950,578 | $ | 60,570,311 | $ | — | $ | 60,570,311 | ||||||||||||||||||
|
COGS
|
$ | 12,637,386 | $ | 668,381 | $ | 13,305,767 | $ | 25,153,336 | $ | 1,088,149 | $ | 26,241,485 | $ | 38,299,212 | $ | 1,692,406 | $ | 39,991,618 | ||||||||||||||||||
|
Gross Profit
|
$ | 6,759,811 | $ | (668,381 | ) | $ | 6,091,430 | $ | 14,797,242 | $ | (1,088,149 | ) | $ | 13,709,093 | $ | 22,271,099 | $ | (1,692,406 | ) | $ | 20,578,693 | |||||||||||||||
|
Operating Expenses
|
$ | 4,887,281 | $ | (668,381 | ) | $ | 4,218,900 | $ | 9,797,959 | $ | (1,088,149 | ) | $ | 8,709,810 | $ | 15,194,607 | $ | (1,692,406 | ) | $ | 13,502,201 | |||||||||||||||
|
Income from Operations
|
$ | 1,872,530 | $ | — | $ | 1,872,530 | $ | 4,999,283 | $ | — | $ | 4,999,283 | $ | 7,076,492 | $ | — | $ | 7,076,492 | ||||||||||||||||||
|
(Unaudited)
Three Months Ended
March 31, 2011
|
(Unaudited)
Six Months Ended
June 30, 2011
|
(Unaudited)
Nine Months Ended
September 30, 2011
|
||||||||||||||||||||||||||||||||||
|
As Previously Reported
|
Adjustment
|
As Restated
|
As Previously Reported
|
Adjustment
|
As Restated
|
As Previously Reported
|
Adjustment
|
As Restated
|
||||||||||||||||||||||||||||
|
Income Statement
|
||||||||||||||||||||||||||||||||||||
|
Net Sales
|
$ | 17,303,903 | $ | — | $ | 17,303,903 | $ | 35,501,821 | $ | — | $ | 35,501,821 | $ | 53,203,425 | $ | — | $ | 53,203,425 | ||||||||||||||||||
|
COGS
|
$ | 9,722,230 | $ | 532,856 | $ | 10,255,086 | $ | 22,478,463 | $ | 990,620 | $ | 23,469,083 | $ | 34,047,699 | $ | 1,581,339 | $ | 35,629,038 | ||||||||||||||||||
|
Gross Profit
|
$ | 7,581,673 | $ | (532,856 | ) | $ | 7,048,817 | $ | 13,023,358 | $ | (990,620 | ) | $ | 12,032,738 | $ | 19,155,726 | $ | (1,581,339 | ) | $ | 17,574,387 | |||||||||||||||
|
Operating Expenses
|
$ | 4,316,051 | $ | (532,856 | ) | $ | 3,783,195 | $ | 9,057,522 | $ | (990,620 | ) | $ | 8,066,902 | $ | 13,622,185 | $ | (1,581,339 | ) | $ | 12,040,846 | |||||||||||||||
|
Income from Operations
|
$ | 3,265,622 | $ | — | $ | 3,265,622 | $ | 3,965,836 | $ | — | $ | 3,965,836 | $ | 5,533,541 | $ | — | $ | 5,533,541 | ||||||||||||||||||
The Company is named a party to lawsuits in the normal course of business. In the opinion of management, the resolution of these lawsuits will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
In September 2011 the FASB issued ASC Topic 350, Intangibles – Goodwill and Other. FASB ASC Topic 250 amends the existing standards related to annual and interim goodwill impairment tests by allowing companies to consider qualitative factors to determine whether it is more likely or not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendment is effective for interim periods and fiscal years beginning after December 15, 2011; however, early adoption was permitted. The adoption of this new accounting guidance did not have a material effect on the Company’s financial statements or results of operations.
In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 became effective for the Company on January 1, 2012. Management adopted this statement effective January 1, 2012.
- 34 -
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|
None.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2012 in ensuring that information required to be disclosed by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the Exchange Act rules and forms due to the material weakness described below. As a result, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes the consolidated financial statements included in this Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is identified in Exchange Act Rules 13a-15(f). Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial and accounting officer, and effected by the Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our control over financial reporting includes those policies and procedures that:
|
●
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
|
|
●
|
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures of the company are being made only in accordance with authorizations of our management and our directors; and
|
|
●
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
|
Internal control over financial reporting has inherent limitations which may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the level of compliance with related policies or procedures may deteriorate.
Management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2012. In making the assessment, management used the framework in “Internal Control –Integrated Framework” promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on that assessment, our principal executive officer and principal financial and accounting officer concluded that our internal control over financial reporting was not effective as of December 31, 2012 because a material weakness existed in our internal control over financial reporting related to the classification of certain costs and expenses. Specifically, the Company and its auditors determined during the audit of our financial statements that certain post-closing adjustments were required with respect to our classification of certain direct manufacturing costs from general and administrative to cost of goods sold, primarily consisting of utilities, wage related expenses and overhead.
