##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended March 31, 2007
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For
the transition period from  to
  LIFEWAY
FOODS, INC.
  Illinois
    
    36-3442829(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)
  
   
  
  þ o
 o o
 APPLICABLE ONLY TO CORPORATE ISSUERS
  o þ




---



##### 



INDEX
 PART I  FINANCIAL INFORMATION
    
    
    3ITEM 1. FINANCIAL STATEMENTS
    
    
    3ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    20ITEM 3. CONTROLS AND PROCEDURES
    
    
    23PART II  OTHER INFORMATION
    
    
    23ITEM 5. OTHER INFORMATION
    
    
    23ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    23SIGNATURE
    
    
    24
  2




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2007 AND 2006
 AND DECEMBER 31, 2006




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 2007 and 2006 (Unaudited) and December 31, 2006
 (Unaudited)March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006ASSETSCurrent assetsCash and cash equivalents
    
    $
    1,013,345
    
    
    $
    3,817,745
    
    
    $
    1,547,812Marketable securities
    
    
    8,560,756
    
    
    
    8,337,907
    
    
    
    8,491,363Inventories
    
    
    2,883,455
    
    
    
    2,024,330
    
    
    
    2,522,196Accounts receivable, net of allowance for doubtful accounts
of $39,460 and $45,000 at March 31, 2007 and 2006 and
$80,000 at December 31, 2006
    
    
    4,587,966
    
    
    
    3,054,017
    
    
    
    3,942,717Prepaid expenses and other current assets
    
    
    9,992
    
    
    
    15,247
    
    
    
    11,983Other receivables
    
    
    50,425
    
    
    
    55,404
    
    
    
    71,050Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    32,234Refundable income taxes
    
    
    158,553
    
    
    
    40,388
    
    
    
    267,771Total current assets
    
    
    17,264,492
    
    
    
    17,345,038
    
    
    
    16,887,126Property and equipment, net
    
    
    8,554,799
    
    
    
    7,774,651
    
    
    
    8,580,716Intangible assetsGoodwill
    
    
    3,952,425
    
    
    
    75,800
    
    
    
    3,952,425Other intangible assets, net of accumulated amortization
of $358,985 and $108,958 at March 31, 2007 and 2006
and $278,710 December 31, 2006
    
    
    3,498,653
    
    
    
    333,680
    
    
    
    3,578,928Total intangible assets
    
    
    7,451,078
    
    
    
    409,480
    
    
    
    7,531,353Total assets
    
    $
    33,270,369
    
    
    $
    25,529,169
    
    
    $
    32,999,195LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent maturities of notes payable
    
    
    1,129,004
    
    
    $
    528,415
    
    
    $
    1,131,336Accounts payable
    
    
    1,239,046
    
    
    
    453,022
    
    
    
    1,463,014Accrued expenses
    
    
    341,189
    
    
    
    245,168
    
    
    
    480,101Deferred income tax
    
    
    31,032
    
    
    
    4,251
    
    
    
    Total current liabilities
    
    
    2,740,271
    
    
    
    1,230,856
    
    
    
    3,074,451Notes payable
    
    
    5,201,873
    
    
    
    2,887,785
    
    
    
    5,746,718Deferred income taxes
    
    
    454,212
    
    
    
    345,709
    
    
    
    449,619Stockholders equityCommon stock, no par value; 20,000,000 shares authorized;
17,273,766 shares issued; 16,889,237 shares outstanding at
March 31, 2007; 17,273,776 shares issued; 16,793,310 shares
outstanding at March 31, 2006; and 17,273,776 shares issued;
16,897,826 shares outstanding at December 31, 2006
    
    
    6,509,267
    
    
    
    6,509,267
    
    
    
    6,509,267Paid-in-capital
    
    
    1,080,911
    
    
    
    98,712
    
    
    
    1,080,911Treasury stock, at cost
    
    
    (1,411,195
    )
    
    
    (1,015,146
    )
    
    
    (1,334,313
    )Retained earnings
    
    
    18,454,103
    
    
    
    15,317,611
    
    
    
    17,318,772Accumulated other comprehensive income (loss), net of taxes
    
    
    240,927
    
    
    
    154,375
    
    
    
