def14a_17101.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
SCHEDULE 14A
(Rule 14a-101)
 
INFORMATION REQUIRED IN PROXY STATEMENT
 
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
 
 
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þ
  
Definitive Proxy Statement
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Soliciting Material Pursuant to §240.14a-12
 
 
LIFEWAY FOODS, INC.
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously.  Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
       
 
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LIFEWAY FOODS, INC.
6431 W. OAKTON
MORTON GROVE, IL 60053
 
 
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 17, 2011
 
 

 
TO OUR SHAREHOLDERS:

You are invited to be present either in person or by proxy at the Annual Meeting of Shareholders of Lifeway Foods, Inc., an Illinois corporation (the “Company”), to be held at the Holiday Inn North Shore, 5300 West Touhy Avenue, Skokie, Illinois 60077, on June 17, 2011 at 2:00 p.m. local time (the “Meeting”), to consider and act upon the following:

1.
  
The election of six Directors to serve until the next meeting or until their successors are duly elected and qualified.
     
2.
  
The ratification of the appointment of Plante & Moran, PLLC, as independent auditors for the next fiscal year.
     
3.
  
The transaction of such other business as may properly come before the Meeting or any adjournments thereof.

Only shareholders of Common Stock of record at the close of business on April 25, 2011 will be entitled to notice of and to vote at the Meeting.  The stock transfer books of the Company will remain open.

WE INVITE EACH OF YOU TO ATTEND THE MEETING.  WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY VOTE YOUR SHARES VIA THE INTERNET OR THE TOLL-FREE TELEPHONE NUMBER AS DESCRIBED IN THE ENCLOSED MATERIALS.  IF YOU RECEIVED A PROXY CARD BY MAIL, PLEASE SIGN, DATE AND RETURN IT IN THE ENVELOPE PROVIDED.  IF YOU ATTEND THE MEETING AND VOTE IN PERSON, YOUR VOTE BY PROXY WILL NOT BE USED. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO ITS EXERCISE, REGARDLESS OF THE MANNER USED TO TRANSMIT YOUR VOTING INSTRUCTIONS.

 
 
BY ORDER OF THE BOARD OF DIRECTORS
 
Ludmila Smolyansky
Chairperson of the Board
Skokie, Illinois
May 5, 2011

 
 
 




 
 
 
LIFEWAY FOODS, INC.

PROXY STATEMENT

PROCEDURAL MATTERS

THIS PROXY STATEMENT IS FURNISHED TO THE SHAREHOLDERS OF LIFEWAY FOODS, INC., AN ILLINOIS CORPORATION (THE “COMPANY” or “LIFEWAY”), IN CONNECTION WITH THE SOLICITATION OF PROXIES BY AND ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY TO BE VOTED AT THE ANNUAL MEETING OF SHAREHOLDERS (THE “MEETING”) TO BE HELD AT 2:00 P.M., LOCAL TIME, ON JUNE 17, 2011, OR AT ANY ADJOURNMENT OR POSTPONEMENT THEREOF.

Shareholders of record of Common Stock of the Company at the close of business on April 25, 2011 (the “Record Date”), will be entitled to notice of and to vote at the Meeting.  The Meeting will be held at the Holiday Inn North Shore, 5300 West Touhy Avenue, Skokie, Illinois 60077.  Proxies received prior to the Meeting will be voted in accordance with the instructions contained in the proxy and, if no choice is specified, will be voted in favor of each nominee for Director named in this Proxy Statement and in favor of each other proposal set forth in this Proxy Statement.  A shareholder who votes by proxy may revoke it at any time before it is voted by a written revocation delivered to any of the proxy holders named therein, by submitting another valid proxy bearing a later date or by attending the Meeting and voting in person.  Beneficial owners wishing to vote at the Meeting who are not shareholders of record on the Company’s books (e.g., persons holding in street name) must bring to the Meeting a power of attorney or proxy in their favor signed by the holder of record in order to be able to vote.

SOLICITATION OF PROXIES

Our proxy materials are primarily available to shareholders on the Internet, as permitted by rules of the U.S. Securities and Exchange Commission (the “SEC”).  A Notice of Internet Availability of Proxy Materials is first being mailed to shareholders beginning approximately May 5, 2011, and this Proxy Statement and the form of proxy, together with our Annual Report on Form 10-K, are first being made available to the shareholders beginning approximately May 5, 2011 at www.proxyvote.com.  

All of the costs and expenses in connection with the solicitation of proxies with respect to the matters described herein will be borne by the Company.  In addition to solicitation of proxies by mail, the directors, officers and investor relations staff (who will receive no compensation in addition to their regular remuneration) of the Company named herein may solicit the return of proxies by telephone, telegram or personal interview.  As of this date, the Company has retained Broadridge Financial Solutions, Inc. (“Broadridge”), an outside firm, to solicit proxies solely from individual shareholders of record and to print proxy notices and other related materials.  The services provided by Broadridge to the Company are expected to cost approximately $6,000.  The Company has also retained Automatic Data Processing, Inc. (“ADP”), at an approximate cost of $3,000, to contact banks, brokerage houses and other custodians, nominees and fiduciaries with requests to forward copies of the proxy materials to their respective principals and to request instructions for voting the proxies.  The expenses of such banks, brokerage houses and other custodians, nominees and fiduciaries in connection therewith are covered by the estimated fee to be paid by the Company to ADP.  Action may be taken on the business to be transacted at the Meeting on the date specified in the Notice of Meeting or on any date or dates to which such Meeting may be adjourned.