- 35 -
As a result, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes the consolidated financial statements included in this Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Remediation of Material Weakness
In light of the material weakness described above, we are taking steps to remediate our material weakness. Management enhanced the review process by improving real time general ledger monitoring and wage detail in the financial statement functionality of our accounting software, allowing for improved internal review of the source information which goes in to the completion of the financial statements. More specifically, management has focused on improving specific coding of direct expenses as compared to general and administrative expenses.
Management is committed to continuous improvement of the Company’s internal control processes. Under the direction of the Audit Committee, management will continue to review and make changes it deems necessary to the overall design of the Company’s internal control over financial reporting, including implementing further improvements in policies and procedures and taking additional measures to address any control deficiencies.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
- 36 -
DIRECTORS AND EXECUTIVE OFFICERS.
LUDMILA SMOLYANSKY, 62, was appointed as a Director by the Board to fill a vacancy created by an increase of the maximum number of Directors up to seven and unanimously elected as the Chairperson of the Board in November 2002. For more than 20 years, Mrs. Smolyansky has been the operator of several independent delicatessen, gourmet food distributorship businesses and imported food distributorships. In 2002, prior to the commencement of her tenure as a Director, she was hired by the Company as its General Manager. Mrs. Smolyansky devotes as much time as necessary to the business of the Company and currently holds no other directorships in any other reporting company. Mrs. Smolyansky is the mother of Julie Smolyansky (the President, Chief Executive Officer, and a Director of the Company) and Edward P. Smolyansky (the Chief Operating Officer, Treasurer, Chief Financial and Accounting Officer and Secretary of the Company). Mrs. Smolyansky brings many years of food industry experience to the Board.
JULIE SMOLYANSKY, 37, was appointed as a Director, and elected President, CEO, CFO and Treasurer of the Company by the Board of Directors to fill the vacancies in those positions created by the death of her father, Michael Smolyansky, in June 2002. She is a graduate with a Bachelor’s degree from the University of Illinois at Chicago. Prior to her appointment, Ms. Smolyansky spent six years as the Company’s Director of Sales and Marketing. She devotes as much time as necessary to the business of the Company and currently holds no other directorships in any other reporting company. Ms. Smolyansky is the daughter of Ludmila Smolyansky, the Chairperson of the Board. In 2004, Ms. Smolyansky resigned as CFO and Treasurer and Edward Smolyansky, Ms. Smolyansky’s brother, was appointed to such positions. Ms. Smolyansky brings historical and operational expertise and experience to the Board.
POL SIKAR, 64, has been a Director of the Company since its inception in February 1986. He is a graduate with a Master’s degree from the Odessa State Institute of Civil Engineering in Russia. For more than 13 years, he has been President and a major shareholder of Montrose Glass & Mirror Co., a company providing glass and mirror products to the wholesale and retail trade in the greater Chicago area. Mr. Sikar devotes as much time as necessary to the business of the Company. Mr. Sikar holds no other directorships in any other reporting company. Mr. Sikar has been a Director since inception and brings a histroical perspective to the Board.
RENZO BERNARDI, 60, has been a Director of the Company since 1994. Mr. Bernardi is the president and founder of Renzo & Sons, Inc., a Dairy and Food Service Company which has been in business since 1969 (formerly, Renzo-Milk Distribution Systems). He has over 30 years of experience in the dairy distribution industry. Mr. Bernardi is a graduate of Instituto Teonico E Commerciale of Macomer, Sardinia. Mr. Bernardi devotes as much time as necessary to the business of the Company. Mr. Bernardi holds no other directorships in any other reporting company. Mr. Bernardi brings deep industry experience to the Board.
GUSTAVO CARLOS VALLE, 48, has been a Director of the Company since June 19, 2009. He is an Argentine citizen and was appointed President and CEO of the Dannon Company, Inc. effective April 1, 2009. Mr. Valle joined Danone Argentina in 1996 as Vice President Finance where he became CEO of Danone Waters Argentina in 2002. Two years later, he was appointed CEO of Danone Brazil. Mr. Valle graduated in Economics from Buenos Aires University in Argentina. Mr. Valle holds no other directorships in any other reporting company. Mr. Valle has been designated by DS Waters, L.P. (as the related successor to The Dannon Company, Inc.) to be its representative to the Board in accordance with the terms of that certain Stockholder’s Agreement, as amended, between the Company and Dannon. Mr. Valle brings deep industry experience to the Board.
PAUL LEE, 38, was elected as a Director of the Company to fill a vacancy on the Board of Directors created by the resignation of Eugene Katz in July 2012. Mr. Lee joined Lightbank Inc. as a Partner in February 2011. Previously, Mr. Lee was Managing Director and Group Head for Digital Ventures at Playboy Enterprises, and was a founding member and Senior Vice President at the Peacock Equity Fund. Mr. Lee brings financial and strategic experience to the Company’s Board of Directors.