    153,770Total stockholders equity
    
    
    24,874,013
    
    
    
    21,064,819
    
    
    
    23,728,407Total liabilities and stockholders equity
    
    $
    33,270,369
    
    
    $
    25,529,169
    
    
    $
    32,999,195
  3




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Three Months Ended March 31, 2007 and 2006 (Unaudited)
and The Year Ended December 31, 2006
 (Unaudited)Three Months Ended
    
    
    Year EndedMarch 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Sales
    
    $
    9,022,244
    
    
    $
    6,003,023
    
    
    $
    27,720,713Cost of goods sold
    
    
    5,449,825
    
    
    
    3,305,643
    
    
    
    17,081,992Gross profit
    
    
    3,572,419
    
    
    
    2,697,380
    
    
    
    10,638,721Selling Expenses
    
    
    770,081
    
    
    
    582,943
    
    
    
    3,065,254General and Administrative
    
    
    1,000,848
    
    
    
    708,065
    
    
    
    3,343,341Total Operating Expenses
    
    
    1,770,929
    
    
    
    1,291,008
    
    
    
    6,408,595Income from operations
    
    
    1,801,490
    
    
    
    1,406,372
    
    
    
    4,230,126Other income (expense):Interest and dividend income
    
    
    65,799
    
    
    
    86,235
    
    
    
    388,339Rental Income
    
    
    8,600
    
    
    
    
    
    
    
    11,401Interest expense
    
    
    (109,529
    )
    
    
    (50,226
    )
    
    
    (345,525
    )Gain (loss) on sale of marketable
securities, net
    
    
    14,137
    
    
    
    (36,878
    )
    
    
    355,767Gain on marketable securities
classified as trading
    
    
    608
    
    
    
    512
    
    
    
    791Total other income (Expense)
    
    
    (20,385
    )
    
    
    (357
    )
    
    
    410,773Income before provision for
income taxes
    
    
    1,781,105
    
    
    
    1,406,015
    
    
    
    4,640,899Provision for income taxes
    
    
    645,774
    
    
    
    511,352
    
    
    
    1,745,075Net income
    
    $
    1,135,331
    
    
    $
    894,663
    
    
    $
    2,895,824Basic and diluted earnings per
common share
    
    
    0.07
    
    
    
    0.05
    
    
    
    0.17Weighted average number of shares
outstanding
    
    
    16,895,351
    
    
    
    16,792,378
    
    
    
    16,829,601COMPREHENSIVE INCOMENet income
    
    $
    1,135,331
    
    
    $
    894,663
    
    
    $
    2,895,824Other comprehensive income (loss),
net of tax:Unrealized gains (losses) on
marketable securities
(net of tax benefits)
    
    
    264,952
    
    
    
    275,537
    
    
    
    (251,021
    )Less reclassification adjustment
for gains (losses)
included in net income (net of taxes)
    
    
    (177,795
    )
    
    
    (21,648
    )
    
    
    504,305Comprehensive income
    
    $
    1,222,488
    
    
    $
    1,148,552
    
    
    $
    3,149,108
  4




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
For the Three Months Ended March 31, 2007 (Unaudited)
and the Year Ended December 31, 2006
 Common Stock, No Par Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated20,000,000 Shares
    
    
    # of Shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherAuthorized
    
    
    of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive# of Shares
    
    
    # of Shares
    
    
    Treasury
    
    
    Common
    
    
    Paid In
    
    
    Treasury
    
    
    Retained
    
    
    Income (Loss),Issued
    
    
    Outstanding
    
    
    Stock
    
    
    Stock
    
    
    Capital
    
    
    Stock
    
    
    Earnings
    
    
    Net of Tax
    
    
    TotalBalances at December 31, 2005
    
    
    17,273,776
    
    
    
    16,790,510
    
    
    
    483,266
    
    
    $
    6,509,267
    
    
    $
    90,725
    
    
    $
    (1,024,659
    )
    
    $
    14,422,948
    
    
    $
    (99,514
    )
    
    $
    19,898,767Issuance of treasury stock for compensation
    
    
    
    
    
    
    4,666
    
    
    
    (4,666
    )
    
    
    
    
    
    
    13,311
    
    
    
    15,855
    
    
    
    
    
    
    
    
    