VOTING OF PROXIES

A form of proxy is provided for use at the Meeting if a shareholder is unable to attend in person.  Each proxy may be revoked at any time thereafter by writing to the Secretary of the Company prior to the Meeting, by execution and delivery of a subsequent proxy, or by attendance and voting in person at the Meeting, except as to any matter or matters upon which, prior to such revocation, a vote shall have been cast pursuant to the authority conferred by such proxy.  Shares represented by a valid proxy which if received pursuant to this solicitation and not revoked before it is exercised, will be voted as provided on the proxy at the Meeting or at any adjournment or adjournments thereof.

 
 
 
 
VOTING SECURITIES AND VOTE REQUIRED

Only holders of the 16,437,809 shares of Common Stock, no par value per share, of record outstanding at the close of business on April 25, 2011, will be entitled to vote at the Meeting.  Each holder of Common Stock is entitled to one vote for each share held by such holder.  The presence, in person or by proxy, of the holders of a majority of the outstanding shares of Common Stock is necessary to constitute a quorum at the Meeting.  Under the rules of the SEC, boxes and a designated blank space are provided on the proxy card for shareholders to mark if they wish to withhold authority to vote for one or more nominees for Director or for Proposal 2.  Votes withheld in connection with the election of one or more of the nominees for Director or Proposal 2 will be counted as votes cast against such individuals or Proposal 2 and will be counted toward the presence of a quorum for the transaction of business.  If no direction is indicated, the proxy will be voted for the election of the nominees for Director and for Proposal 2.  The form of proxy provides for withholding of votes with respect to the election of Directors and a shareholder present at the Meeting also may abstain with respect to such election.

ANNUAL REPORT ON FORM 10-K

The Company’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2010 (the “Annual Report”) has been posted along with this Proxy Statement.  Shareholders are referred to the Annual Report for information concerning the Company’s business and operations, but the Annual Report is not part of the proxy soliciting materials.

PROPOSAL 1: ELECTION OF DIRECTORS

Six Directors are to be elected at the Meeting.  The Company’s Board has a maximum number of Directors equal to seven, however the Company has determined to intentionally keep one seat vacant at this time.  Directors will be elected at the Meeting to serve until the next annual meeting of shareholders of the Company or until each of their successors shall be duly elected and qualified.  As noted, unless otherwise indicated thereon, all proxies received will be voted in favor of the election of each of the six nominees of the Board named below as Directors of the Company.  Should any of the nominees not remain a candidate for election at the date of the Meeting (which contingency is not now contemplated or foreseen by the Company), proxies solicited thereunder will be voted in favor of those nominees who do remain candidates and may be voted for substitute nominees elected by the Board.  Each of the nominees (other than Eugene B. Katz) is currently serving as a Director of the Company.  Julie Oberweis, who has served as a Director since 2006, has determined not to stand for re-election to the Board.

REQUIRED VOTE

The six nominees receiving the highest number of affirmative votes of the shares present or represented and entitled to be voted for them shall be elected as Directors.  Votes withheld from any Director are counted for purposes of determining the presence or absence of a quorum for the transaction of business, but have no other legal effect under Illinois law.  

THE BOARD OF DIRECTORS RECOMMENDS A VOTE TO ELECT THE DIRECTORS NOMINATED HEREIN TO SERVE AND PROXIES SOLICITED BY THE BOARD WILL BE VOTED IN FAVOR THEREOF UNLESS A SHAREHOLDER HAS INDICATED OTHERWISE ON THE PROXY.
 
The names of the nominees and certain information with regard to each nominee follows:
         
NAME
  
AGE
  
TITLE
Ludmila Smolyansky
  
60
  
Director and Chairperson of the Board of Directors
Julie Smolyansky
  
35
  
CEO, President, and Director
Pol Sikar
  
62
  
Director
Renzo Bernardi
  
58
  
Director
Gustavo Carlos Valle
  
46
  
Director
Eugene B. Katz
  
34
  
Director

 
 
 
 
NOMINEES FOR ELECTION AS DIRECTORS

LUDMILA SMOLYANSKY, 60, 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, Chief Financial Officer, Chief Accounting Officer, Treasurer and Controller of the Company). Mrs. Smolyansky brings many years of food industry experience to the Board.

JULIE SMOLYANSKY, 35, 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, 62, 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 12 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 historical perspective to the Board.

RENZO BERNARDI, 58, 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, 46, 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 Stockholders’ Agreement, as amended, between the Company and Dannon. Mr. Valle brings deep industry experience to the Board.

EUGENE B. KATZ, 34, is a Senior Vice President of Hovde Financial in Inverness, IL, an investment banking firm focused on the financial services industry, and has been employed there since 1997.  Mr. Katz advises financial institutions in the identification and implementation of strategic alternatives including structuring and negotiating mergers, acquisitions, sale assignments, branch acquisitions and divestitures, and raising capital.  He is actively involved in growing his firm’s international client practice with cross-border transactions and a special focus on emerging markets.  Mr. Katz serves on the Board of Directors of MRL Industries in Itasca, Illinois.  Mr. Katz holds no directorship in any reporting company.  Mr. Katz earned his undergraduate degree in Finance and Investments with a concentration in International Studies from Babson College in Massachusetts.  Mr. Katz brings financial and strategic experience to the Board.
 