JASON SCHER, 38, was elected as a Director of the Company to fill a vacancy on the Board of Directors in July 2012. Mr. Scher is the Chief Operating Officer of Vosges Haut-Chocolat. Mr Scher previously served as principal in Khoury Construction and RP3 Development. His strong leadership has been instrumental in laying a foundation for an entrepreneurial growing business. Mr. Scher also brings financial and strategic experience to the Company's Board of Directors.
- 37 -
EDWARD P. SMOLYANSKY, 33, was appointed as Chief Financial and Accounting Officer and Treasurer of Lifeway in November 2004. He was also appointed Chief Operating Officer and Secretary in 2012. He had served as the Controller of the Company from June 2002 until such time. He received his baccalaureate degree in finance from Loyola University of Chicago in December 2001. Edward P. Smolyansky is the brother of Company President and CEO Julie Smolyansky and the son of Lifeway’s Chairperson of the Board, Ludmila Smolyansky.
KEY EMPLOYEES.
VALERIY NIKOLENKO, 67, Vice President of Operations, has been VP of Operations for 16 years with Lifeway.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the Company’s Officers and Directors, and persons who own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Based on the Company’s review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that none of its directors, executive officers or persons who beneficially own more than 10% of the Company’s Common Stock failed to comply with Section 16(a) reporting requirements in fiscal year ended December 31, 2012, except for Ms. Julie Smolyansky who failed to timely file one Form 4 regarding six transactions, and each of Messrs. Paul Lee and Jason Scher, each of whom failed to timely file a Form 3.
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, Treasurer, Chief Operating Officer and Secretary of Lifeway is the son of Ludmila Smolyansky and the brother of Julie Smolyansky.
CODE OF ETHICS
The Company has adopted a Code of Ethics applicable to all Officers which is included in this report as an exhibit hereto. Any person may, without charge, request a copy of such Code of Ethics by contacting the Company at (847) 967-1010 or by email at
info@lifeway.net
.
CORPORATE GOVERNANCE
The Board does not have any formal policy regarding the consideration of director candidates recommended by shareholders; any recommendation would be considered on an individual basis. The Board believes this is appropriate due to the lack of such recommendations made in the past, and its ability to consider the establishment of such a policy in the event of an increase of such recommendations. Accordingly, there have been no material changes to the procedure by which any security holder may recommend nominees to the Board.
The Company’s Audit Committee consists of Mr. Sikar, Mr. Bernardi and Mr. Lee, each of whom has an understanding of finance and accounting and is able to read and understand fundamental financial statements. Audit Committee members are appointed by the full Board. The functions of the Audit Committee are to review the Company’s internal controls, accounting policies and financial reporting practices; to review the financial statements, the arrangements for and scope of the independent audit, as well as the results of the audit engagement; to review the services and fees of the independent auditors, including pre-approval of non-audit services and the auditors’ independence; and to recommend to the Board of Directors for its approval and for ratification by the shareholders the engagement of the independent auditors to serve the following year in examining the accounts of the Company. Board of Directors has examined the qualifications of Mr. Lee and determined Mr. Lee to be an “audit committee financial expert,” as defined in Item 407(d)(5)(ii) of Regulation S-K promulgated by the SEC.
- 38 -
Summary Compensation Table as of December 31, 2011 and December 31, 2012
|
Name
|
Year
|
Salary
|
Bonus
|
All other Comp.
|
Total
|
|
Julie Smolyansky, CEO and President(1)
|
2012
|
$890,903
|
$125,000
|
$14,280
|
$1,030,183
|
|
2011
|
$585,874
|
$ 75,000
|
$27,126
|
$ 688,000
|
|
|
(5)
|
|||||
|
Edward P. Smolyansky,
|
2012
|
$928,403
|
$150,000
|
$31,280
|
$1,109,683
|
|
CFO, Chief Accounting Officer, Treasurer, Chief
|
2011
|
$571,318
|
$100,000
|
$29,832
|
$ 701,150
|
|
Operating Officer and Secretary (2)
|
(6)
|
||||
|
Valeriy Nikolenko, Vice President of Operations
|
2012
|
$153,800
|
$ 60,000
|
$29,210
|
$ 243,010
|
|
and Secretary (4)(8)
|
2011
|
$ 91,800
|
$ 40,000
|
$18,500
|
$ 150,300
|
|
(7)
|
|||||
NOTES TO SUMMARY COMPENSATION TABLE
|
(1)
|
The Board appointed Julie Smolyansky as the CEO, CFO, President and Treasurer of the Company on June 10, 2002. From September 21, 1998 until such appointments, she had been Director of Sales and Marketing of the Company. Since November 2004, Ms. Smolyansky has served solely as CEO and President.
|
|
(2)
|
The Board appointed Edward Smolyansky as the CFO, Chief Accounting Officer and Treasurer of the Company in November 2004.