    
    
    29,166Issuance of treasury stock for acquisition of Helios
    
    
    
    
    
    
    202,650
    
    
    
    
    
    
    
    
    
    
    
    976,875
    
    
    
    323,125
    
    
    
    
    
    
    
    
    
    
    
    1,300,000Redemption of stock
    
    
    
    
    
    
    (100,000
    )
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    (648,634
    )
    
    
    
    
    
    
    
    
    
    
    (648,634
    )Other comprehensive income (loss):Unrealized losses on securities, net of
taxes and reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    253,284
    
    
    
    253,284Net income for the year
ended December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,895,824
    
    
    
    
    
    
    
    2,895,824Balances at December 31, 2006
    
    
    17,273,776
    
    
    
    16,897,826
    
    
    
    578,600
    
    
    $
    6,509,267
    
    
    $
    1,080,911
    
    
    $
    (1,334,313
    )
    
    $
    17,318,772
    
    
    $
    153,770
    
    
    $
    23,728,407Redemption of stock
    
    
    
    
    
    
    (8,589
    )
    
    
    8,589
    
    
    
    
    
    
    
    
    
    
    
    (76,882
    )
    
    
    
    
    
    
    
    
    
    
    (76,882
    )Other comprehensive income (loss):Unrealized gains on securities, net of
taxes and reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,157
    
    
    
    87,157Net income for the three months
ended March 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,135,331
    
    
    
    
    
    
    
    1,135,331Balances at March 31, 2007
    
    
    17,273,776
    
    
    
    16,889,237
    
    
    
    587,189
    
    
    $
    6,509,267
    
    
    $
    1,080,911
    
    
    $
    (1,411,195
    )
    
    $
    18,454,103
    
    
    $
    240,927
    
    
    $
    24,874,013
  5




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2007 and 2006 (Unaudited)
and the Year Ended December 31, 2006
 (Unaudited)Three Months Ended
    
    
    Years EndedMarch 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Cash flows from operating activities:Net income
    
    $
    1,135,331
    
    
    $
    894,663
    
    
    $
    2,895,824Adjustments to reconcile net income to net
cash flows from operating activities, net of acquisition:Depreciation and amortization
    
    
    245,568
    
    
    
    143,437
    
    
    
    758,754(Gain) Loss on sale of marketable securities, net
    
    
    (14,137
    )
    
    
    36,878
    
    
    
    (355,767
    )Gain on marketable securities
classified as trading
    
    
    (608
    )
    
    
    (512
    )
    
    
    (791
    )Deferred income taxes
    
    
    6,536
    
    
    
    (34,822
    )
    
    
    33,031Treasury stock issued for services
    
    
    
    
    
    
    17,500
    
    
    
    29,166Increase (decrease) in allowance for doubtful accounts
    
    
    (40,540
    )
    
    
    10,000
    
    
    
    45,000(Increase) decrease in operating assets:Accounts receivable
    
    
    (604,709
    )
    
    
    (546,402
    )
    
    
    (1,190,448
    )Other receivables
    
    
    20,625
    
    
    
    1,031
    
    
    
    (14,615
    )Inventories
    
    
    (361,259
    )
    
    
    (307,331
    )
    
    
    (585,563
    )Refundable income taxes
    
    
    109,218
    
    
    
    (28,826
    )
    
    
    (256,209
    )Prepaid expenses and other current assets
    
    
    1,991
    
    
    
    (6,103
    )
    
    
    35,032Increase (decrease) in operating liabilities:Accounts payable
    
    
    (223,968
    )
    
    
    26,769
    
    
    
    638,999Accrued expenses
    
    
    (138,912
    )
    
    
    (109,843
    )
    
    
    125,090Net cash provided by operating activities
    
    
    135,136
    
    
    
    96,439
    
    
    
    2,157,503Cash flows from investing activities:Purchases of marketable securities
    
    
    (802,587
    )
    
    
    (1,423,859
    )
    
    
    (7,509,692
    )Sale of marketable securities
    
    
    896,419
    
    
    
    960,801
    
    
    
    7,285,071Purchases of property and equipment
    
    
    (139,376
    )
    
    
    (150,114
    )
    
    
    (680,174
    )Acquisition of Helios, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (2,551,679
    )Net cash used in investing activities
    
