MORTON GROVE, Ill., Aug. 16 /PRNewswire-FirstCall/ -- Lifeway Foods, Inc., (Nasdaq: LWAY), makers of the nutritious, probiotic dairy beverage, Kefir, today reported financial results for the second quarter ended June 30, 2010. In addition, the company announced an exclusive, nationwide distribution agreement with Whole Foods to bring three flavors of their new BioKefir(TM) drink to all store locations.

Financial Highlights for Second Quarter 2010

    --  Sales increased more than seven percent to $15,546,556
    --  Increased marketing fueling organic growth
    --  Working capital increased more than 11 percent to $8,682,934

Other Recent Highlights

    --  Signed a 90-day exclusive distribution agreement with Whole Foods to
        bring three flavors of new BioKefir to store locations nationwide
    --  Paid outstanding debt notes totaling approximately $850,000 on August
        5th, six months ahead of schedule, due to strong cash flow
    --  Purchased 101,476 shares during the second quarter, due to strong cash
        flow

For the quarter ended June 30, 2010, total sales increased more than seven percent to $15,546,556 from $14,479,429 during the same period a year ago. Total net income was $1,184,504, or $0.07 per share, compared to $2,531,905, or $0.15 per share, in the same period in 2009. This decrease in net income, of approximately 53 percent, is due largely to disallowed research and development credits from 2007 and 2008 that resulted in approximately $220,000 in additional taxes that were paid in the 2010 second quarter and represent a non-recurring expense.

Sales increased by $3,295,206, (approximately 12%) to $31,510,715 during the six month period ended June 30, 2010 from $28,215,509 during the same six-month period in 2009. This increase is primarily attributable to increased sales and awareness of Lifeway's flagship line, Kefir, as well as Lifeway's kids Kefir drink, ProBugs®.

"We are pleased with our continued growth in sales as it was purely organic and not the result of new distribution," said Edward Smolyansky, Lifeway Food Inc.'s chief financial officer. "The decrease in net income was primarily driven by three factors including higher conventional milk prices, which rose about 45% from last years second quarter record lows, the payment of past taxes from disallowed R&D unit credits, and our increased advertising and marketing initiatives. We believe our marketing program is building greater awareness of the health benefits of Kefir, and is driving demand for Lifeway's flagship line, as well as ProBugs(TM) Organic Kefir for kids."

Cost of goods sold as a percentage of sales was approximately 61 percent, compared to approximately 58 percent during the same period in 2009. The increase was primarily due to a 45 percent rise in the costs for conventional milk, our largest raw material, when compared to the second quarter 2009. However, the increase represents a return to more normalized levels from the historically low prices a year ago. Gross profit decreased approximately two percent during the second quarter compared with the same period in 2009.

Operating expenses as a percentage of sales were approximately 25 percent, compared to about 21 percent during the same period in 2009. This increase is primarily attributable to increased advertising and marketing expenditures. The company also had expenses of approximately $100,000 related tot the development of it's new BioKefir(TM) product line.

Total operating income decreased by $1,000,310 (approximately 32 percent) to $2,154,337, from $3,154,647 during the same period a year ago.

Net cash provided by operating activities was $2,271,542 during the six months ended June 30, 2010, which is a decrease of $1,119,173 when compared to the same period in 2009.

Interest expense during the second quarter 2010 decreased to $80,164 compared to $110,090 during the same period a year ago. This lower interest expense is primarily due to a reduction of principal in the note payable related to the February 6, 2009 Fresh Made acquisition.

Provision for income taxes for the second quarter 2010 was $1,029,688, or a 47 percent effective tax rate, compared to $623,918, or a 20 percent effective tax rate, during the same period in 2009. In addition to the higher rate, the company's tax expense was higher due to disallowed research and development credits from 2007 and 2008 that resulted in approximately $220,000 in additional taxes being paid in the 2010 second quarter.

During the second quarter 2010, Lifeway Foods continued to strengthen its balance sheet. The company's working capital increased more than 11 percent to $8,682,934, from $7,800,056 during the same period a year ago. The company's current ratio remains strong at 2.0 to 1. In addition, the company reported that it paid off approximately $850,000 of its notes payable from its strong cash flow, six months ahead of schedule on August 5, 2010.

Additionally, the company reported that it repurchased 101,476 shares during the 2010 second quarter and has approximately 170,000 shares remaining in its current buy-back program. The stock buy-backs were made as a result of the company's strong cash flow.

"We are encouraged about our progress in the third quarter, especially given the tough economic environment. To that end, we are excited about our exclusive product launch with Whole Foods as they begin to carry three flavors of our BioKefir in their stores nationwide. Whole Foods will have a 90-day exclusive to this product, and we expect to begin shipping by the end of August," Smolyansky said.

About Lifeway Foods

Lifeway, recently named Fortune Small Business' 97th Fastest Growing Small Business, and one of only 4 companies to ever be named to the list four straight years in a row, is America's leading supplier of the cultured dairy product known as kefir, and now America's only supplier of Organic Kefir. Lifeway Kefir is a dairy beverage that contains Lifeway's exclusive 10 Live and Active probiotic cultures. While most regular yogurt only contains two or three of these "friendly" cultures, Lifeway kefir products offer more nutritional benefits. Lifeway offers 12 different flavors of its Kefir beverage, Organic Kefir and SoyTreat (a soy based kefir). Lifeway recently introduced a series of innovative new products such as pomegranate kefir, Greek-style kefir, a children's line of organic kefir products called ProBugs (TM) in a no-spill pouch in kid-friendly flavors like Orange Creamy Crawler and Sublime Slime Lime, and a line of organic whole milk kefir. Lifeway also produces a line of products marketed in US Hispanic communities, called La Fruta, Drinkable Yogurt (yogurt drinks distinct from kefir). In addition to its line of Kefir products, the company produces a variety of cheese products and recently introduced a line of organic pudding called It's Pudding!

Live conference calls will now be on an annual basis to discuss fiscal full year results. For more information, contact Lifeway Foods, Inc. at (847) 967-1010 or e-mail at info@lifeway.net and visit http://www.lifeway.net .

This news release contains forward-looking statements. Investors are cautioned that actual results may differ materially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, competitive pressures and other important factors detailed in the Company's reports filed with the Securities and Exchange Commission.

                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
      Condensed Consolidated Statements of Income and Comprehensive Income
     For the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)
                    and for the Year Ended December 31, 2009

                             (Unaudited)             (Unaudited)
                         Three Months Ended       Six Months Ended
                              June 30,                June 30,
                              --------                --------
                            2010             2009        2010          2009
                            ----             ----        ----          ----

    Sales             15,546,556       14,479,429  31,510,715    28,215,509

    Cost of goods
     sold              9,273,872        7,978,110  17,892,871    16,102,691
    Depreciation
     expense             281,220          353,654     684,595       570,428
                         -------          -------     -------       -------

    Total cost of
     goods sold        9,555,092        8,331,764  18,577,466    16,673,119
                       ---------        ---------  ----------    ----------

    Gross profit       5,991,464        6,147,665  12,933,249    11,542,390

    Selling
     expenses          2,183,304        1,386,815   4,710,777     2,694,740
    General and
     administrative    1,478,062        1,437,505   2,968,219     2,810,103
    Amortization
     expense             175,761          168,698     351,521       339,388
                         -------          -------     -------       -------

    Total
     Operating
     Expenses          3,837,127        2,993,018   8,030,517     5,844,231

    Income from
     operations        2,154,337        3,154,647   4,902,732     5,698,159

    Other income
     (expense):
      Interest and
       dividend
       income             53,176           48,506     107,684       110,717
      Rental Income        2,800           11,947       4,035        21,294
      Interest
       expense           (80,164)        (110,090)   (176,106)     (264,473)
      Loss on
       Disposition
       of Equipment          ---           (2,825)        ---        (2,825)
      Gain (loss)
       on sale of
       marketable
          securities,
           net            84,043           53,638      54,784       (96,152)
                                                       ------       -------
      Total other
       income
       (expense)          59,855            1,176      (9,603)     (231,439)
                          ------            -----      ------      --------

    Income before
     provision
     for
       income taxes    2,214,192        3,155,823   4,893,129     5,466,720

    Provision for
     income taxes      1,029,688          623,918   1,939,936     1,387,350
                       ---------          -------   ---------     ---------

    Net income        $1,184,504       $2,531,905  $2,953,193    $4,079,370
                      ==========       ==========  ==========    ==========

    Basic and
     diluted
     earnings
      per common
       share                0.07             0.15        0.18          0.24
                            ====             ====        ====          ====

    Weighted
     average
     number of
      shares
       outstanding    16,701,539       16,823,691  16,731,549    16,823,691
                      ==========       ==========  ==========    ==========

                                            Year Ended
                                             December
                                                31,
                                            ---------
                                                  2009
                                                  ----

    Sales                                   58,115,878

    Cost of goods sold                      36,083,553
    Depreciation expense                     1,134,404
                                             ---------

    Total cost of goods sold                37,217,957
                                            ----------

    Gross profit                            20,897,921

    Selling expenses                         5,987,917
    General and administrative               5,294,550
    Amortization expense                       676,786
                                               -------

    Total Operating Expenses                11,959,253

    Income from operations                   8,938,668

    Other income (expense):
      Interest and dividend income             199,047
      Rental Income                             35,240
      Interest expense                        (442,703)
      Loss on Disposition of
       Equipment                                (2,826)
      Gain (loss) on sale of
       marketable
          securities, net                     (278,474)
      Total other income (expense)            (489,716)
                                              --------

    Income before provision for
       income taxes                          8,448,952

    Provision for income taxes               2,879,250
                                             ---------

    Net income                              $5,569,702
                                            ==========

    Basic and diluted earnings
      per common share                            0.33
                                                  ====

    Weighted average number of
      shares outstanding                    16,798,164
                                            ==========

                LIFEWAY FOODS, INC. AND SUBSIDIARIES
           Condensed Consolidated Statements of Cash Flows
     For the Six Months Ended June 30, 2010 and 2009 (Unaudited)
              and for the Year Ended December 31, 2009

                                         (Unaudited)
                                            June 30,             December 31,
                                            --------             ------------
                                         2010               2009         2009
                                         ----               ----         ----

    Cash flows from
     operating activities:
    ----------------------
      Net income                   $2,953,193         $4,079,370   $5,569,702
      Adjustments to reconcile
       net income to net
        cash flows from
         operating activities,
         net of acquisition:
         Depreciation and
          amortization              1,036,116            909,816    1,811,190
         (Gain) Loss on sale of
          investments, net            (54,784)            96,152      278,474
         Loss on disposition of
          assets                          ---              2,825        2,826
         Deferred income taxes       (290,465)           179,796      389,754
         Treasury stock issued
          for compensation             62,317             82,318      144,636
         Decrease in allowance
          for doubtful accounts           ---                ---      (75,000)
         (Increase) decrease in
          operating assets:
           Accounts receivable     (1,780,774)          (752,978)    (612,915)
           Other receivables          (92,631)           (25,416)      (7,758)
           Inventories               (857,743)          (346,800)     173,419
           Refundable income taxes  1,308,978           (435,205)    (475,635)
           Prepaid expenses and
            other current assets      (29,433)             5,029        9,506
         Increase (decrease) in
          operating liabilities:
           Accounts payable          (504,764)          (440,911)     298,800
           Accrued expenses           (82,791)            36,719       96,062
           Accrued income taxes       604,323                ---          ---
                                      -------                ---          ---
    Net cash provided by
     financing activities           2,271,542          3,390,715    7,603,061

    Cash flows from
     investing activities:
    ----------------------
      Purchases of investments       (538,852)        (3,342,662)  (6,156,682)
      Proceeds from sale of
       investments                  1,502,724          4,127,666    6,928,321
      Proceeds from redemption
       of certificates of
       deposit                        102,545                ---          ---
      Purchases of property
       and equipment               (1,292,741)          (714,052)  (1,766,280)
      Acquisition of Fresh
       Made, net of cash
       acquired                           ---        (10,498,224) (11,042,546)
                                          ---        -----------  -----------
    Net cash used in
     investing activities            (226,324)       (10,427,272) (12,037,187)

    Cash flows from
     financing activities:
    ----------------------
      Proceeds of note payable        250,000          9,342,085    9,353,504
      Checks written in excess
       of bank balances               504,398                ---      342,976
      Purchases of treasury
       stock                       (1,418,657)          (402,947)    (905,607)
      Repayment of notes
       payable                     (1,152,876)        (1,597,063)  (4,003,588)
    Net cash (used in)
     provided by in
     financing activities          (1,817,135)         7,342,075    4,787,285
                                   ----------          ---------    ---------

    Net increase in cash and
     cash equivalents                 228,083            305,518      353,159

    Cash and cash
     equivalents at the
     beginning of the period          630,407            277,248      277,248
                                      -------            -------      -------

    Cash and cash
     equivalents at the end
     of the period                   $858,490           $582,766     $630,407
                                     ========           ========     ========

SOURCE Lifeway Foods, Inc.