|
|
(3)
|
The Company approves, on an annual basis, the payment to Ludmila Smolyansky of salary and bonus as other compensation for continuing advisory services to the Company and in light of her extensive experience. Ludmila Smolyansky devotes as much time as necessary to the business of the Company.
|
|
(4)
|
The Board appointed Valeriy Nikolenko as the Vice President of Operations and Secretary of the Company in December 1993.
|
|
(5)
|
Represents (i) the Company’s portion of the matching contributions to the Company’s 401(k) plan on behalf of the following named executive officer, Julie Smolyansky: $0.00 for 2012; and (ii) the following amounts related to personal usage of automobiles leased by the Company, and related insurance and fuel, for 2012: $8,400 for of lease payments, $4,740 for insurance premiums and $1,140 for fuel.
|
|
(6)
|
Represents (i) the Company’s portion of the matching contributions to the Company’s 401(k) plan on behalf of the following named executive officer, Edward Smolyansky: $17,000 for 2012; and (ii) the following amounts related to personal usage of automobiles leased by the Company, and related insurance and fuel, for 2012: $8,400 for lease payments, $4,740 for insurance premiums and $1,140 for fuel.
|
|
(7)
|
Represents (i) the Company’s portion of the matching contributions to the Company’s 401(k) plan on behalf of the following named executive officer, Val Nikolenko: $18,500 for 2012; and (ii) the following amounts related to personal usage of automobiles leased by the Company, and related insurance and fuel, for 2012: $7,290 for lease payments, $2,570 for insurance premiums and $900 for fuel.
|
The Company does not maintain any formal bonus or cash incentive plans or arrangements. However, the Board determines bonus awards, if any, on an annual basis.
Julie Smolyansky has an employment agreement (the “Employment Agreement”) with the Company pursuant to which she serves as Chief Executive Officer. Pursuant to the Employment Agreement, Ms. Smolyansky is entitled to an annual base salary and an annual bonus subject to such incentive bonus targets and plans which the Company may adopt from time to time. The Company has not currently set any such targets in advance or adopted any such plans. In lieu thereof, the Board of Directors determines Ms. Smolyansky’s salary and a discretionary bonus on an annual basis concurrently with determining amounts for other executive officers. In the event that (a) Ms. Smolyansky is terminated other than for Cause (as defined therein) or (b) Ms. Smolyansky terminates her employment for Good Reason (as defined therein) or death, then Ms. Smolyansky is entitled to a lump sum payment consisting of (y) twice her then-current base salary and (z) the aggregate of the annual bonus for which she is then eligible under the Employment Agreement and any plans.
- 39 -
There are no employment agreements with other executive officers (written or unwritten).
On June 9, 1995, the Company filed a registration statement on Form S-8 with the Securities and Exchange Commission in connection with the “Lifeway Foods, Inc. Consulting and Services Compensation Plan” (the “Plan”) covering 1,200,000, as adjusted, shares of its Common Stock. The Plan was adopted by the Company on June 5, 1995. 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 a total of approximately 940,000 shares eligible for issuance under the Plan at December 31, 2012. The option price, number of shares, grant date, and vesting terms of awards granted under the Plan are determined at the discretion of the Company’s Board of Directors.
Outstanding Equity Awards At December 31, 2012
As of December 31, 2012, there were no stock options outstanding or exercisable and no unvested stock awards.
There are no agreements with the named executive officers that provide for payments in connection with resignation, retirement, termination of employment or change in control other than the Employment Agreement described above.
Director Compensation as of December 31, 2012
|
Name
|
Fees Earned or
Paid in Cash
|
All Other
Compensation
|
Total
|
|||||||||
|
Ludmila Smolyansky
|
$ | 591,626 | $ | 13,052 | (1) | $ | 604,678 | (2) | ||||
|
Pol Sikar
|
$ | 2,000 | — | $ | 2,000 | |||||||
|
Renzo Bernardi
|
$ | 2,000 | — | $ | 2,000 | |||||||
|
Gustavo Carlos Valle
|
— | — | — | |||||||||
|
Eugene Katz
|
$ | 1,000 | — | $ | 1,000 | |||||||
|
Paul Lee
|
$ | 500 | — | $ | 500 | |||||||
|
Jason Sher
|
— | — | — | |||||||||
|
(1)
|
Of the Fees Paid in Cash, $591,626 represents the annual fees paid to Ms. Smolyansky for her services as a consultant to the Company. Ms. Smolyansky did not receive any additional retainer fees or other meeting attendance fees in her capacity as a director.
|
|
(2)
|
Represents (i) the Company’s portion of the matching contributions to the Company’s 401(k) plan on behalf of Ludmila Smolyansky: $11,332 for 2012; and (ii) $0.00 for insurance premiums and $1,720 for fuel.
|
During 2012, each outside (non-employee) director other than Ms. Ludmila Smolyansky was compensated at the rate of $500 per non-annual meeting attended. No employee director (Julie Smolyansky) nor any Director serving as the nominee of Danone (Gustavo Carlos Valle) was compensated as a Director during 2012.