    
    (45,544
    )
    
    
    (613,172
    )
    
    
    (3,456,474
    )Cash flows from financing activities:Purchases of treasury stock
    
    
    (76,882
    )
    
    
    
    
    
    
    (648,634
    )Repayment of notes payable
    
    
    (547,177
    )
    
    
    (19,603
    )
    
    
    (858,664
    )Net cash provided by (used in) financing activities
    
    
    (624,059
    )
    
    
    (19,603
    )
    
    
    (1,507,298
    )Net decrease in cash and cash equivalents
    
    
    (534,467
    )
    
    
    (536,336
    )
    
    
    (2,806,269
    )Cash and cash equivalents at the beginning of the period
    
    
    1,547,812
    
    
    
    4,354,081
    
    
    
    4,354,081Cash and cash equivalents at the end of the period
    
    $
    1,013,345
    
    
    $
    3,817,745
    
    
    $
    1,547,812
  6




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 1  NATURE OF BUSINESS
    Cash
    
    $
    11,321Accounts Receivable Assumed
    
    
    279,654Inventories
    
    
    219,634Equipment, Building and Land
    
    
    721,572Prepaid Items
    
    
    37,871Trade Name  Intangible Asset
    
    
    1,980,000Formula  Intangible Asset
    
    
    438,000Contractual Backlog  Intangible Asset
    
    
    12,000Customer Relationships  Intangible Asset
    
    
    985,000Goodwill
    
    
    3,876,625Total Assets Acquired
    
    
    8,561,677Note Payable and Accounts Payable Assumed
    
    
    (498,677
    )Net Assets Acquired
    
    $
    8,063,000
  7




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 1  NATURE OF BUSINESS  Continued
  Quarter ended
    
    Year endedMarch
31, 2007
    

December 31, 2006Net Sales
    
    $
    7,310,936
    
    
    $
    30,804,309Net Income
    
    $
    897,115
    
    
    $
    2,621,228EPS
    
    $
    0.05
    
    
    $
    0.16
 Note 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles of consolidation
  Use of estimates
  Revenue Recognition
  Cash and cash equivalents
    March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Amounts insured
    
    $
    244,029
    
    
    $
    478,025
    
    
    $
    432,678Uninsured and uncollateralized amounts
    
    
    1,045,160
    
    
    
    3,823,916
    
    
    
    1,412,560Total bank balances
    
    $
    1,289,189
    
    
    $
    4,301,941
    
    
    $
    1,845,238
 8




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued
 Marketable securities
 Accounting for Certain
Investments in Debt and Equity Securities Accounting for Noncurrent Marketable Equity Securities the meaning of other-than-temporary impairment and
its application to certain investments,
 Accounts receivable
   Inventories
  Property and equipment
   Category
    
    YearsBuildings and improvements
    
    31 and 39Machinery and equipment
    
    
    5  12Office equipment
    
    
    5  7Vehicles
    
    
    5
 9




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued
 Intangible assets
     Category
    
    YearsRecipes
    
    
    4Customer lists and other
customer related intangibles
    
    
    15Lease agreement
    
    
    7Trade names
    
    
    15Formula
    
    
    10Customer relationships
    
    
    12
 Income taxes
     10




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued
 Treasury stock
  Advertising costs
  Earning per common share
  Reclassification
  Note 3  INTANGIBLE ASSETS
  March 31, 2007
    
    
    March 31, 2006
    
    
    December 31, 2006Accumulated
    
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Cost
    
    
    Amortization
    
    
    Cost
    
    
    AmortizationRecipes
    
    $
    43,600
    
    
    $
    29,067
    
    
    $
    43,600
    
    
    $
    18,167
    
    
    $
    43,600
    
    
    $
    26,342Customer lists and
other customer
related intangibles
    
    
    305,200
    
    
    
    110,453
    
    
    
    305,200
    
    
    
    69,033
    
    
    
    305,200
    
    
    
    100,098Lease acquisition
    
    
    87,200
    
    
    
    33,219
    
    
    
    87,200
    
    
    
    20,762
    
    
    
    87,200
    
    
    
    30,105Goodwill
    
    
    3,952,425
    
    
    