 
 
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 SEC. Officers, Directors, and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of copies of such reports received or representations from certain reporting persons, the Company believes that, during the year ended December 31, 2010, all Section 16(a) filing requirements applicable to its Officers, Directors and 10% shareholders were timely met.

BOARD AND COMMITTEE MEETINGS

Board Leadership.

Since 2004, the positions of Chairperson of the Board of the Company and Chief Executive of the Company have been held by different individuals.  Currently, Ludmila Smolyansky serves as Chairperson of the Board of the Company and Julie Smolyansky as Chief Executive of the Company.  These two individuals provide leadership to the Board of Directors by setting the agenda for Board meetings, preparing information and alternatives for presentation to the Board and leading discussions among, and facilitating decision making by, the Board of Directors.

The Board believes that this structure is appropriate because it results in a balanced leadership, combining a separate independent Chairperson together with a member of management involved in the day-to-day operation of the Company’s business.

During 2010, the Company’s Board of Directors held five regular meetings (the Company’s annual meeting of shareholders and Directors and quarterly meetings).  In 2010, four of six Directors attended the Company’s annual meeting.  Each director attended at least 75% of all meetings of our board of directors and committees on which he or she served that were held during 2010.  Shareholders of the Company may send communications to the Board of Directors via the Company’s Investor Relations department, which makes such communications available to the Directors as appropriate, to LIFEWAY FOODS, INC., 6431 W. OAKTON, MORTON GROVE, IL 60053, telephone (847) 967-1010, fax (847) 967-6558.  The Investor Relations department can be reach via email at: info@lifeway.net.

Board Committees.

Up until the expiration of Ms. Oberweis's term, the Company’s Audit Committee (the “Audit Committee”) consists of Mr. Sikar and Ms. Oberweis.  If elected, Mr. Katz will be appointed to serve on the Audit Committee to replace Ms. Oberweis.  The Company believes Mr. Katz to be an audit committee financial expert, and all of the Audit Committee members have an understanding of finance and accounting and are 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. No member of the current Audit Committee is a “financial expert,” as defined in Item 407(d)(5)(ii) of Regulation S-K promulgated by the SEC. The Board examined the qualifications of its Audit Committee members and determined that the present members of the Audit Committee, based on their prior education and professional experience, were sufficiently capable of performing the duties of the Audit Committee in 2010 without being “financial experts” within such definition.

 
 
 
The Board of Directors does not have a standing nominating committee, compensation committee or any committees performing similar functions.  As there are only six Directors currently serving on the Board, it is the view of the Board that all 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, Ludmila Smolyansky, Renzo Bernardi, Pol Sikar, Gustavo Carlos Valle and Julie Oberweis all participate in the nominating process, in the review of executive employment contracts and in review of the Company’s executive compensation practices, except with respect to their own executive compensation, if applicable.  It is the view of the Board that the participation of all Directors in the duties of nominating and compensation committees ensures not only as comprehensive as possible a review of Director candidates and executive compensation, but also that the views of independent, employee, and shareholder Directors are considered.

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.  The Board welcomes properly submitted recommendations from shareholders and would evaluate shareholder nominees in the same manner that it evaluates a candidate recommended by other means.  The deadline for submitting nominees to the Board is January 7, 2012.  Shareholders may submit candidate recommendations by mail to LIFEWAY FOODS, INC., 6431 W. OAKTON, MORTON GROVE, IL 60053.  With respect to the evaluation of director nominee candidates, the Board has no formal requirements or minimum standards for the individuals that it nominates.  Rather, the Board considers each candidate on his or her own merits.  However, in evaluating candidates, there are a number of factors that the Board generally views as relevant and is likely to consider, including the candidate’s professional experience, his or her understanding of the business issues affecting the Company, his or her experience in facing issues generally of the level of sophistication that the Company faces, and his or her integrity and reputation.  With respect to the identification of nominee candidates, the Board has not developed a formalized process.  Instead, its members and the Company’s senior management have recommended candidates whom they are aware of personally or by reputation.

The Company does not current have a formal process for shareholders to send communication to the Board.  In the opinion of the Board, it is appropriate for the Company not to have such a formal process  in place because the Board believes there is currently not a need for a formal policy due to, among other things, the limited number of shareholders of the Company and the infrequency of such communications in the past. While the Board will, from time to time, review the need for a formal policy, at the present time, shareholders who wish to contact the Board may do so by submitting any communication to the Company at LIFEWAY FOODS, INC., 6431 W. OAKTON, MORTON GROVE, IL 60053 with an instruction to forward the communication to a particular Director or the Board as a whole.

During 2010 through the date of this Proxy Statement, Ludmila Smolyansky, Julie Smolyansky and Edward Smolyansky collectively controlled more than 50% of the voting power of our Common Stock.  See “Security Ownership of Certain Beneficial Owners and Management,” below.  Consequently, we are a “controlled company” under applicable Nasdaq rules.  Under these rules, a “controlled company” may elect not to comply with certain Nasdaq corporate governance requirements, including requirements that: (i) a majority of the board of directors consist of independent directors; (ii) director nominees be selected or recommended for selection by a majority of the independent directors or by a nominating committee composed solely of independent directors; and (iii) compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors.  We have elected to use each of these exemptions.

Oversight of Risk Management.

The Company’s management is responsible for assessing and managing Lifeway’s exposure to various risks.  Responsibility for risk oversight by the Board of Directors lies with the entire Board. Therefore,  the responsibility for the administration of this risk oversight lies primarily with the Board’s leadership.

The Company’s principal risks exist in the potential for rising milk prices, the Company’s primary raw material,  and from competitors producing dairy-based probiotic products.  The Board addresses at least annually the principal current and future risk exposures of the Company.  The Board receives regular reports from members of senior management on areas of material risk to the Company, including operational, financial, legal and regulatory, and strategic and reputation risks.
 
 
 
 
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

The Audit Committee assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, internal control and financial reporting practices of the Company.  Up until the expiration of the term of Ms. Oberweis, the Audit Committee consists of two directors, Mr. Sikar and Ms. Oberweis, both of whom are independent directors in accordance with the Securities and Exchange Act of 1934 (the “Exchange Act”) and the Nasdaq listing standards.  In accordance with the Exchange Act and the Nasdaq listing standards, Mr. Sikar and Mr. Katz who, if elected, will be appointed to replace Ms. Oberweis as a member of the Audit Committee, will be the Company’s only independent directors.  Mr. Sikar is the Chairperson of the Audit Committee.  Each of the Audit Committee members has an understanding of finance and accounting and is able to read and understand fundamental financial statements.  To the extent Company employees are aware of any financial irregularities, the Audit Committee has been designated to receive such information in a confidential manner.
 
The Audit Committee reviewed and discussed the audited financial statements for the fiscal year ended December 31, 2010 with the Company’s management and the independent auditors, Plante & Moran, PLLC (“Plante”).  Additionally, the Audit Committee discussed with Plante matters as required by the Statement of Auditing Standards No. 61, which included Plante’s judgments as to the quality not just the acceptability of the financial statements, changes in accounting policies and sensitive accounting estimates.

Plante provided the Audit Committee with written disclosures and a letter required by Independence Standards Board Standard No. 1 (“ISB Standard No. 1”).  ISB Standard No. 1 requires Plante to (i) disclose in writing all relationships between Plante and related entities and the Company and its related entities, in Plante’s professional judgment, that may reasonably be thought to bear on independence; (ii) confirm that, in Plante’s professional opinion, they are independent of the Company within the meaning of the federal securities laws and (iii) discuss Plante’s independence with the Audit Committee.  The Audit Committee discussed with Plante its independent status.

The Audit Committee amended and restated its written charter governing its actions effective December 17, 2003.  The Audit Committee reviews and reassesses the charter annually.  The Company is required to attach the charter as an appendix to the Company’s proxy statement every three years and has filed the charter with its proxy statement for the 2011 annual meeting.

Based on the Audit Committee’s review of the year-end audited financial statements and the various discussions noted above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2010.

The Audit Committee:
Pol Sikar, Director
Julie Oberweis, Director

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

The Lifeway Audit Committee, comprised of Mr. Pol Sikar and Ms. Julie Oberweis, pre-approved Plante & Moran, PLLC as the Company’s independent auditor for the year-ended December 31, 2011 and has adopted the following guidelines regarding the engagement of the Company’s independent auditor to perform services for the Company:

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.

EXECUTIVE COMPENSATION

 Summary Compensation Table as of December 31, 2009 and December 31, 2010
 
 
Name
Year
Salary
Bonus
Stock
Awards
All other
Comp.
Total
 
 Julie Smolyansky, CEO and President(1)(5)
2010
2009
 
$530,000
$390,153
 
$75,000
$50,000
 
$55,087
$84,762
 
$22,726     
     $16,926(5)
 
$682,813
$541,841
 
 Edward P. Smolyansky,
 COO,  CFO, Chief Accounting Officer, Treasurer and Controller (2)(6)
2010
2009
 
$530,000
$467,153
 
$110,000
$50,000
 
$55,087
$84,762
 
$28,792     
     $19,632(6)
 
$723,879
$621,547
 
 
 Ludmila Smolyansky, Chairman (3)
2010
2009
 
$440,000
$359,926
 
$120,000
$60,000
 
 
—
 
      $11,234    
$8,700    
 
$463,234
$428,626
 
 
 Val Nikolenko, Vice President of Operations and 
 Secretary (4)(7)
2010
2009
 
$122,000
$124,602
 
  $40,000
$20,000
 
  $5,508
  $8,476
  
     $15,930     
     $15,664(7)
 
$183,438
$168,742
 

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 COO, CFO, Chief Accounting Officer, Treasurer and Controller 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 Val 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 for 2010 and $0 for 2009; and (ii) the following amounts related to personal usage of automobiles leased by the Company, and related insurance and fuel, for 2009 and 2010;  $13,126 for 2010 and $13,126 for 2009 for 2010 of lease payments, $7,800 for 2010 and $2,000 for 2009 of insurance premiums and $1,800 for 2010 and $1,800 for 2009 of 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:  $16,860 for 2010 and $8,700 for 2009; and (ii) the following amounts related to personal usage of automobiles leased by the Company, and related insurance and fuel, for 2009 and 2010;  $7,132 for 2010 and $7,132 for 2009 of lease payments, $3,000 for 2010 and $2,000 for 2009 of insurance premiums and $1,800 for 2010 and $1,800 for 2009 of 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:  $6,050 for 2010 and $5,784 for 2009; and (ii) the following amounts related to personal usage of automobiles leased by the Company, and related insurance and fuel, for 2009 and 2010;  $7,080 for 2010 and $7,080 for 2009 of lease payments, $1,000 for 2010 and $1,000 for 2009 of insurance premiums and  $1,800 for 2010 and $1,800 for 2009 of 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 for other persons.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS

 
(1)
EMPLOYMENT CONTRACTS
 
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 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 such plans.

There are no employment agreements with other executive officers (written or unwritten).

Outstanding Equity Awards At December 31, 2010
 
Stock Awards
Name
Number of Shares or Units of
Stock That Have Not Vested
Market Value of Shares or Units of
Stock That Have Not Vested
Julie Smolyansky
0
$0
Edward Smolyansky
0
$0
Ludmila Smolyansky
0
$0
Val Nikolenko
0
$0


 
(2)
EMPLOYEE, CONSULTANTS AND SERVICE PROVIDERS BENEFIT PLAN
 
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, 2010.  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, 2010, there were no stock options outstanding or exercisable.

On May 28, 2009, Lifeway's Board of Directors approved awards of an aggregate amount of 18,000 shares to be awarded under its Employee and Consulting Services and Compensation Plan to certain key employees and consultants for services rendered to the Company.  The stock awards were made on May 28, 2009 and have vesting periods of one year. The expense for the awards is measured as of July 14, 2009 at $14.69 per share for 18,000 shares, or a total stock award expense of $264,420. This expense was recognized as the stock awards vest in 12 equal portions of $22,035, or 1,500 shares per month for one year.
 
Director Compensation as of December 31, 2010
 
 
Name
Fees Earned or Paid in Cash
Total
  
 
Pol Sikar
$2,000
$2,000
  
 
Renzo Bernardi
$2,000
$2,000
  
 
Julie Oberweis
$2,000
$2,000
  

During 2010, each outside (non-employee) director was compensated at the rate of $500 per non-annual meeting attended. Neither any employee director (Ludmila Smolyansky and Julie Smolyansky) nor any Director serving as the nominee of Danone (Gustavo Carlos Valle) was compensated as a Director during 2010. 
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Equity Compensation Plan Information
Plan category
 Number of securities to be issued upon exercise of outstanding options, warrants and rights
 Weighted-average exercise price of outstanding options, warrants and rights
 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
(a)
(b)
(c)
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 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 1, 2011 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.

Name and Address of Beneficial Owner(1)
  
Amount and
Nature of
Beneficial
Ownership
  
Percent
of Class(2)
Ludmila Smolyansky(3)
    
7,503,354
  
    
45.5
%
Julie Smolyansky(3)
    
539,560
      
  3.27
%
Edward Smolyansky(3)
    
326,046
      
  1.98
%
Pol Sikar(3)
    
3,000
      
  *
  
Renzo Bernardi(3)
    
14,900
      
  *
  
Gustavo Carlos Valle (3,4)
    
0
      
  *
  
Julie Oberweis(3)
    
0
      
  *
  
Val Nikolenko
    
5,000
      
  *
  
All Directors and Officers of the Company as a Group (Eight persons in total)
    
8,391,860
      
  50.9
%
Danone Foods, Inc.
    
3,454,756
      
  20.9
%
GAMCO Investors, Inc.(5)
    
831,105
      
5.03
% 
_____________________
*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 Gustavo Carlos Valle and Danone Foods, Inc. is 100 Hillside Avenue, White Plains, NY 10603-2861.
     
(2)
  
Based upon 16,502,566 shares of Common Stock outstanding as of March 1, 2011.
     
(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)
  
Mario J. Gabelli directly or indirectly controls or acts as the chief investment officer of the following entities. Gabelli Funds, LLC owns 326,000 shares or 1.96% of the Company; GAMCO Asset Management, Inc. owns 286,305 shares or 1.73% of the Company; Teton Advisors, Inc. owns 213,000 shares or 1.29% of the Company; Mario J. Gabelli owns 5,500 shares or 0.03% of the Company.  Collectively, Mario J. Gabelli and the foregoing entities hold more than 5% of the aggregate outstanding shares of the Company. The foregoing is based solely on the number of shares reported in the most recent Schedule 13D, and filed by such shareholders with the SEC through February 7, 2011.


PROPOSAL 2: RATIFICATION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Audit Committee of the Board has designated Plante as independent auditors of the Company for the next fiscal year.  The Audit Committee and the Company have been advised by Plante that neither it nor any member or associate of such firm has any relationship with the Company or with any of its affiliates other than as independent accountants and auditors.

REQUIRED VOTE

An affirmative vote of the holders of a majority of the shares of Common Stock issued and outstanding is required for ratification of the appointment of Plante.  Abstentions and broker non-votes are considered shares of stock present in person or represented by proxy at the Meeting and entitled to vote and are counted in determining the number of votes necessary for a majority.  An abstention will therefore have the practical effect of voting against ratification of the appointment because it represents one fewer vote for ratification of the appointment.  In the event that ratification of the appointment of Plante as the independent public accountants for the Company is not obtained at the Meeting, the Board of Directors will reconsider its appointment.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE THE RATIFICATION OF THE APPOINTMENT OF PLANTE & MORAN, PLLC AS THE INDEPENDENT AUDITORS FOR THE CURRENT FISCAL YEAR (ENDING DECEMBER 31, 2011), AND PROXIES SOLICITED BY THE BOARD WILL BE VOTED IN FAVOR THEREOF UNLESS A SHAREHOLDER HAS INDICATED OTHERWISE ON THE PROXY.

During the two most recent fiscal years, there have been no disagreements with Plante on matters of accounting principles or practices, financial statement disclosure, auditing scope or procedure, or any reportable event.
 
Representatives of Plante are not expected to be present at the Meeting.

 
 
 
AUDIT FEES

In 2010 and 2009, Plante & Moran, PLLC, billed Lifeway approximately $186,665 and $177,536, 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 2009 and 2010.

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 2009 and 2010.

ALL OTHER FEES

No other fees were billed to Lifeway by Plante & Moran, PLLC during 2009 and 2010 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.

OTHER MATTERS

The Board of Directors knows of no other business to come before the meeting.  If, however, other matters properly come before the meeting, it is the intention of the persons named in the enclosed proxy to vote the shares represented thereby in accordance with their best judgment.

SHAREHOLDER PROPOSALS

Any proposal that a shareholder may desire to present to the Company’s 2012 Annual Meeting of Shareholders must be received in writing by Val Nikolenko, the Secretary of the Company, on or before January 7, 2012, in order to be considered for possible inclusion in the Company’s proxy materials relating to such meeting.

UNTIMELY SHAREHOLDER PROPOSALS

Any shareholder proposals received by the Company after January 7, 2012 shall be considered an untimely proposal.  The Company, in its sole discretion, may consider untimely proposals for possible inclusion in its 2012 Annual Meeting proxy materials if such untimely proposals are received on or before March 31, 2012.  Any untimely shareholder proposals received after March 31, 2012 shall not be considered for possible inclusion in the Company’s 2012 Annual Meeting proxy materials.
 
AVAILABILITY OF PROXY MATERIALS

THE PROXY STATEMENT, THE PROXY AND THE ANNUAL REPORT ARE AVAILABLE AT www.proxyvote.com.   To view these documents, enter the 12-digit control number which appears on your Notice.  Our proxy materials and other SEC filings are also available on the Internet at our website, www.lifeway.net, and on the SEC’s EDGAR system, at www.sec.gov. 

 
 
 
DIRECTIONS TO THE ANNUAL MEETING OF SHAREHOLDERS ARE AVAILABLE UPON REQUEST DIRECTED TO LIFEWAY’S SECRETARY AT 6431 WEST OAKTON, MORTON GROVE, IL 60053 OR (847) 967-1010.

Lifeway’s Annual Report on Form 10-K has been posted along with this Proxy Statement.  Such Annual Report is not a part of the proxy solicitation materials.  Upon receipt of a written request, Lifeway will furnish to any shareholder, without charge, an additional copy of such Annual Report (without exhibits).  Any such written request should be directed to Lifeway’s Secretary at 6431 West Oakton, Morton Grove, IL 60053 or (847) 967-1010.
  
 

 
BY ORDER OF THE BOARD OF DIRECTORS
 
Ludmila Smolyansky
Chairperson of the Board
May 5, 2011
 



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIFEWAY FOODS, INC.
ATTN: EDWARD SMOLYANSKY                   
6431 W. OAKTON
MORTON GROVE, IL  60053
VOTE BY INTERNET - www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
 
Electronic Delivery of Future PROXY MATERIALS
If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years.
 
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions.
 
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.
 
 
TO VOTE, MARK BLOCKS BELOW IN  BLUE OR BLACK INK AS FOLLOWS:
KEEP THIS PORTION FOR YOUR RECORDS
 
 
DETACH AND RETURN  THIS  PORTION ONLY
 
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
 
The Board of Directors recommends that you vote FOR the following:
 
1.
  
Election of Directors:
     
   
Nominees
 
01  Ludmila Smolyansky     02  Julie Smolyansky     03  Pol Sikar     04  Renzo Bernardi     05  Gustavo Carlos Valle     06 Eugene B. Katz
 
     
   
o FOR ALL   o WITHHOLD ALL   o FOR ALL EXCEPT
     
 
The Board of Directors recommends you vote FOR the following proposal(s):
 
2.
  
Ratification of Plante & Moran, PLLC, as independent auditors
     
   
o FOR                     o AGAINST                         o ABSTAIN
 
 
 
 
NOTE: Such other business as may properly come before the meeting or any adjournment thereof.
 
To withhold authority to vote for any individual nominee(s), mark “For All Except” and write the number(s) of the nominee(s) on the line below.
 
 
 
Please sign exactly as your name(s) appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership name, by authorized officer.
 
     
SIGNATURE [PLEASE SIGN WITHIN BOX]
  
DATE
     
     
SIGNATURE (JOINT OWNERS)
  
DATE
     

 
 
 
 
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting: The Notice & Proxy Statement, Form 10-K is/are available at  www.proxyvote.com.
 
 
 
 
LIFEWAY FOODS, INC.
Annual Meeting of Shareholders
June 17, 2011 2:00 PM
This proxy is solicited by the Board of Directors
 
 
The undersigned hereby appoints Ludmila Smolyansky or Julie Smolyansky, with full power of substitution, as proxy to vote the Common Stock of the undersigned in Lifeway Foods, Inc. at the above Annual Meeting and at any adjournment thereof.
 
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS HEREIN SPECIFIED. IF A CHOICE IS NOT SPECIFIED, SUCH SHARES WILL BE VOTED FOR PROPOSALS 1 AND 2.
 
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER.
 
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.
 
 
 
 
Continued and to be signed on reverse side
 
 
 
 
 
APPENDIX A

AMENDED AND RESTATED
CHARTER OF THE AUDIT COMMITTEE

This Amended and Restated Charter of the Board of Directors of Lifeway Foods, Inc. was adopted as of this 17th day of December, 2003 by the Audit Committee (the “Committee”) of the Board of Directors (the “Board”) of Lifeway Foods, Inc. (the “Company”).

I.   AUDIT COMMITTEE PURPOSE

          1.   The Audit Committee (the “Committee”) is appointed by the Board of Directors (the “Board”) of Lifeway Foods, Inc. (the “Company”) to assist the Board in fulfilling its oversight responsibilities. The Committee’s primary duties and responsibilities are to:

               a. Monitor the integrity of the Company’s financial reporting process and systems of internal controls regarding finance, accounting, and legal compliance;

               b. Monitor the independence and performance of the Company’s independent auditors and internal auditing department; and

               c. Provide an avenue of communication among the independent auditors, management, the internal auditing department and the Board.

          2.   The Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities, and it has direct access to the independent auditors as well as anyone in the organization. The Committee has the ability to retain, at the Company’s expense, special legal, accounting, or other consultants or experts it deems necessary in the performance of its duties.

II.  AUDIT COMMITTEE COMPOSITION AND MEETINGS

          1.  The Committee shall meet the requirements of The Securities Act of 1933, as amended, The Securities  Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder by the U.S. Securities and  Exchange Commission (SEC) and the Qualitative Listing Requirements for  Nasdaq National Market and Nasdaq SmallCap Market Issuers applicable to the Company, as amended from time to time, regarding the composition and duties of the Committee. The Committee shall be comprised of at least three, but no more than seven directors, as determined by the Board, all of whom shall be independent directors.

          2.   All members of the Committee shall have a basic understanding of finance and accounting and be able to read and understand fundamental financial statements. In the event the Company files reports under SEC Regulation S-K, at least one member of the Committee shall have past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.

          3.   Committee members shall be appointed by the Board. If the Committee Chair is not designated or present, the members of the Committee may designate a Chair by a majority vote of the Committee membership.

          4.   The Committee shall meet four times annually, or more or less frequently as circumstances may dictate. The Committee Chair may prepare and/or approve an agenda in advance of each meeting, consistent with the provisions of this Charter. The Committee should meet privately in executive session at least annually with each of management, the independent auditors, and as a committee to discuss any matters that the Committee or each of these groups believe should be discussed.

 
 
 
     The Committee may ask members of management or others to attend the meetings and provide pertinent information as necessary.  In addition, the Committee, or at least its Chair, should communicate quarterly with the management and the independent auditors to review the Company’s financial statements and significant findings based upon the independent auditors’ limited review procedures.

III. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES

     Review Procedures

          1.   Review and reassess the adequacy of this Charter at least annually. Submit the Charter to the Board for approval and have the document published as an appendix to the Company’s annual proxy statement at least every three years or otherwise prescribed by applicable SEC regulations.

          2.   Review the Company’s annual audited and quarterly unaudited financial statements prior to filing or distribution. Review should include discussion with management and independent auditors of significant issues regarding accounting principles, practices and judgments.

          3.   In consultation with management, the independent auditors, and the internal auditors, consider the integrity of the Company’s financial reporting processes and controls. Discuss significant financial risk exposures and steps management has taken to monitor, control, and report such exposures. Review significant findings prepared by the independent auditors and the internal auditing department together with management’s responses including the status of previous recommendations.

          4.   Review with financial management and the independent auditors the Company’s quarterly financial results prior to the release of earning and/or the Company’s quarterly financial statements prior to filing or distribution. Discuss any significant changes to the Company’s accounting principles and any items required to be communicated by the independent auditors in accordance with the Statement of Auditing Standards No. 61 (“SAS 61”) which requires that auditors communicate, either in writing or orally before or after the financial statements have been issued. The Chair of the Committee may represent the entire Committee for purposes of this review or in certain cases may request that the entire Committee participate.

     Independent Auditors

          5.   The independent auditors are ultimately accountable to the Committee and the Board. The Committee shall review the independence and performance of the auditors and annually recommend to the Board the appointment of the independent auditors or approve any discharge of the independent auditors when circumstances warrant.

          6.   Approve the fees and other significant compensation to be paid to the independent auditors. Review and approve requests for significant management consulting engagements to be performed by the independent auditors’ firm and be advised of any other significant study undertaken at the request of management that is beyond the scope of the audit engagement letter.

          7.   On an annual basis, the Committee should review and discuss with the independent auditors all significant relationships they have with the Company that could impair the auditors’ independence.

          8.   Review the independent auditors’ engagement letter and audit plan discuss scope, staffing, locations, reliance upon management, and internal audit and general audit approach.

          9.   Prior to releasing the year-end earnings, discuss the results of the audit with the independent auditors. Discuss certain matters required to be communicated to the Committee by the independent auditors in accordance with SAS 61.

 
 
 

 
          10.  Consider the independent auditors’ judgments about the quality and appropriateness of the Company’s accounting principles as applied in its financial reporting.

          11.  Discuss with management and the independent auditors the quality of the accounting principles and underlying estimates used in the preparation of the Company’s financial statements.

          12.  Discuss with the independent auditors the clarity of the financial disclosure practices used or proposed by the Company.

          13.  Inquire as to the independent auditors’ views about whether management’s choices of accounting principles appear reasonable from the prospective of income, asset and liability recognition and whether those principles are common practices or are minority practices.

     Internal Audit Department and Legal Compliance

          14. Review the budget, plan, changes in plan, activities, organization structure, and qualifications of the internal audit department, as needed.

          15. Review the appointment, performance, and replacement of the senior internal audit executive.

          16. Review significant reports prepared by the internal audit department together with management’s response and follow-up to these reports.

          17. On at least an annual basis, review with the Company’s counsel, any legal matters that could have a significant impact on the organization’s financial statements, the Company’s compliance with applicable laws and regulations, and inquiries received from regulators or governmental agencies.

     Other Audit Committee Responsibilities

          18. Annually prepare a report to shareholders as required by the SEC.  The report should be included in the Company’s annual proxy statement.

          19. Perform any other activities consistent with this Charter, the Company’s by-laws, and governing law, as the Committee or the Board deems necessary or appropriate.

          20. Maintain minutes of meetings and periodically report to the Board on significant results of the foregoing activities.

 
 
 
APPENDIX B

CODE OF ETHICS

I.   Introduction

This Code of Ethics (this “Code”) is applicable to the officers of Lifeway Foods, Inc. (“Lifeway”). References in this Code of Ethics to Lifeway mean Lifeway or any of its subsidiaries.

While Lifeway and its stockholders expect honest and ethical conduct in all aspects of its business from all employees, Lifeway and its stockholders expect the highest possible standards of honest and ethical conduct from its officers.  The officers are setting an example for other employees and are expected to foster a culture of transparency, integrity and honesty. Compliance with this Code and all other applicable codes of business conduct or ethics adopted by the Board of Directors of Lifeway is mandatory and any violations will be addressed severely.

II.  Conflicts of Interest

Conflicts of interest are strictly prohibited as a matter of Lifeway policy.  Officers must be scrupulous in avoiding any action or interest that conflicts with, or gives the appearance of a conflict with, Lifeway’s interests.   A “conflict of interest” exists whenever an individual’s private interests in any way interfere or conflict with, or appear to interfere or conflict with, the interests of Lifeway or make, or appear to make, it difficult for the individual to perform his or her work for Lifeway objectively and effectively. Conflicts of interest arise when:

          (a)  personal interests interfere, or appear to interfere, in any way, with the interests of Lifeway (for example, competition with Lifeway);

          (b)  undertakings for an officer’s direct or indirect benefit or the direct or indirect benefit of a third party that is inconsistent with the interests of Lifeway (for example, causing Lifeway to engage in business transactions with a company under the control of an officer, whether solely or with friends or relatives);

          (c)  an officer, or a member of an officer’s family, receives improper personal benefits as a result of such officer’s position in Lifeway (for example, a loan or other benefit from a third party to direct Lifeway business to a third-party).

There are other situations in which conflicts of interest may arise.   Conflicts of interest may not always be clear-cut. Questions regarding conflicts of interest should be directed to the Company’s Counsel.

III. Accurate Periodic Reports

Full, fair, accurate, timely and understandable disclosure (as required in the reports and other documents that filed with, or submitted to, the SEC and in our other public communications) is critical for the Company to maintain its good reputation, to comply with its obligations under the securities laws and to meet the expectations of our stockholders and other members of the investment community. Officers are to exercise the highest standard of care in preparing such reports and documents and other public communications, in accordance with the following guidelines:

          (a)  all accounting records, and the reports produced from such records, must be in accordance with all applicable laws and regulations;

          (b)  all accounting records must fairly and accurately reflect the transactions or occurrences to which they relate;

          (c)  all accounting records must fairly and accurately reflect in reasonable detail Lifeway’s assets, liabilities, revenues and expenses;

 
 
 
 
          (d)  no accounting records may contain any false or intentionally misleading entries;

          (e)  no transactions should be intentionally misclassified as to accounts, departments or accounting periods;

          (f)  all transactions must be supported by accurate documentation in reasonable detail and recorded in the proper account and in the proper accounting period;

          (g)  no material information should be concealed from the internal auditors or the independent auditors; and compliance with Lifeway’s system of internal controls is required.

IV.  Compliance with Laws

Officers are expected to understand and comply with both the letter and spirit of all applicable laws and governmental rules and regulations.

V.   Reporting Violations

Officers are expected to report any violations of this Code of Ethics promptly to the Chairman of the Board of Directors.

VI.  Consequences of Non-Compliance with this Code

Violations of this Code will be reported to the Audit Committee and the Board of Directors. Failure to comply with this Code of Ethics or applicable laws, rules or regulations (including without limitation all rules and regulations of the Securities and Exchange Commission) may result in disciplinary measures, up to and including discharge from Lifeway, and any appropriate legal action.

VII. Amendment, Modification and Waiver

This Code may be amended or modified by the Board of Directors. Waivers of this Code may only be granted by the Board of Directors or a committee of the Board of Directors with specifically delegated authority. Waivers will be disclosed to stockholders as required by the Securities Exchange Act of 1934.