The following table sets forth certain information known to the Company regarding the beneficial ownership of the Company’s Common Stock, the Company’s only outstanding class of securities, as of March 9, 2013 by (a) each shareholder known by the Company to be the beneficial owner of more than five percent of the Company’s Common Stock, (b) each of the Company’s directors, (c) each of the Company’s executive officers named in the Summary Compensation Table above and (d) all executive officers and directors of the Company as a group. The shareholders listed below have sole voting and investment power except as noted.
- 40 -
|
Name and Address of Beneficial Owner(1)
|
Amount and Nature of Beneficial Ownership
|
Percent
of Class(2)
|
|
Ludmila Smolyansky(3,6)
|
7,410,484
|
45.3%
|
|
Julie Smolyansky(3,7)
|
548,265
|
3.4%
|
|
Edward Smolyansky(3)
|
307,546
|
1.9%
|
|
Pol Sikar(3)
|
3,000
|
*
|
|
Renzo Bernardi(3)
|
14,900
|
*
|
|
Gustavo Carlos Valle (3,4)
|
0
|
*
|
|
Paul Lee(3)
|
0
|
*
|
|
Jason Scher(3)
|
0
|
*
|
|
Val Nikolenko
|
0
|
*
|
|
All Directors and Officers of the Company as a Group
(Seven persons in total)
|
8,284,195
|
50.7%
|
|
Danone Foods, Inc.
|
3,454,756
|
21.1%
|
|
Mario J. Gabelli(5)
|
831,805
|
5.1%
|
| _________________ | ||
|
*Less than .01%.
|
||
NOTES TO BENEFICIAL OWNERSHIP TABLE
|
(1)
|
With the exception of Gustavo Carlos Valle and Danone Foods, Inc., the address for all Directors and shareholders listed in this table is 6431 Oakton St., Morton Grove, IL 60053. The address of Gustavo Carlos Valle and Danone Foods, Inc. is 100 Hillside Avenue, White Plains, NY 10603-2861.
|
|
(2)
|
Based upon 16,346,017 shares of Common Stock outstanding as of March 9, 2013.
|
|
(3)
|
A director or officer of the Company.
|
|
(4)
|
Mr. Valle is also an officer of the Dannon Company, Inc., which is an affiliate of Danone Foods, Inc.
|
|
(5)
|
Mr. Gabelli directly or indirectly controls or acts as the chief investment officer of Gabelli funds, LLC, GAMCO Asset
Management, Inc. and Teton Advisors, Inc. The 831,805 shares of the Company's common stock that Mr. Gabelli may be deemed to beneficially own, include (i) 5,500 shares held directly by Mr. Gabelli, (ii) 326 shares held by Gabelli Funds, LLC, (iii) 286,305 shares held by GAMCO Asset Management, Inc., and (iv) 213,000 shares held by Teton Advisors, Inc.
|
|
(6)
|
Includes 7,410,484 shares held by the Ludmila Smolyansky Trust 2/1/05, of which Ms. Smolyansky is the trustee.
|
|
(7)
|
Includes 5,000 shares held by Ms. Smolyansky on behalf of minor children.
|
Equity Compensation Plan Information
|
Plan category
|
(a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
(b)
Weighted-average exercise
price of outstanding options,
warrants and rights
|
(c)
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities reflected
in column (a))
|
|
Equity compensation plans approved by
|
|||
|
security holders
|
0
|
$0
|
940,000
|
|
Equity compensation plans not approved by security holders
|
0
|
$0
|
—
|
|
Total
|
0
|
$0
|
—
|
*All of Lifeway’s equity compensation plans have been approved by its shareholders. The only Securities remaining available for issuance are under the Plan the terms of which are described in the narratives following the Summary Compensation Table above.
- 41 -
Related Transactions
We have determined that there are no related party transactions in excess of the lesser $120,000 or 1% of the average of the Company’s total assets for each of 2011 and 2012, since the beginning of 2010 or currently proposed, involving the Company.
Director Independence
In evaluating director independence, the Company has adopted the definition set forth in Rule 4200 of the NASDAQ Marketplace Rules. The Company’s board of directors, taking into consideration the relationships described in the Certain Relationships and Related Transactions section above, has determined that of the Company’s current directors, Pol Sikar, Renzo Bernardi, Paul Lee and Jason Scher were independent of management.
The Board of Directors does not have a standing nominating committee, compensation committee or any committees performing similar functions. As there are only seven Directors serving on the Board, it is the view of the Board that a majority of the Directors should participate in the process for the nomination and review of potential Director candidates and for the review of the Company’s executive pay practices. Accordingly, Julie Smolyansky and Ludmila Smolyansky, who are not considered independent, participate in the nominating process, in the review of executive employment contracts entered into during their tenure as directors and Julie Smolyansky and Ludmila Smolyansky, who are not considered independent, in review of the Company’s executive compensation practices, together with the independent directors.