    
    
    
    
    75,800
    
    
    
    
    
    
    
    3,952,425
    
    
    
    Loan acquisition costs
    
    
    6,638
    
    
    
    2,323
    
    
    
    6,638
    
    
    
    996
    
    
    
    6,638
    
    
    
    1,991Customer Relationship
    
    
    985,000
    
    
    
    54,723
    
    
    
    
    
    
    
    
    
    
    
    985,000
    
    
    
    34,924Contractual Backlog
    
    
    12,000
    
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    12,000
    
    
    
    12,000Trade Names
    
    
    1,980,000
    
    
    
    88,000
    
    
    
    
    
    
    
    
    
    
    
    1,980,000
    
    
    
    55,000Formula
    
    
    438,000
    
    
    
    29,200
    
    
    
    
    
    
    
    
    
    
    
    438,000
    
    
    
    18,250$
    7,810,063
    
    
    $
    358,985
    
    
    $
    518,438
    
    
    $
    108,958
    
    
    $
    7,810,063
    
    
    $
    278,710
  2007
    
    $
    323,9882008
    
    
    323,3252009
    
    
    319,6922010
    
    
    314,6052011
    
    
    314,605Thereafter
    
    
    1,902,438$
    3,498,653
  11




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 4  MARKETABLE SECURITIES
  Loss onMarketableSecuritiesUnrealized
    
    
    Unrealized
    
    
    Classified as
    
    
    FairMarch 31, 2007
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Trading
    
    
    ValueEquities
    
    $
    2,810,733
    
    
    $
    507,649
    
    
    $
    (92,378
    )
    
    
    
    
    
    $
    3,226,004Mutual Funds
    
    
    595,823
    
    
    
    7,064
    
    
    
    (9,323
    )
    
    
    
    
    
    
    593,564Preferred Securities
    
    
    1,637,458
    
    
    
    5,865
    
    
    
    (15,833
    )
    
    
    
    
    
    
    1,627,490Private Investment LP
    
    
    600,000
    
    
    
    94,507
    
    
    
    
    
    
    
    
    
    
    
    694,507Certificates of Deposit
    
    
    75,000
    
    
    
    
    
    
    
    (2,392
    )
    
    
    
    
    
    
    72,608Corporate Bonds
    
    
    2,137,085
    
    
    
    2,906
    
    
    
    (90,985
    )
    
    
    
    
    
    
    2,049,006Municipal Bonds
    
    
    160,757
    
    
    
    3,776
    
    
    
    (417
    )
    
    
    
    
    
    
    164,116Government agency
Obligations
    
    
    134,776
    
    
    
    
    
    
    
    
    
    
    
    (1,315
    )
    
    
    133,461Total
    
    $
    8,151,632
    
    
    $
    621,767
    
    
    $
    (211,328
    )
    
    $
    (1,315
    )
    
    $
    8,560,756
 Loss onMarketableSecuritiesUnrealized
    
    
    Unrealized
    
    
    Classified as
    
    
    FairMarch 31, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Trading
    
    
    ValueEquities
    
    $
    2,565,132
    
    
    $
    470,019
    
    
    $
    (102,220
    )
    
    $
    
    
    
    $
    2,932,931Mutual Funds
    
    
    584,921
    
    
    
    3,269
    
    
    
    (38,806
    )
    
    
    
    
    
    
    549,384Preferred Securities
    
    
    1,119,577
    
    
    
    993
    
    
    
    (30,128
    )
    
    
    
    
    
    
    1,090,442Private Investment LP
    
    
    600,000
    
    
    
    35,864
    
    
    
    
    
    
    
    
    
    
    
    635,864Certificates of Deposit
    
    
    150,000
    
    
    
    
    
    
    
    (1,410
    )
    
    
    
    
    
    
    148,590Corporate Bonds
    
    
    2,508,126
    
    
    
    10,040
    
    
    
    (84,182
    )
    
    
    
    
    
    
    2,433,984Municipal Bonds,
maturing within five years
    
    
    61,275
    
    
    
    839
    
    
    
    (1,289
    )
    
    
    
    
    
    
    60,825Government agency
obligations, maturing
after five years
    
    
    488,088
    
    
    
    
    
    
    
    
    
    
    