AUDIT FEES
In 2012 and 2011, Plante & Moran, PLLC, billed Lifeway approximately $324,081 and $247,711, respectively, for professional services rendered for the audit of Lifeway’s annual financial statements and review of financial statements included in Lifeway’s Forms 10-Q or services that are normally provided in connection with statutory and regulatory filings or engagements in 2011 and 2012.
AUDIT-RELATED FEES
None.
TAX FEES
No professional services were rendered by Plante & Moran, PLLC to Lifeway regarding tax advice, tax compliance and tax planning during 2011 and 2012.
ALL OTHER FEES
No other fees were billed to Lifeway by Plante & Moran, PLLC during 2011 and 2012 other than those described in this report.
No hours expended by Plante & Moran, PLLC in its engagement to audit Lifeway’s financial statements for the most recent fiscal year were attributable to work performed by persons other than Plante’s full-time permanent employees. The Audit Committee has approved 100% of all services performed by Plante for Lifeway and disclosed above.
- 42 -
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Lifeway Audit Committee (the “Committee”), comprised of Messrs. Sikar, Bernardi, and Katz, pre-approved Plante & Moran, PLLC as the Company’s independent auditor for the year-ended December 31, 2012 and has adopted the following guidelines regarding the engagement of the Company’s independent auditor to perform services for the Company. Mr. Katz thereafter declined to stand for re-election. Mr. Lee was subsequently elected and appointed to fill Mr. Katz’ vacancy on the Company’s Board of Directors and the Committee.
For audit services (including statutory audit engagements as required under local country laws), the independent auditor will provide the Committee with an engagement letter during the January-March quarter of each year outlining the scope of the audit services proposed to be performed during the fiscal year. If agreed to by the Committee, this engagement letter will be formally accepted by the Committee at its first or second quarter meeting.
The independent auditor will submit to the Committee for approval an audit services fee proposal after acceptance of the engagement letter.
For non-audit services, the Company’s management will submit to the Committee for approval (during the second or third quarter of each fiscal year) the list of non-audit services that it recommends the Committee engage the independent auditor to provide for the fiscal year. Company management and the independent auditor will each confirm to the Committee that each non-audit service on the list is permissible under all applicable legal requirements. In addition to the list of planned non-audit services, a budget estimating non-audit service spending for the fiscal year will be provided. The Committee will approve both the list of permissible non-audit services and the budget for such services. The Committee will be informed routinely as to the non-audit services actually provided by the independent auditor pursuant to this pre-approval process.
To ensure prompt handling of unexpected matters, the Committee delegates to either member thereof the authority to amend or modify the list of approved permissible non-audit services and fees. Either member will report action taken to the Committee at the next Committee meeting.
The independent auditor must ensure that all audit and non-audit services provided to the Company have been approved by the Committee. The Chief Financial Officer will be responsible for tracking all independent auditor fees against the budget for such services and report at least annually to the Committee.
- 43 -
A list of the Financial Statements and Financial Statement Schedules filed as part of this Report is set forth in Item 8, which list is incorporated herein by reference.
EXHIBITS
|
3.1
|
Amended and Restated Bylaws (incorporated by reference to Exhibit No. 3.5 of Lifeway’s Current Report on Form 8-K dated and filed on December 10, 2002 (File No. 000-17363)).
|
|
3.2
|
Articles of Incorporation, as amended and currently in effect (incorporated by reference to Exhibit 3.5 of Lifeway’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000 and filed on August 8, 2000 (File No. 000- 17363)).
|
|
4.1
|
Revolving Note dated February 6, 2009 (incorporated by reference to Exhibit 10.2 on Lifeway’s Current Report on Form 8-K dated February 6, 2009 and filed on February 13, 2009 (File No. 000- 17363)).
|
|
4.2
|
Term Note dated February 6, 2009 (incorporated by reference to Exhibit 10.3 on Lifeway’s Current Report on Form 8-K dated February 6, 2009 and filed on February 13, 2009 (File No. 000-17363)).
|
|
10.1
|
Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated June 5, 1995 (incorporated by reference to Lifeway’s Registration Statement on Form S-8, (File No. 333-93306)).
|
|
10.2
|
Stock Purchase Agreement dated October 1, 1999 by and among Danone Foods, Inc., Lifeway Foods, Inc., Michael Smolyansky and certain other parties (incorporated by reference to Exhibit 10.10 of Lifeway’s Current Report on Form 8-K dated October 1, 1999, and filed October 12, 1999 (File No. 000-17363)).
|
|
10.3
|
Stockholders’ Agreement dated October 1, 1999 by and among Danone Foods, Inc., Lifeway Foods, Inc., Michael Smolyansky and certain other parties (incorporated by reference to Exhibit 10.11 of Lifeway’s Current Report on Form 8-K dated October 1, 1999, and filed October 12, 1999 (File No. 000-17363)).
|
|
10.4
|
Letter Agreement dated December 24, 1999 (amending original Stockholders’ Agreement with Danone Foods, Inc.) (incorporated by reference to Exhibit 10.12 of Lifeway’s Current Report on Form 8-K dated December 24, 1999, and filed January 12, 2000 (File No. 000-17363)).
|
|
10.5
|
Employment Agreement, dated September 12, 2002, between Lifeway Foods, Inc. and Julie Smolyansky (incorporated by reference to Exhibit 10.14 of Amendment No. 2 filed April 30, 2003 to Lifeway’s Quarterly Report on Form 10- QSB/A for the quarter ended September 30, 2002 (File No. 000-17363)).
|
|
10.6
|
Loan and Security Agreement dated February 6, 2009 by and among Lifeway Foods, Inc., Fresh Made, Inc., LFI Enterprises, Inc., Helios Nutrition Limited, Pride Main Street Dairy, LLC and Starfruit, LLC and The Private Bank and Trust Company (incorporated by reference to Exhibit 10.1 of Lifeway’s Current Report on Form 8-K dated February 6, 2009 and filed on February 13, 2009 (File No. 000- 17363)).
|
|
10.7
|
First Modification Agreement dated August 13, 2009 by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC (incorporated by reference to Exhibit 10.15 of Lifeway’s Annual Report on Form 10-K dated December 31, 2009 and filed on March 31, 2010 (File No. 000- 17363)).
|
|
10.8
|
Second Modification Agreement dated November 12, 2009 by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC (incorporated by reference to Exhibit 10.16 of Lifeway’s Annual Report on Form 10-K dated December 31, 2009 and filed on March 31, 2010 (File No. 000- 17363)).
|
- 44 -
|
10.9
|
Third Modification Agreement dated February 6, 2010 by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC (incorporated by reference to Exhibit 10.17 of Lifeway’s Annual Report on Form 10-K dated December 31, 2009 and filed on March 31, 2010 (File No. 000- 17363)).
|
|
10.10
|
Fourth Modification Agreement dated March 31, 2011 by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC (incorporated by reference to Exhibit 10.10 of Lifeway’s Annual Report on Form 10-K dated December 31, 2010 and filed on March 31, 2011 (File No. 000- 17363)).
|
|
10.11
|
Fifth Modification Agreement dated June 20, 2011 by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC.
|
|
10.12
|
Sixth Modification Agreement dated June 13, 2012, effective as of May 31, 2012, by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC.
|
|
14
|
Code of Ethics (incorporated by reference to Exhibit 14 on Lifeway’s Annual Report on Form 10-KSB for the year ended December 31, 2007 and filed on March 31, 2008 (File No. 000-17363)).
|
|
21
|
List of Subsidiaries of the Registrant
|
|
23.1
|
Consent of Independent Registered Public Accounting Firm
|
|
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
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32.2
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Section 1350 Certification of Edward P. Smolyansky
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101
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Interactive Data Files
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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LIFEWAY FOODS, INC.
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Date:
April 1, 2013
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By:
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/s/ Julie Smolyansky
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Julie Smolyansky
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Chief Executive Officer, President, and
Director
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Date:
April 1, 2013
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By:
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/s/ Edward P. Smolyansky
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Edward P. Smolyansky
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Chief Financial and Accounting Officer, Treasurer, Chief Operating Officer and Secretary
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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.
Pursuant to the requirements of 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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Date:
April 1, 2013
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/s/ Julie Smolyansky
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Julie Smolyansky
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Chief Executive Officer, President, and Director
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Date:
April 1, 2013
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/s/ Ludmila Smolyansky
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Ludmila Smolyansky
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Chairperson of the Board of Directors
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Date:
April 1, 2013
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/s/ Pol Sikar
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Pol Sikar
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Director
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Date:
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Gustavo Carlos Valle
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Director
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Date:
April 1, 2013
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/s/ Renzo Bernardi
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Renzo Bernardi
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Director
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Date:
April 1, 2013
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/s/ Paul Lee | ||
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Paul Lee
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Director
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| Date: April 1, 2013 | /s/ Jason Scher | ||
| Jason Scher | |||
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Director
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INDEX OF EXHIBITS
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3.1
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Amended and Restated Bylaws (incorporated by reference to Exhibit No. 3.5 of Lifeway’s Current Report on Form 8-K dated and filed on December 10, 2002 (File No. 000-17363)).
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3.2
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Articles of Incorporation, as amended and currently in effect (incorporated by reference to Exhibit 3.5 of Lifeway’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000 and filed on August 8, 2000 (File No. 000- 17363)).
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4.1
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Revolving Note dated February 6, 2009 (incorporated by reference to Exhibit 10.2 on Lifeway’s Current Report on Form 8-K dated February 6, 2009 and filed on February 13, 2009 (File No. 000- 17363)).