    (2,201
    )
    
    
    485,887Total
    
    $
    8,077,119
    
    
    $
    521,024
    
    
    $
    (258,035
    )
    
    $
    (2,201
    )
    
    $
    8,337,907
 12




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 4  MARKETABLE SECURITIES  Continued
 Loss onMarketableSecuritiesUnrealized
    
    
    Unrealized
    
    
    Classified as
    
    
    FairDecember 31, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Trading
    
    
    ValueEquities
    
    $
    3,048,755
    
    
    $
    359,729
    
    
    $
    (69,950
    )
    
    
    
    
    
    $
    3,338,534Mutual Funds
    
    
    522,492
    
    
    
    3,248
    
    
    
    (7,675
    )
    
    
    
    
    
    
    518,065Preferred Securities
    
    
    1,353,568
    
    
    
    6,554
    
    
    
    (11,347
    )
    
    
    
    
    
    
    1,348,775Private Investment
LP
    
    
    600,000
    
    
    
    71,632
    
    
    
    
    
    
    
    
    
    
    
    671,632Certificates of
Deposit
    
    
    225,000
    
    
    
    2,190
    
    
    
    (2,393
    )
    
    
    
    
    
    
    224,797Corporate Bonds
    
    
    2,185,982
    
    
    
    2,408
    
    
    
    (95,075
    )
    
    
    
    
    
    
    2,093,315Municipal Bonds
    
    
    160,757
    
    
    
    2,937
    
    
    
    (303
    )
    
    
    
    
    
    
    163,391Government agency
    
    
    134,776
    
    
    
    
    
    
    
    
    
    
    
    (1,922
    )
    
    
    132,854Total
    
    $
    8,231,330
    
    
    $
    448,698
    
    
    $
    (186,743
    )
    
    $
    (1,922
    )
    
    $
    8,491,363
    Less Than 12 Months
    
    
    12 Months or Greater
    
    
    TotalDescription of
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedSecurities
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesEquities
    
    $
    582,414
    
    
    $
    (81,853
    )
    
    $
    120,250
    
    
    $
    (10,525
    )
    
    $
    702,664
    
    
    $
    (92,378
    )Mutual Funds
    
    
    131,060
    
    
    
    (2,073
    )
    
    
    92,750
    
    
    
    (7,250
    )
    
    
    223,810
    
    
    
    (9,323
    )Preferred Securities
    
    
    877,700
    
    
    
    (12,610
    )
    
    
    106,070
    
    
    
    (3,223
    )
    
    
    983,770
    
    
    
    (15,833
    )Certificates of Deposit
    
    
    
    
    
    
    
    
    
    
    72,608
    
    
    
    (2,392
    )
    
    
    72,608
    
    
    
    (2,392
    )Corporate Bonds
    
    
    314,270
    
    
    
    (7,684
    )
    
    
    1,396,908
    
    
    
    (83,301
    )
    
    
    1,711,178
    
    
    
    (90,985
    )Municipal Bonds
    
    
    
    
    
    
    
    
    
    
    19,588
    
    
    
    (417
    )
    
    
    19,588
    
    
    
    (417
    )$
    1,905,444
    
    
    $
    (104,220
    )
    
    $
    1,808,174
    
    
    $
    (107,108
    )
    
    $
    3,713,618
    
    
    $
    (211,328
    )
  13




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 4  MARKETABLE SECURITIES  Continued
    Note 5  INVENTORIES
  March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Finished goods
    
    $
    1,084,748
    
    
    $
    753,631
    
    
    $
    952,484Production supplies
    
    
    1,134,987
    
    
    
    772,311
    
    
    
    988,174Raw materials
    
    
    663,720
    
    
    
    498,388
    
    
    
    581,538Total inventories
    
    $
    2,883,455
    
    
    $
    2,024,330
    
    
    $
    2,522,196
 Note 6  PROPERTY AND EQUIPMENT
  March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Land
    
    $
    969,232
    
    
    $
    909,232
    
    
    $
    969,232Buildings and improvements
    
    
    6,713,743
    
    
    
    6,488,166
    
    
    
    6,713,743Machinery and equipment
    
    
    7,274,990
    
    
    
    5,911,844
    
    
    
    7,143,537Vehicles
    
    
    534,365
    
    
    
    513,670
    
    
    
    534,365Office equipment
    
    
    97,115
    
    
    
    78,763
    
    
    
    89,19215,589,445
    
    
    
    13,901,675
    
    
    
    15,450,069Less accumulated depreciation
    
    
    7,034,646
    
    
    
    6,127,024
    
    
    
    6,869,353Total property and equipment
    
    $
    8,554,799
    
    
    $
    7,774,651
    
    
    $
    8,580,716
  14




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 7 ACCRUED EXPENSES
  March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Accrued payroll and payroll taxes
    
    $
    93,727
    
    
    $
    57,326
    
    
    $
    139,367Accrued property tax
    
    
    206,000
    
    
    
    182,341
    
    
    
    269,435Other
    
    
    41,462
    
    
    
    5,501
    
    
    
    71,299$
    341,189
    
    
    $
    245,168
    
    
    $
    480,101
 Note 8  NOTES PAYABLE
  March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Mortgage note payable
to a bank, payable in
monthly installments
of $3,273 including
interest at 7%, with a
balloon payment of
$416,825 due September
25, 2011.
Collateralized by real
estate
    
    $
    451,542
    
    
    $
    460,092
    
    
    $
    453,355Mortgage note payable
to a bank, payable in
monthly installments
of $19,513 including
interest at 5.6%, with
a balloon payment of
$2,652,143 due July
14, 2010.
Collateralized by real
estate
    
    
    2,888,051
    
    
    
    2,956,108
    
    
    
    2,905,988Note payable to Amani
Holding LLC, payable
in quarterly
installments of
$262,500 plus interest
at the floating prime
rate per annum (8.25%
at December 31, 2006)
due September 1, 2010
secured by letter of
credit
    
    
    2,991,284
    
    
    
    
    
    
    
    3,518,711Total notes payable
    
    
    6,330,877
    
    
    
    3,416,200
    
    
    
    6,878,054Less current maturities
    
    
    1,129,004
    
    
    
    528,415
    
    
    
    1,131,336Total long-term portion
    
    $
    5,201,873
    
    
    $
    2,887,785
    
    
    $
    5,746,718
  As of March 31,2007
    
    $
    1,129,0042008
    
    
    1,144,7692009
    
    
    1,146,6982010
    
    
    2,475,5812011
    
    
    434,825Total
    
    $
    6,330,877
 15




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 9  PROVISION FOR INCOME TAXES
  For theFor the Three Months Ended
    
    
    Year EndedMarch 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Current:Federal
    
    $
    537,138
    
    
    $
    443,238
    
    
    $
    1,390,590State and local
    
    
    102,100
    
    
    
    102,936
    
    
    
    321,454Total current
    
    
    639,238
    
    
    
    546,174
    
    
    
    1,712,044Deferred
    
    
    6,536
    
    
    
    (34,822
    )
    
    
    33,031Provision for income taxes
    
    $
    645,774
    
    
    $
    511,352
    
    
    $
    1,745,075
  For theFor the Three Months Ended
    
    
    Year EndedMarch 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Federal income tax expense
computed at the statutory rate
    
    $
    605,576
    
    
    $
    478,045
    
    
    $
    1,577,226State and local tax expense, net
    
    
    85,493
    
    
    
    67,742
    
    
    
    222,667Permanent differences
    
    
    (45,295
    )
    
    
    (34,435
    )
    
    
    (54,818
    )Provision for income taxes
    
    $
    645,774
    
    
    $
    511,352
    
    
    $
    1,745,075
  March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Non-current deferred tax liabilities
arising from:Temporary differences -
accumulated depreciation and amortization
    
    $
    (454,212
    )
    
    $
    (345,709
    )
    
    $
    (449,619
    )Current deferred tax assets (liabilities)
arising from:Unrealized losses (gains) on marketable
securities
    
    
    (169,511
    )
    
    
    (108,615
    )
    
    
    (108,188
    )Inventory
    
    
    122,183
    
    
    
    85,779
    
    
    
    107,382Allowance for doubtful accounts
    
    
    16,296
    
    
    
    18,585
    
    
    
    33,040Total current deferred tax assets
(liabilities)
    
    
    (31,032
    )
    
    
    (4,251
    )
    
    
    32,234Net deferred tax liability
    
    $
    (485,244
    )
    
    $
    (349,960
    )
    
    $
    (417,385
    )
 16




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 10  SUPPLEMENTAL CASH FLOW INFORMATION
  For TheFor The Three Months Ended
    
    Year EndedMarch 31,
    
    December 31,2007
    
    2006
    
    2006Interest
    
    $
    96,908
    
    
    $
    50,226
    
    
    $
    337,768Income taxes
    
    $
    551,386
    
    
    $
    575,000
    
    
    $
    1,556,586
 Note 11  STOCK OPTION PLANS
     Note 12  FAIR VALUE OF FINANCIAL INSTRUMENTS
  March 31,
    
    March 31,
    
    December 31,2007
    
    2006
    
    2006Carrying
    
    Fair
    
    Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value
    
    Amount
    
    ValueCash and cash
equivalents
    
    $
    1,013,345
    
    
    $
    1,013,345
    
    
    $
    3,817,745
    
    
    $
    3,817,745
    
    
    $
    1,547,812
    
    
    $
    1,547,812Marketable securities
    
    $
    8,560,756
    
    
    $
    8,560,756
    
    
    $
    8,337,907
    
    
    $
    8,337,907
    
    
    $
    8,491,363
    
    
    $
    8,491,363Notes payable
    
    $
    6,330,877
    
    
    $
    6,330,877
    
    
    $
    3,416,200
    
    
    $
    3,397,690
    
    
    $
    6,878,054
    
    
    $
    6,878,054
 17




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 12  FAIR VALUE OF FINANCIAL INSTRUMENTS  Continued
    Note 13  RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting for
Servicing of Financial Assets,
 18




---



##### 



LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006
 Note 13  RECENT ACCOUNTING PRONOUNCEMENTS  Continued
 Fair Value Measurements
 Employers Accounting for Defined Benefit
Pension and Other Postretirement
 Note 14  STOCK SPLIT
   19




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND OPERATIONS
  
    
    Changes in economic conditions, commodity prices;
 
    
    Shortages of and price increase for fuel, labor strikes or work
stoppages, market acceptance of the Companys new products;
 
    
    Significant changes in the competitive environment;
 
    
    Changes in laws, regulations, and tax rates; and
 
    
    Managements ability to achieve reductions in cost and employment
levels, to realize production efficiencies and to implement
capital expenditures, all at of the levels and times planned by
management.
  Results of Operations for the Three Months Ended March 31, 2007
  Results of Operations
  ä
 20




---



##### 



Liquidity and Capital Resources
     21




---



##### 



Off-balance Sheet Arrangements
  Critical Accounting Policies
  22




---



##### 



ITEM 3. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 ITEM 5. OTHER INFORMATION
 .
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
  ExhibitNumber
    
    Description3.4
    
    Amended and Restated By-laws (incorporated by reference to Exhibit No. 3.5 of Lifeways
Current Report on Form 8-K dated and filed on December 10, 2002). (File No. 000-17363)3.5
    
    Articles of Incorporation, as amended and currently in effect (incorporated by reference to
Exhibit 3.5 of Lifeways Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000
and filed on August 8, 2000). (File No. 000-17363)11
    
    Statement re: Computation of per share earnings (incorporated by reference to Note 2 of the
Consolidated Financial Statements).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky.32.1
    
    Section 1350 Certification of Julie Smolyansky.32.2
    
    Section 1350 Certification of Edward P. Smolyansky.99.1
    
    Press Release dated May 14,
2007- Lifeway Foods Reports Record
1st Quarter 2007 Results.
   23




---



##### 



SIGNATURE
   LIFEWAY FOODS, INC.By: /s/ Julie SmolyanskyJulie SmolyanskyChief Executive Officer, President, and Director/s/ Edward P. SmolyanskyChief Financial and Accounting Officerand Treasurer
 24




---



##### 



31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky.32.1
    
    Section 1350 Certification of Julie Smolyansky.32.2
    
    Section 1350 Certification of Edward P. Smolyansky.99.1
    
    Press Release dated May 14,
2007- Lifeway Foods Reports Record
1st Quarter 2007 Results.