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4.2
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Term Note dated February 6, 2009 (incorporated by reference to Exhibit 10.3 on Lifeway’s Current Report on Form 8-K dated February 6, 2009 and filed on February 13, 2009 (File No. 000-17363)).
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10.1
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Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated June 5, 1995 (incorporated by reference to Lifeway’s Registration Statement on Form S-8, (File No. 333-93306)).
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10.2
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Stock Purchase Agreement dated October 1, 1999 by and among Danone Foods, Inc., Lifeway Foods, Inc., Michael Smolyansky and certain other parties (incorporated by reference to Exhibit 10.10 of Lifeway’s Current Report on Form 8-K dated October 1, 1999, and filed October 12, 1999 (File No. 000-17363)).
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10.3
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Stockholders’ Agreement dated October 1, 1999 by and among Danone Foods, Inc., Lifeway Foods, Inc., Michael Smolyansky and certain other parties (incorporated by reference to Exhibit 10.11 of Lifeway’s Current Report on Form 8-K dated October 1, 1999, and filed October 12, 1999 (File No. 000-17363)).
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10.4
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Letter Agreement dated December 24, 1999 (amending original Stockholders’ Agreement with Danone Foods, Inc.) (incorporated by reference to Exhibit 10.12 of Lifeway’s Current Report on Form 8-K dated December 24, 1999, and filed January 12, 2000 (File No. 000-17363)).
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10.5
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Employment Agreement, dated September 12, 2002, between Lifeway Foods, Inc. and Julie Smolyansky (incorporated by reference to Exhibit 10.14 of Amendment No. 2 filed April 30, 2003 to Lifeway’s Quarterly Report on Form 10- QSB/A for the quarter ended September 30, 2002 (File No. 000-17363)).
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10.6
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Loan and Security Agreement dated February 6, 2009 by and among Lifeway Foods, Inc., Fresh Made, Inc., LFI Enterprises, Inc., Helios Nutrition Limited, Pride Main Street Dairy, LLC and Starfruit, LLC and The Private Bank and Trust Company (incorporated by reference to Exhibit 10.1 of Lifeway’s Current Report on Form 8-K dated February 6, 2009 and filed on February 13, 2009 (File No. 000- 17363)).
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10.7
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First Modification Agreement dated August 13, 2009 by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC (incorporated by reference to Exhibit 10.15 of Lifeway’s Annual Report on Form 10-K dated December 31, 2009 and filed on March 31, 2010 (File No. 000- 17363)).
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10.8
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Second Modification Agreement dated November 12, 2009 by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC (incorporated by reference to Exhibit 10.16 of Lifeway’s Annual Report on Form 10-K dated December 31, 2009 and filed on March 31, 2010 (File No. 000- 17363)).
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10.9
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Third Modification Agreement dated February 6, 2010 by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC (incorporated by reference to Exhibit 10.17 of Lifeway’s Annual Report on Form 10-K dated December 31, 2009 and filed on March 31, 2010 (File No. 000- 17363)).
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10.10
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Fourth Modification Agreement dated March 31, 2011 by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC (incorporated by reference to Exhibit 10.10 of Lifeway’s Annual Report on Form 10-K dated December 31, 2010 and filed on March 31, 2011 (File No. 000- 17363)).
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10.11
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Fifth Modification Agreement dated June 20, 2011 by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC.
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10.12
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Sixth Modification Agreement dated June 13, 2012, effective as of May 31, 2012, by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, Pride of Main Street Dairy, LLC and Starfruit, LLC.
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14
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Code of Ethics (incorporated by reference to Exhibit 14 on Lifeway’s Annual Report on Form 10-KSB for the year ended December 31, 2007 and filed on March 31, 2008 (File No. 000-17363)).
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21
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List of Subsidiaries of the Registrant
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23.1
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Consent of Independent Registered Public Accounting Firm
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky
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32.1
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Section 1350 Certification of Julie Smolyansky
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32.2
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Section 1350 Certification of Edward P. Smolyansky
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101
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Interactive Data Files
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TABLE OF CONTENTS
Part IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 8. Financial Statements and Supplementary DataNote 1 Nature Of BusinessNote 2 Summary Of Significant Accounting PoliciesNote 2 Summary Of Significant Accounting Policies ContinuedNote 3 Intangible AssetsNote 4 InvestmentsNote 4 Investments - ContinuedNote 5 InventoriesNote 6 Property and EquipmentNote 7 Accrued ExpensesNote 8 Notes PayableNote 9 Commitments and ContingenciesNote 10 Provision For Income TaxesNote 10 Provision For Income Taxes - ContinuedNote 11 Supplemental Cash Flow InformationNote 12 Stock Award and Stock Option PlansNote 13 Fair Value MeasurementsNote 13 Fair Value Measurements ContinuedNote 14 Restatement Of Consolidated Financial StatementsNote 15 LitigationNote 16 Recent Accounting PronouncementsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules