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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No.     )
Filed by the Registrant   x
Filed by a Party other than the Registrant    o
Check the appropriate box:
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o	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x	Definitive Proxy Statement
o	Definitive Additional Materials
o	Soliciting Material Pursuant to §240.14a-12
LANNETT COMPANY, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x	No fee required.
o	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
	(1)		Title of each class of securities to which transaction applies:
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o	Fee paid previously with preliminary materials.
o	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.
	(1)	Amount Previously Paid:
	(2)	Form, Schedule or Registration Statement No.:
	(3)	Filing Party:
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LANNETT COMPANY, INC.

9000 STATE ROAD

PHILADELPHIA, PA  19136

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD JANUARY 19, 2011

 

TO THE STOCKHOLDERS OF LANNETT COMPANY, INC.

 

The annual meeting (the “Annual Meeting”) of the Stockholders of Lannett Company, Inc., a Delaware Corporation, (the “Company”) will be held on Wednesday, January 19, 2011 at 9:00 a.m., local time, at the Company’s facility at 9001 Torresdale  Avenue, Philadelphia, PA  19136, for the following purposes:

 

1.                To elect eight (8) members of the Board of Directors to serve until the next Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified;

 

2.                To approve the 2011 Long-Term Incentive Plan; and

 

3.                To transact such other business as may properly come before the Annual Meeting or any adjournment thereof.

 

THESE MATTERS ARE MORE FULLY DESCRIBED IN THE PROXY STATEMENT ACCOMPANYING THIS NOTICE.

 

Stockholders of record at the close of business on December 10, 2010 may vote at this Annual Meeting.

 

It is important that you be represented at the Annual Meeting.  You are cordially invited to attend the Annual Meeting in person and we encourage you to attend and take the opportunity to ask questions.

 

 

	By Order of the Board of Directors
December 14, 2010	/s/ William Farber
Philadelphia, Pennsylvania	William Farber, Chairman of the Board

 

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LANNETT COMPANY, INC.

 

PROXY STATEMENT

FOR

ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON JANUARY 19, 2011

 

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ATTENDANCE AND VOTING MATTERS	1
PROPOSAL NO. 1 — ELECTION OF DIRECTORS	2
BOARD MEETINGS AND COMMITTEES	5
PRINCIPAL STOCKHOLDERS	6
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE	9
DIRECTORS AND OFFICERS	10
EXECUTIVE COMPENSATION	12
REPORT OF THE COMPENSATION COMMITTEE	23
EMPLOYMENT AGREEMENTS	26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	26
CODE OF CONDUCT	27
REPORT OF THE AUDIT COMMITTEE	28
APPOINTMENT OF INDEPENDENT AUDITORS FOR FISCAL 2011	29
PROPOSAL NO. 2 — APPROVAL OF 2011 LONG-TERM INCENTIVE PLAN (the “Plan”)	30

 

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ATTENDANCE AND VOTING MATTERS

 

DATE, TIME, AND PLACE OF MEETING

 

This Proxy Statement is provided to you by the Board of Directors of Lannett Company, Inc. (the “Company” or “Lannett”) in connection with the Annual Meeting.  The Annual Meeting will be held on Wednesday, January 19, 2011 at 9:00 a.m., local time, at the Company’s facility at 9001 Torresdale Avenue, Philadelphia, PA 19136, or at any adjournments or postponements of the Annual Meeting for the purposes set forth in the accompanying Notice of Annual Meeting. We intend to mail this Proxy Statement and the accompanying Notice of Annual Meeting on or about December 16, 2010 to all Stockholders of the Company entitled to vote at the Annual Meeting.

 

VOTING METHODS

 

You may vote on matters to come before the meeting in two ways:

 

·                   You may come to the Annual Meeting and cast your vote in person;

·                   You may vote by signing and returning the enclosed proxy card by mail.  If you do so, the individuals named on the card will vote your shares in the manner you indicate.  You may revoke your proxy at any time prior to the Annual Meeting by sending written notice to the Secretary of the Company at 13200 Townsend Road, Philadelphia, PA 19154, or by attending the meeting.

 

If you come to the Annual Meeting to cast your vote in person and you are holding your stock in a brokerage account (“street name”), you will need to bring a legal proxy obtained from your broker.

 

You are entitled to cast one vote for each share of Lannett common stock owned on the record date, December 10, 2010. As of the record date, there were 25,080,233 shares of Lannett common stock outstanding.  Stockholders are not entitled to cumulative voting in the election of directors.

 

QUORUM

 

A quorum of stockholders is necessary to hold a valid meeting for the transaction of business.  If the holders of a majority of Lannett common stock are present at the meeting, in person or by proxy, a quorum will exist.  Abstentions and “broker non-votes” are counted as present for purposes of establishing a quorum.

 

VOTE NECESSARY FOR ACTION

 

Directors are elected by a plurality vote of shares present at the Annual Meeting.  Each other action to be considered by the stockholders will be approved by the affirmative vote of at least a majority of the shares present in person or by proxy at the meeting and entitled to vote on the matter.  For any proposal, an abstention will have the same effect as a vote against the proposal.  Broker non-votes will not be voted for or against any of these proposals and will have no effect on any of these proposals.

 

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PROPOSAL NO. 1 — ELECTION OF DIRECTORS

 

NOMINEES

 

The Company’s Bylaws provide that the number of directors of the Company may be determined by the Stockholders, or in the absence of such determination, by the Board of Directors. Currently, there are seven members of the Board of Directors, but at its October 28, 2010 meeting the Board has recommended that the total membership be increased to eight members. The Board of Directors nominates the eight persons named below, seven of whom are currently serving on the Board of Directors, for election to the Board of Directors.  As of the date of this Proxy Statement, the Board of Directors is not aware that any nominee is unable to serve or will decline to serve as a director.  The eight nominees receiving the highest number of affirmative votes of the shares entitled to vote at the Annual Meeting will be elected directors of the Company until the next Annual Meeting and until their successors have been elected and qualified or until their earlier resignation or removal.

 

The following list identifies the nominees for election to the Board of Directors and sets forth-certain information regarding each nominee.  All nominees are currently serving as directors of the Company.  A majority of the Directors on the Board are independent, as defined by the rules of the NYSE Amex stock exchange.  Those directors are referred to as “independent” below.

 

William Farber, 79 , was elected as Chairman of the Board of Directors in August 1991.  From April 1993 to the end of 1993, Mr. Farber was the President and a director of Auburn Pharmaceutical Company. From 1990 through March 1993, Mr. Farber served as Director of Purchasing for Major Pharmaceutical Corporation.  From 1965 through 1990, Mr. Farber was the Chief Executive Officer of Michigan Pharmacal Corporation.  Mr. Farber was previously a registered pharmacist in the State of Michigan for more than 40 years until his retirement from active employment in the pharmaceutical industry.

 

The Nominating and Governance Committee concluded that Mr. Farber is qualified and should continue to serve, due, in part, to his long and very successful career in generic drug distribution, having built and managed one of the Country’s leading generic distribution companies. His skills include cost controls and material handling.

 

Ronald A. West, 76 , was elected a Director of the Company in January 2002.  In September 2004, Mr. West was elected Vice Chairman of the Board of Directors.  Mr. West is currently a Director of Beecher Associates, an industrial real estate investment company.  Prior to this, from 1983 to 1987, Mr. West served as Chairman and Chief Executive Officer of Dura Corporation, an original equipment manufacturer of automotive products and other engineered equipment components.  In 1987, Mr. West sold his ownership position in Dura Corporation, at which time he retired from active management positions.  Mr. West was employed at Dura Corporation since 1969.  Previously, he served in various financial management positions with TRW, Inc., Marlin Rockwell Corporation and National Machine Products Group, a division of Standard Pressed Steel Company.  Mr. West studied Business Administration at Michigan State University and the University of Detroit.

 

The Nominating and Governance Committee concluded that Mr. West is qualified and should continue to serve, due, in part, because of his long and successful career in the manufacturing sector, both as a senior executive and as a financial manager. In addition to his financial analytic skills, he is a natural leader with solid experience in corporate governance.  Mr. West is an independent director.  Mr. West serves as our independent lead director.

 

Arthur P. Bedrosian, J.D., 65, was promoted to President of the Company in May 2002 and CEO in January 2006.  Prior to this, he served as the Company’s Vice President of Business Development from January 2002 to April 2002.  Mr. Bedrosian was elected as a Director in February 2000 and served to January 2002.  Mr. Bedrosian was re-elected a Director in January 2006. Mr. Bedrosian has operated generic drug manufacturing, sales, and marketing businesses in the healthcare industry for many years.  From 1999 to 2001, Mr. Bedrosian served as President and Chief Executive Officer of Trinity Laboratories, Inc., a medical device and drug manufacturer. Mr. Bedrosian also operated Pharmaceutical Ventures Ltd, a healthcare consultancy, Pharmeral, Inc. a drug representation company selling generic drugs, and Interal Corporation, a computer consultancy to Fortune 100 companies. Mr. Bedrosian holds a Bachelor of Arts Degree in Political Science from Queens College of the City University of New York and a Juris Doctorate from Newport University in California.

 

The Nominating and Governance Committee concluded that Mr. Bedrosian is qualified to serve as a director, in part, because his experience as our President and Chief Executive Officer has been instrumental in the company’s growth and provides the board with a compelling understanding of our operations, challenges and opportunities. In addition, his 42-year background in the generic pharmaceutical industry that encompasses a broad background and knowledge in the underlying scientific, sales, marketing and supply chain management brings special expertise to the board in developing our business strategies. His recent qualification to FINRA’s list of arbitrators recognizes his expertise and experience.

 

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Jeffrey Farber, 50 , was elected a Director of the Company in May 2006.  Jeffrey Farber joined the Company in August 2003 as Secretary. For the past 14 years, Mr. Farber has been President and the owner of Auburn Pharmaceutical (“Auburn”), a national generic pharmaceutical distributor. Prior to starting Auburn, Mr. Farber served in various positions at Major Pharmaceutical Corporation (“Major”), where he was employed for over 15 years. At Major, Mr. Farber was involved in sales, purchasing and eventually served as President of the mid-west division. Mr. Farber also spent time working at Major’s manufacturing division — Vitarine Pharmaceuticals — where he served on its Board of Directors.  Mr. Farber graduated from Western Michigan University with a Bachelors of Science Degree in Business Administration and participated in the Pharmacy Management Graduate Program at Long Island University. Mr. Farber is the son of William Farber, the Chairman of the Board of Directors and the principal shareholder of the Company.

 

The Nominating and Governance Committee concluded that Mr. Farber is qualified and should continue to serve, due, in part, to his significant experience in the generic drug industry and his ongoing role as the owner of a highly regarded and successful generic drug distributor. His skills include a thorough knowledge of the generic drug marketplace and drug supply chain management.

 

Kenneth Sinclair, Ph.D., 64, was elected a Director of the Company in September 2005. Dr. Sinclair is currently Professor of Accounting and Senior Advisor to the College of Business and Economics Dean at Lehigh University, where he began his academic career in 1972. Dr. Sinclair served as Chair of Lehigh’s Accounting Department from 1988 to 1994 and 1998 to 2007.  He has taught a variety of accounting courses, including financial and managerial accounting at both the undergraduate and graduate level.  He has been recognized for his teaching innovation, held leadership positions with professional accounting organizations and served on numerous academic and advisory committees. He has received a number of awards and honors for teaching and service, and has researched and written on a myriad of subjects related to accounting. He has also been heavily involved with strategic planning at both the College and Department level at Lehigh. Dr. Sinclair earned a Bachelor of Business Administration degree in Accounting, a Master of Science degree in Accounting and a Doctorate Degree in Business Administration with a concentration in Accounting from the University of Massachusetts.

 

The Nominating and Governance Committee concluded that Dr. Sinclair is qualified and should continue to serve, due, in part to his long and distinguished career as an Accounting Academic and his deep understanding of accounting and financial reporting.  His skills also include organizational planning and interpersonal relations.  Dr. Sinclair is an independent director.

 

Albert I. Wertheimer, Ph.D., MBA, 68 , was elected a Director of the Company in September 2004. Dr. Wertheimer has a long and distinguished career in various aspects of pharmacy, health care, education and pharmaceutical research.  Since 2000, Dr. Wertheimer has been a professor at the School of Pharmacy at Temple University, and director of its Center for Pharmaceutical Health Services Research.  From 1997 to 2000, Dr. Wertheimer was Director of Outcomes Research and Management at Merck & Co., Inc.  In addition to his academic responsibilities, he is the author of 28 books and more than 380 journal articles.  Dr. Wertheimer also provides consulting services to institutions in the pharmaceutical industry.  Dr. Wertheimer’s academic experience includes professorships and other faculty and administrative positions at several educational institutions, including the Medical College of Virginia, St. Joseph’s University, Philadelphia College of Pharmacy and Science and the University of Minnesota. Dr. Wertheimer’s previous professional experience includes pharmacy services in commercial and non-profit environments.  Professor Wertheimer is a licensed pharmacist in five states, and is a member of several health associations, including the American Pharmacists Association and the American Public Health Association.  Dr. Wertheimer is the editor of the Journal of Pharmaceutical Health Services Research ; and he has been on the editorial board of the Journal of Managed Pharmaceutical Care, Medical Care , and other healthcare journals. Dr. Wertheimer has a Bachelor of Science Degree in Pharmacy from the University of Buffalo, a Master of Business Administration from the State University of New York at Buffalo, a Doctorate from Purdue University and a Post Doctoral Fellowship from the University of London, St. Thomas’ Medical School.

 

The Nominating and Governance Committee concluded that Dr. Wertheimer is qualified and should continue to serve, due, in part to his deep understanding of all aspects of pharmacy practice, including retail and manufacturing.  His skills include business planning and a sound knowledge of drug regulation and distribution.  Dr. Wertheimer is an independent director.

 

Myron Winkelman, R. Ph., 73 , was elected a Director of the Company in June 2003. Mr. Winkelman has significant career experience in various aspects of pharmacy and health care.  He is currently President of Winkelman Management Consulting (“WMC”), which provides consulting services to both commercial and governmental clients.  He has served in this position since 1994.  Mr. Winkelman has recently managed multi-state drug purchasing initiatives for both Medicaid and state entities.  Prior to creating WMC, he was a senior executive with ValueRx, a large pharmacy benefits manager, and served for many years as a senior executive for the Revco, Rite Aid and Perry Drug chains. While at ValueRx, Mr. Winkelman served on the Board of Directors of the Pharmaceutical Care Management Association.  He belongs to a number of pharmacy organizations, including the Academy of Managed Care Pharmacy and the Michigan Pharmacy Association. Mr. Winkelman is a registered pharmacist and holds a Bachelor of Science Degree in Pharmacy from Wayne State University.

 

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The Nominating and Governance Committee concluded that Mr. Winkelman is qualified and should continue to serve, due, in part to his experiences with and knowledge of Pharmacy Benefit Administration and Mail Order Pharmacy.  His skills include a deep understanding of government pharmacy benefits and the drug supply chain.  Mr. Winkelman is an independent director.

 

David Drabik, 42 , was nominated to become a board member by the Nominating Committee of the Company in November 2010.   If elected, Mr. Drabik would be an independent director.  Since 2002, Mr. Drabik has been President of Cranbrook & Co., LLC (“Cranbrook”), an advisory firm primarily serving the private equity and venture capital community.   At Cranbrook, Mr. Drabik assists and advises its clientele on originating, structuring, and executing private equity and venture capital transactions.  From 1995 to 2002, Mr. Drabik served in various roles and positions with UBS Capital Americas (and its predecessor UBS Capital LLC), a New York City based, private equity and venture capital firm that managed $1.5 billion of capital.  From 1992 to 1995, Mr. Drabik was a banker with Union Bank of Switzerland’s Corporate and Institutional Banking division in New York City.  Mr. Drabik graduated from the University of Michigan with a Bachelors of Business Administration degree.

 

The Nominating and Governance Committee concluded that Mr. Drabik is well qualified and should be nominated to serve as a Director due, in part to his excellent understanding of investment banking.  As a global investment bank professional with extensive experience advising senior management, his skills include business analytics, financing and a strong familiarity with SEC documentation.

 

To the best of the Company’s knowledge, there are no material proceedings to which any nominee is a party, or has a material interest adverse to the Company.  To the best of the Company’s knowledge, there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions that are material to the evaluation of the ability or integrity of any nominee during the past five years.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT LANNETT STOCKHOLDERS VOTE “FOR” THESE NOMINEES. UNLESS MARKED TO THE CONTRARY, PROXIES RECEIVED FROM STOCKHOLDERS WILL BE VOTED IN FAVOR OF THESE NOMINEES.

 

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BOARD MEETINGS AND COMMITTEES

 

The Board of Directors met six times during the fiscal year ended June 30, 2010 (“Fiscal 2010”).  In addition to meetings of the Board, directors attended meetings of individual Board committees.  In Fiscal 2010, each of the directors attended at least 75% of the Board meetings and meetings of Board committees of which they were a member, except William Farber who attended 67% of the meetings due to illness.  There were 11 Audit Committee meetings, one Strategic Planning Committee meeting, one Nominating and Governance Committee meeting, 11 Compensation Committee meetings and one Independent directors meeting held during Fiscal 2010.

 

The Audit Committee has responsibility for recommending the retention of independent auditors, conferring with the independent auditors regarding their audit of the Company’s consolidated financial statements, reviewing the independent auditors’ fees and considering whether non-audit services are compatible with maintaining their independence, and considering the adequacy of internal financial controls. All members of the Audit Committee are independent directors as defined by the rules of the American Stock Exchange. The Audit Committee is comprised of Dr. Sinclair (Chairman), Mr. West and Dr. Wertheimer.  See “Report of the Audit Committee.”

 

Financial expert on audit committee: The Board of Directors has determined that Dr. Sinclair, current director of Lannett as well as current Professor of Accounting and Senior Advisor to the College of Business and Economics Dean at Lehigh University, where he began his academic career in 1972, is the audit committee financial expert as defined in section 3(a)(58) of the Exchange Act and the related rules of the Commission.

 

The Compensation Committee establishes and regularly reviews the Company’s compensation philosophy, strategy, objectives and ethics and determines the compensation payable to the officers of the Company. The Committee also administers the Company’s equity compensation plans. All members of the Compensation Committee are independent directors as defined by the rules of the American Stock Exchange. The Compensation Committee is comprised of Mr. Winkelman (Chairman), Mr. West and Dr. Wertheimer.

 

The Strategic Planning Committee oversees the Company’s medium and long-term business strategies, including the decisions regarding new product initiatives, joint ventures and alliances, new markets and other matters related to the Company’s long-term planning process.  The Strategic Planning Committee is comprised of Mr. Winkelman, Dr. Wertheimer (Chairman), Mr. Bedrosian and Mr. Jeffrey Farber.

 

The Nominating and Governance Committee reviews possible candidates for Board membership and recommends a slate of nominees to the Company.  This committee was formed in November 2007.  The committee is comprised of Dr. Sinclair and Mr. Winkelman.

 

Recommendations to the Board of Directors are approved by a majority of directors. The Nominating and Governance Committee is responsible for identifying and evaluating individuals qualified to become Board members and to recommend such individuals for nomination. All candidates must possess an unquestionable commitment to high ethical standards and have a demonstrated reputation for integrity.  Other facts considered include an individual’s business experience, education, civic and community activities, knowledge and experience with respect to the issues impacting the pharmaceutical industry and public companies, as well as the ability of the individual to devote the necessary time to service as a director.

 

The Nominating and Governance Committee does not have a formal policy with regard to the consideration of any director candidates recommended by security holders.  The Nominating and Governance Committee will consider candidates recommended by Stockholders.  All nominees will be evaluated in the same manner, regardless of whether they were recommended by the Nominating and Governance Committee, or recommended by a Stockholder. This will ensure that appropriate director selection continues.

 

The Chairman’s Committee’s purpose is to act on behalf of the Board between scheduled Board meetings, except for those matters specifically reserved to the full Board, when in exceptional circumstances, it is not possible or practicable to convene a regular meeting of the Board.  The Chairman’s Committee is comprised of Mr. William Farber, Mr. West and Mr. Bedrosian.

 

Executive Sessions of Independent Directors

 

In accordance with the rules and regulations of the NYSE Amex stock exchange, non-management independent directors meet at regularly scheduled executive sessions without management participation. At least once a year, an executive session is held with only independent directors. Executive sessions are chaired by a lead independent director who is appointed annually by the Board of Directors from our independent directors. Mr. West currently serves as the lead independent director. In this role, Mr. West serves as chairperson of the independent director sessions and assists the Board in assuring effective corporate governance.

 

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PRINCIPAL STOCKHOLDERS

 

The following table sets forth, as of December 1, 2010, information regarding the security ownership of the directors and certain executive officers of the Company and persons known to the Company to be beneficial owners of more than five (5%) percent of the Company’s common stock.  Although grants of restricted stock under the Company’s 2006 Long Term Incentive Plan (“2006 LTIP”) generally vest equally over a three year period from the grant date, the restricted shares are included below because the voting rights with respect to such restricted stock are acquired immediately upon grant.

 

				Excluding Options				Including Options (*)
Name and Address of Beneficial Owner		Office		Number of Shares		Percent of Class		Number of Shares		Percent of Class
Directors/Executive Officers:
William Farber 13200 Townsend Road Philadelphia, PA 19154		Chairman of the Board		8,162,487	(1)	32.34	%	8,254,987	(1),(2)	32.48	%
Ronald A. West 13200 Townsend Road Philadelphia, PA 19154		Vice Chairman of the Board, Director		16,810	(3)	0.07	%	71,758	(3),(4)	0.28	%
Jeffrey Farber 13200 Townsend Road Philadelphia, PA 19154		Director		5,703,562	(5)	22.52	%	5,751,062	(5),(6)	22.67	%
Kenneth Sinclair 13200 Townsend Road Philadelphia, PA 19154		Director		17,500	(7)	0.07	%	42,500	(7),(8)	0.17	%
Albert Wertheimer 13200 Townsend Road Philadelphia, PA 19154		Director		18,500	(9)	0.07	%	43,500	(9),(10)	0.17	%
Myron Winkelman 13200 Townsend Road Philadelphia, PA 19154		Director		18,500	(11)	0.07	%	58,500	(11),(12)	0.23	%
Arthur P. Bedrosian 13200 Townsend Road Philadelphia, PA 19154		President and Chief Executive Officer		588,424	(13)	2.32	%	941,324	(13),(14)	3.67	%
William Schreck 13200 Townsend Road Philadelphia, PA 19154		Senior Vice President and General Manager		35,493	(15)	0.14	%	165,905	(15),(16)	0.65	%
Kevin Smith 13200 Townsend Road Philadelphia, PA 19154		Vice President of Sales and Marketing		28,651	(17)	0.11	%	204,744	(17),(18)	0.80	%
Ernest Sabo 13200 Townsend Road Philadelphia, PA 19154		Vice President of Regulatory Affairs and Chief Compliance Officer		20,953	(19)	0.08	%	78,046	(19),(20)	0.31	%
David Farber 6884 Brook Hollow Ct West Bloomfield, MI 48322				5,705,050	(21)	22.53	%	5,727,550	(21),(22)	22.60	%
Keith R. Ruck 13200 Townsend Road Philadelphia, PA 19154		Vice President of Finance and Chief Financial Officer		8,647	(23)	0.03	%	26,980	(23),(24)	0.11	%

 

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				Excluding Options				Including Options (*)
Name and Address of Beneficial Owner		Office		Number of Shares		Percent of Class		Number of Shares		Percent of Class
Farber Properties 1775 John R Road Troy, MI 48083				5,000,000	(25)	19.74	%	5,000,000		19.74	%
Farber Family LLC 1775 John R Road Troy, MI 48083				528,142	(26)	2.09	%	528,142		2.09	%
Farber Investment LLC 1775 John R Road Troy, MI 48083				38,000	(27)	0.15	%	38,000		0.15	%
Stephen Kovary 13200 Townsend Road Philadelphia, PA 19154		Vice President of Operations		2,507	(28)	0.01	%	9,174	(28),(29)	0.04	%
All directors and executive officers as a group (12 persons)				14,622,034		57.74	%	15,648,480		59.39	%

 

(1)           Includes 197,825 shares owned by William Farber’s spouse, Audrey Farber; 14,000 shares owned by William Farber’s brother, Gerald G. Farber, and 132,212 shares held by William Farber as custodian for his seven grandchildren.  Includes 26,250 shares held in William Farber’s IRA account.  Includes 5,000 shares received pursuant to a restricted stock award granted in September 2007.

 

(2)           Includes 37,500 vested options to purchase common stock at an exercise price of $7.97 per share, 25,000 vested options to purchase common stock at an exercise price of $17.36 per share, 25,000 vested options to purchase common stock at an exercise price of $16.04 per share, and 5,000 vested options to purchase common stock at an exercise price of $6.89 per share.

 

(3)                                   Includes 5,000 shares received pursuant to a restricted stock award granted in September 2007.

 

(4)           Includes 9,948 vested options to purchase common stock at an exercise price of $7.97 per share, 15,000 vested options to purchase common stock at an exercise price of $17.36 per share, 25,000 vested options to purchase common stock at an exercise price of $16.04 and 5,000 vested options to purchase common stock at an exercise price of $6.89.

 

(5)           Includes 5,000,000 shares held by Farber Properties Group LLC (“FPG”).  FPG is managed and jointly owned by Jeffrey Farber and David Farber.  David Farber and Jeffrey Farber each disclaim beneficial ownership of 2,500,000 shares held by FPG.  Includes 528,142 shares held by Farber Family LLC (“FFLLC”) which is managed by Jeffrey and David Farber. David Farber and Jeffrey Farber each disclaim beneficial ownership of these shares. Includes 150 shares held by Jeffrey Farber as custodian for his son and 10,800 shares held by William Farber as custodian for his children.  Also includes 9,500 shares held by Farber Investment Company (“FIC”), which holds 38,000 shares of common stock.  Jeffrey Farber and David Farber each beneficially owns 25% of FIC and each disclaims beneficial ownership of all but 9,500 shares held by FIC.  Also includes 5,000 shares received pursuant to a restricted stock award granted in September 2007.

 

(6)           Includes 10,000 vested options to purchase common stock at an exercise price of $17.36 per share, 12,500 vested options to purchase common stock at an exercise price of $16.04, 20,000 vested options to purchase common stock at an exercise price of $4.55, and 5,000 vested options to purchase common stock at an exercise price of $6.89.

 

(7)                                   Includes 5,000 shares received pursuant to a restricted stock award granted in September 2007.

 

(8)           Includes 20,000 vested options to purchase common stock at an exercise price of $4.55 per share and 5,000 vested options to purchase common stock at an exercise price of $6.89 per share.

 

(9)           Includes 5,000 shares received pursuant to a restricted stock award granted in September 2007.

 

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(10)         Includes 20,000 vested options to purchase common stock at an exercise price of $9.02 per share and 5,000 vested options to purchase common stock at an exercise price of $6.89 per share.

 

(11)         Includes 5,000 shares received pursuant to a restricted stock award granted in September 2007.

 

(12)         Includes 15,000 vested options to purchase common stock at an exercise price of $17.36, 20,000 vested options to purchase common stock at an exercise price of $16.04 and 5,000 vested options to purchase common stock at an exercise price of $6.89 per share.

 

(13)         Includes 33,150 shares owned by Arthur Bedrosian’s wife and 1,000 shares owned by his daughter. Mr. Bedrosian disclaims beneficial ownership of these shares. Includes 12,893 shares received pursuant to a restricted stock award granted in September 2007 and 26,655 shares received pursuant to a restricted stock award granted in October 2009.  Also includes 31,337 shares of common stock held through employee stock purchase plan.

 

(14)         Includes 18,000 vested options to purchase common stock at an exercise price of $4.63 per share, 96,900 vested options to purchase common stock at an exercise price of $7.97 per share, 33,000 vested options to purchase common stock at an exercise price of $17.36 per share, 30,000 vested options to purchase common stock at an exercise price of $16.04 per share, 25,000 vested options to purchase common stock at an exercise price of $8.00 per share, 30,000 vested options to purchase common stock at an exercise price of $6.89 per share, 75,000 vested options to purchase common stock at an exercise price of $4.03 per share,  30,000 vested options to purchase common stock at an exercise price of $2.80, and 25,000 vested options to purchase common stock at an exercise price of $6.94.

 

(15)         Includes 6,223 shares received pursuant to a restricted stock award granted in September 2007, and 13,349 shares received pursuant to a restricted stock award granted in October 2009.

 

(16)         Includes 17,745 vested options to purchase common stock at an exercise price of $11.27 per share, 12,000 vested options to purchase common stock at an exercise price of $5.18 per share and 15,000 vested options to purchase common stock at an exercise price of $6.89 per share, 50,000 vested options to purchase common stock at an exercise price of $4.03 per share, 16,000 vested options to purchase common stock at an exercise price of $2.80 per share, 5,000 vested options to purchase common stock at an exercise price of $7.53 per share and 20,000 vested options to purchase common stock at an exercise price of $6.94 per share.

 

(17)         Includes 7,164 shares received pursuant to a restricted stock award granted in September 2007, and 13,229 shares received pursuant to a restricted stock award granted in October 2009.

 

(18)         Includes 38,760 vested options to purchase common stock at an exercise price of $7.97 per share, 13,000 vested options to purchase common stock at an exercise price of $17.36 per share, 20,000 vested options to purchase common stock at an exercise price of $16.04 per share, 12,000 vested options to purchase common stock at an exercise price of $5.18 per share, 15,000 vested options to purchase common stock at an exercise price of $6.89 per share, 50,000 vested options to purchase common stock at an exercise price of $4.03 per share, 16,000 vested options to purchase common stock at an exercise price of $2.80 and 16,666 vested options to purchase common stock at an exercise price of $6.94 per share.

 

(19)         Includes 5,337 shares received pursuant to a restricted stock award granted in September 2007, and 13,349 shares received pursuant to a restricted stock award granted in October 2009.

 

(20)         Includes 3,260 vested options to purchase common stock at an exercise price of $7.48 per share, 4,000 vested options to purchase common stock at an exercise price of $5.18 per share, 7,500 vested options to purchase common stock at an exercise price of $6.89 per share, 15,000 vested options to purchase common stock at an exercise price of $4.03 per share, 16,000 vested options to purchase common stock at an exercise price of $2.80 per share and 16,666 vested options to purchase common stock at an exercise price of $6.94 per share.

 

(21)         Includes 5,000,000 shares held by FPG.  FPG is managed and jointly owned by Jeffrey Farber and David Farber.  David Farber and Jeffrey Farber each disclaim beneficial ownership of 2,500,000 shares held by FPG.  Includes 528,142 shares held by FFLLC which is managed by Jeffrey and David Farber. David Farber and Jeffrey Farber each disclaim beneficial ownership of these shares. Indirect shares include 7,488 shares held by David Farber as custodian for his children, 16,200 shares held by William Farber as custodian for his children and 2,850 shares held by David Farber’s spouse. Also includes 9,500 shares held by FIC, which holds 38,000 shares of common stock.  Jeffrey Farber and David Farber each beneficially owns 25% of FIC and each disclaims beneficial ownership of all but 9,500 shares held by FIC.

 

(22)         Includes 10,000 vested options to purchase common stock at an exercise price of $17.36 per share and 12,500 vested options to purchase common stock at an exercise price of $16.04 per share.

 

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(23)         Includes 6,667 shares received pursuant to a restricted stock award granted in October 2009 and 1,980 shares of common stock held through employee stock purchase plan.

 

(24)         Includes 5,000 vested options to purchase common stock at an exercise price of $6.94 per share..

 

(25)                             Farber Properties Group, LLC is managed and jointly owned by Jeffrey Farber and David Farber.

 

(26)                             Farber Family LLC is managed by Jeffrey Farber and David Farber as trustees.

 

(27)                             Farber Investment LLC is beneficially owned 25% each by Jeffrey and David Farber and 50% by Larry Farber.

 

(28)         Includes 2,507 shares of common stock held through employee stock purchase plan.

 

(29)         Includes 6,667 vested options to purchase common stock at an exercise price of $8.48 per share.

 

* Assumes that all options exercisable within sixty days have been exercised which results in 26,350,308 shares outstanding.

 

SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, officers, and persons who own more than 10% of a registered class of the Company’s equity securities to file with the SEC reports of ownership and changes in ownership of common stock and other equity securities of the Company.  Officers, directors and greater-than-10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

 

Based solely on review of the copies of such reports furnished to the Company or written representations that no other reports were required, the Company believes that during Fiscal 2010, all filing requirements applicable to its officers, directors and greater-than-10% beneficial owners  under Section 16(a) of the Exchange Act were complied with, except for certain Form 4s that were filed late related to certain stock option and restricted share grants made to the officers of Lannett in the current and prior years, and except for certain Form 4s related to Mr. William Farber’s gifting of approximately 528,000 shares in October 2009 to a family trust whose beneficiaries are his grandchildren that was filed late.

 

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DIRECTORS AND OFFICERS

 

The current directors and executive officers of the Company are set forth below:

 

		Age		Position
Directors:
William Farber		79		Chairman of the Board
Ronald A. West		76		Vice Chairman of the Board, Director
Arthur P. Bedrosian		65		Director
Jeffrey Farber		50		Director
Kenneth Sinclair		64		Director
Albert Wertheimer		68		Director
Myron Winkelman		73		Director
Officers:
Arthur P. Bedrosian		65		President and Chief Executive Officer
William Schreck		62		Senior Vice President and General Manager
Kevin Smith		50		Vice President of Sales and Marketing
Ernest Sabo		62		Vice President of Regulatory Affairs and Chief Compliance Officer
Keith R. Ruck		49		Vice President of Finance and Chief Financial Officer
Stephen Kovary		53		Vice President of Operations

 

William Farber — See “Proposal No. 1 - Election of Directors” for matters pertaining to Mr. Farber.

 

Ronald A. West — See “Proposal No. 1 - Election of Directors” for matters pertaining to Mr. West.

 

Arthur P. Bedrosian — See “Proposal No. 1 - Election of Directors” for matters pertaining to Mr. Bedrosian

 

Jeffrey Farber - See “Proposal No. 1 - Election of Directors” for matters pertaining to Mr. Farber.

 

Kenneth Sinclair — See “Proposal No. 1 - Election of Directors” for matters pertaining to Dr. Sinclair.

 

Albert I. Wertheimer — See “Proposal No. 1 - Election of Directors” for matters pertaining to Dr. Wertheimer.

 

Myron Winkelman — See “Proposal No. 1 - Election of Directors” for matters pertaining to Mr. Winkelman.

 

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William Schreck joined the Company in January 2003 as Materials Manager.  In May 2004, he was promoted to Vice President of Logistics. In August 2009, Mr. Schreck has been promoted to Senior Vice President and General Manager.   Prior to this, from 1999 to 2001, he served as Vice President of Operations at Nature’s Products, Inc., an international nutritional and over-the-counter drug product manufacturing and distribution company; from 2001 to 2002 he served as an independent consultant for various companies.  Mr. Schreck’s prior experience also includes executive management positions at Ivax Pharmaceuticals, Inc., a division of Ivax Corporation, Zenith-Goldline Laboratories and Rugby-Darby Group Companies, Inc. Mr. Schreck has a Bachelor of Arts Degree from Hofstra University.

 

Kevin Smith joined the Company in January 2002 as Vice President of Sales and Marketing.  Prior to this, from 2000 to 2001, he served as Director of National Accounts for Bi-Coastal Pharmaceutical, Inc., a pharmaceutical sales representation company.  Prior to this, from 1999 to 2000, he served as National Accounts Manager for Mova Laboratories Inc., a pharmaceutical manufacturer.  Prior to this, from 1991 to 1999, Mr. Smith served as National Sales Manager at Sidmak Laboratories, a pharmaceutical manufacturer.  Mr. Smith has extensive experience in the generic sales market, and brings to the Company a vast network of customers, including retail chain pharmacies, wholesale distributors, mail-order wholesalers and generic distributors.  Mr. Smith has a Bachelor of Science Degree in Business Administration from Gettysburg College.

 

Ernest Sabo joined Lannett in March 2005 as Director of Quality Assurance. In May 2008, Mr. Sabo was promoted to Vice President of Regulatory Affairs and Chief Compliance Officer. Prior to this, he served at Wyeth Pharmaceuticals as Manager of QA Compliance from 2001 to 2003 and as Associate Director of QA Compliance from 2003 to 2005. Mr. Sabo held former positions as Director of Validation, Quality Assurance, Quality Control and R&D at Delavau/Accucorp, Inc. from 1993 thru 2001. He has over 30 years experience in the pharmaceutical industry, his background spans from Quality Assurance, Quality Control, Cleaning/Process Validation and Manufacturing turn-key operations. Mr. Sabo holds a Bachelor of Arts in Biology from Trenton State College (now known as The College of New Jersey).

 

Keith R. Ruck joined the Company in September 2008 as Corporate Controller. On March 23, 2009, the Company named Mr. Ruck Interim Chief Financial Officer.  Effective October 13, 2009, Mr. Ruck was appointed and assumed the duties as the Company’s Vice President of Finance and Chief Financial Officer.  Mr. Ruck, a Certified Public Accountant (CPA), has more than 27 years of public company financial management experience. Prior to joining Lannett, he served as Corporate Controller of Optium Corporation from April 2007 to September 2008.  From 2000 to 2007, he was Vice President - Finance of MAAX KSD Corporation and from 1998 to 2000, he served as Vice President of Finance and Chief Financial Officer of Total Containment, Inc. Mr. Ruck earned a Bachelor of Science degree in business administration and a Master of Finance degree from LaSalle University.

 

Stephen Kovary R. Ph. joined the Company in September 2009 as Vice President of Operations.  Prior to joining Lannett, Mr. Kovary was the Vice President, Plant Manager for PF Laboratories, a division of Purdue Pharma, LP, since 2003.  Formerly, Mr. Kovary held senior level management positions at Pliva, Inc, Abbott Laboratories, Knoll Pharmaceuticals and Parke-Davis.  Mr. Kovary holds a Bachelor of Science in Pharmacy from the Rutgers University Ernest Mario School of Pharmacy and a Masters in Business Administration in Management from Fairleigh Dickenson University.  Mr. Kovary is a member of the American and New Jersey Pharmaceutical Associations, the International Society of Pharmaceutical Engineers and the Parenteral Drug Association.  Mr. Kovary is a registered pharmacist in the State of New Jersey and a member of the Alumni Association of the Rutgers University Ernest Mario School of Pharmacy.

 

To the best of the Company’s knowledge, there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions that are material to the evaluation of the ability or integrity of any director, executive officer, or significant employee during the past five years.

 

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EXECUTIVE COMPENSATION

 

SUMMARY COMPENSATION TABLE*

 

The following table summarizes all compensation paid to or earned by the named executive officers (“NEO”) of the Company for Fiscal 2010, Fiscal 2009 and Fiscal 2008.

 

													Non-equity
Name and Principal		Fiscal					Stock			Options			incentive plan			All Other
Position		Year		Salary			Awards			Awards			compensation			Compensation			Total
(a)		(b)		(c)			(e)			(f)			(g)			(i)			(j)
Arthur P. Bedrosian		2010		$	407,410		$	359,384		$	297,390		$	269,750		$	22,367		$	1,356,301
President and Chief Executive Officer		2009		367,202			—			42,381			244,365			43,796			697,744
		2008		324,825			122,234			158,303			—			22,099			627,461
Keith R. Ruck (1)		2010		189,293			89,550			243,090			123,500			11,257			656,690
Vice President of Finance and Chief Financial Officer		2009		128,854			—			22,163			60,617			1,234			212,868
		2008		—			—			—			—			—			—
Stephen J. Kovary (2)		2010		156,923			—			97,248			105,069			22,548			381,788
Vice President of Operations		2009		—			—			—			—			—			—
		2008		—			—			—			—			—			—
William Schreck		2010		196,681			177,791			302,729			130,000			28,159			835,360
Senior Vice President and General Manager		2009		180,722			—			22,603			118,947			18,341			340,613
		2008		170,670			68,022			105,535			—			18,044			362,271
Kevin Smith		2010		206,564			179,455			198,260			135,019			21,985			741,283
Vice President of Sales and Marketing		2009		200,180			—			22,603			130,825			21,502			375,110
		2008		192,005			61,490			105,535			—			21,495			380,525

 

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* Note — Effective February 28, 2010 for fiscal years ending on or after December 20, 2009, the SEC amended its rules related to the Summary Compensation and Director Compensation Tables.  The new rules require issuers to report as compensation the aggregate grant date fair-value of stock and option awards issued during the fiscal year to NEOs, rather than the dollar amount recognized for financial statement purposes for that fiscal year under the previous rules.  Amounts are computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718.  Prior year amounts have been restated.

 

(1)  Mr. Ruck was hired on September 8, 2008 as Corporate Controller.  Mr. Ruck assumed the title of Interim Chief Financial Officer on March 23, 2009. Effective October 13, 2009, Mr. Ruck was appointed and assumed the duties as the Company’s Vice President of Finance and Chief Financial Officer.

 

(2)  Mr. Kovary was hired on September 8, 2009 as Vice President of Operations.

 

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(i)                                 Supplemental All Other Compensation Table

 

The following table summarizes the components of column (i) of the Summary Compensation Table:

 

				Company
				Match						Pay in
Name and Principal		Fiscal		Contributions			Auto			Lieu of			Housing			Excess Life			Sign On
Position		Year		401(k) Plan			Allowance			Vacation			Allowance			Insurances			Bonus			Total
Arthur P. Bedrosian		2010		$	8,219		$	13,500		$	—		$	—		$	648		$	—		$	22,367
President and Chief Executive Officer		2009		8,823			13,500			20,993			—			480			—			43,796
		2008		8,195			13,500			—			—			404			—			22,099
Keith R. Ruck		2010		2,499			8,668			—			—			90			—			11,257
Vice President of Finance and Chief Financial Officer		2009		1,182			—			—			—			52			—			1,234
		2008		—			—			—			—			—			—			—
Stephen J. Kovary		2010		4,000			8,474			—			—			74			10,000			22,548
Vice President of Operations		2009		—			—			—			—			—			—			—
		2008		—			—			—			—			—			—			—
William Schreck		2010		7,918			10,800			9,030			—			411			—			28,159
Senior Vice President and General Manager		2009		7,114			10,800			—			—			427			—			18,341
		2008		6,872			10,800			—			—			372			—			18,044
Kevin Smith		2010		8,371			13,500			—			—			114			—			21,985
Vice President of Sales and Marketing		2009		7,905			13,500			—			—			97			—			21,502
		2008		7,889			13,500			—			—			106			—			21,495

 

Compensation of Directors

 

Non-employee directors received a retainer of $3,500 per month as compensation for their services during Fiscal 2010.  They also were compensated $1,000 per Board meeting.  There were six Board meetings held during Fiscal 2010.  Additional committees of the Board of Directors include the Audit Committee, the Compensation Committee, the Nominating and Governance Committee and the Strategic Planning Committee.  Committee members received $1,000 and the Chairman received $1,500 per Committee meeting attended.  There were 11 Audit Committee meetings, one Strategic Planning Committee meeting, one Nominating and Governance Committee meeting, 11 Compensation Committee meetings and one Independent directors meeting held during Fiscal 2010.  Directors are also reimbursed for expenses incurred in attending Board and Committee meetings.

 

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The following table provides information regarding fees earned and stock awards granted in Fiscal 2010 to non-employee directors:

 

DIRECTOR COMPENSATION

 

		Fees Earned			Stock Awards			Options Awards			Non-Equity Incentive Plan Compensation			Change in Pension Value and Nonqualified Deferred Compensation			All Other Compensation			Total
Name		($)			($)			($)			($)			($)			($)			($)
(a)		(b)			(c)			(d)			(e)			(f)			(g)			(h)
William Farber		$	46,000		$	48,375		$	—		$	—		$	—		$	—		$	94,375
Ronald A. West		70,500			48,375			—			—			—			—			118,875
Jeffrey Farber		49,000			48,375			—			—			—			—			97,375
Kenneth Sinclair		66,000			48,375			—			—			—			—			114,375
Albert Wertheimer		70,500			48,375			—			—			—			—			118,875
Myron Winkelman		64,000			48,375			—			—			—			—			112,375

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview of Our Compensation Program

 

A fundamental goal of our compensation program is to maximize stockholder value. In order to accomplish this goal, we must attract and retain talented and capable executives, and we must provide those executives with incentives that motivate and reward them for achieving Lannett’s short and longer-term goals. To this end, our executive compensation is guided by the following key principles:

 

·           that executive compensation should depend upon group and individual performance factors;

 

·           that the interests of executives should be closely aligned with those of stockholders through equity-based compensation; and

 

·           that compensation should be appropriate and fair in comparison to the compensation provided to similarly situated executives within the pharmaceutical industry and within other publicly-traded companies similar in market capitalization to Lannett.

 

Important to our compensation program are the decisions of, and guidance from, the Compensation Committee of our Board of Directors. The Compensation Committee (which we refer to, for purposes of this analysis, as “the Committee”) is composed entirely of directors who are independent of Lannett under the independence standards established by the NYSE-AMEX Exchange, the securities exchange where our common stock is traded. The Committee operates pursuant to a written charter adopted by the Board. If you would like to review the Committee’s charter, it is available to any stockholder who requests a copy from our Chief Financial Officer, at 13200 Townsend Road, Philadelphia, Pennsylvania 19154.

 

The Committee has the authority and responsibility to establish and periodically review our executive compensation principles, described above. Importantly, the Committee also has sole responsibility for approving the corporate goals and objectives upon which the compensation of the chief executive officer (the “CEO”) is based, for evaluating the CEO’s performance in light of these goals and objectives, and for determining the CEO’s compensation, including his equity-based compensation.

 

The Committee also reviews and approves the recommendations of the CEO with regard to the compensation and benefits of other executive officers. In accomplishing this responsibility, the Committee meets regularly with the CEO, approves cash and equity incentive objectives of the executive officers, reviews with the CEO the accomplishment of these objectives and approves the base salary and other elements of compensation for the executive officers. The Committee has full discretion to modify the recommendations of the CEO in the course of its approval of executive officer compensation.

 

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The Committee consults as needed with an outside compensation consulting firm retained by the Committee. As it makes decisions about executive compensation, the Committee obtains data from its consultant regarding current compensation practices and trends among United States companies in general and pharmaceutical companies in particular, and reviews this information with its consultant. In addition, the Chairman of the Committee is in contact with management outside of Committee meetings regarding matters being considered or expected to be considered by the Committee.  The Committee annually reviews recommendations from their outside consultant, and makes recommendations to the Board about the compensation of non-employee directors.  During fiscal years 2008 and 2009, Lannett used Mercer Consulting Inc. as its consultant. During fiscal year 2010, Lannett used Compensation Resources Inc. as its consultant.

 

During Fiscal 2007, the Committee recommended the adoption of a new Incentive Plan to supplement our existing stock option plans.  The Incentive Plan was approved by our stockholders in January 2007. The Incentive Plan provides for the grant of various equity awards, including stock options and restricted stock, to Lannett employees and directors. The Committee is responsible for administering this Plan and it has sole authority to make grants to the CEO or any other executive officer.

 

During the second quarter of Fiscal 2011, the Committee recommended the adoption of a new Incentive Plan to supplement our existing stock option plans.  The Incentive Plan is being submitted in this Proxy Statement for approval by our stockholders in January 2011. This Incentive Plan provides for the grant of various equity awards, including stock options and restricted stock, to Lannett employees and directors, as well as Independent Consultants that the Company utilizes. The Committee is responsible for administering this Plan and it has sole authority to make grants to the CEO, any other executive officer, director or Independent Consultant.

 

In conjunction with its responsibilities related to executive compensation, the Committee also oversees the management development process, reviews plans for executive officer succession and performs various other functions.

 

The individuals who served as Chief Executive Officer and Chief Financial Officer during Fiscal 2010, as well as the other individuals included in the Summary Compensation Table on page 12, are referred to as the “named executive officers.”

 

Risk Assessment

 

The criteria used for the bonus program of operating performance, research and development inclusive of ANDA/NDA submissions, acceptances of ANDA/NDAs, launches of approved ANDA/NDAs, individual performance goals, along with the weighting of each element, were assembled by the Company for our industry and were found to be reasonable for the nature of our business. The Compensation Committee reviews this criteria and a gives final approval to the senior management.  The Board of Directors is then notified as to what was approved at its next Board meeting.

 

Operating performance ties in directly with shareholder value. There is no bonus opportunity for management if they do not create value, so management interests and shareholder value are aligned. The risk of diluting the Company’s operating cash positions through the awarding of excessive bonus awards is controlled by the imposition of a bonus cash award limit equal to 20% of adjusted operating income as calculated from its fiscal year-end financial statements.

 

The R&D component of the criteria looks to the sustainability and growth of the organization. While it could be argued that there is risk associated with the choice of which products to submit for approval, there is no indication that those risks would be outside what would be considered normal and reasonable in the course of doing business. The ultimate goal is to be able to sell a product that positively impacts operating performance, which cannot occur unless the process of submission, approval, and launch is followed. If submissions do not make it to the approval stage, and if the approved products are not successfully launched, they cannot positively affect operating performance. Since there is a minimum operating performance (operating profit) level that must be attained before any payments are made through the bonus plan, there is a check and balance to prevent what could be viewed as a portfolio of “risky” submittals. The impact on operating performance is created over a period of time based on the total sales, so there needs to be sustainability with any new launch.

 

The achievement of individual goals as part of the bonus is subject to review and approval by senior management with the CEO providing the final review and approval. This multi-level process reduces the risk of having goals that are not linked to the overall objectives of the Company and its success. The awarding of a CEO discretionary portion, currently at 5% of the total of the bonus, also requires the same oversight. The total impact on bonus payout of these parts of the bonus program is significantly less than the operating performance and R&D parts. Again, there is no bonus payout unless the operating performance (operating profit) minimum goals are attained.

 

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We believe our bonus program, along with the other elements of our executive compensation program, provides appropriate rewards and incentives to our executives to achieve our financial, business, and strategic goals. We also believe the structure and oversight of these programs provides a setting that does not encourage them to take excessive risks in their business decisions.

 

Our Fiscal 2010 Compensation Program

 

In Fiscal 2010, the Committee’s approach to compensation was intended to focus our executives on accomplishing our short and longer-term objectives, and it had as its ultimate objective sustained growth in stockholder value. This approach was intended to compensate executives at levels at or near the median levels of compensation offered by other pharmaceutical companies similar in size to Lannett and with whom we compete.

 

In making decisions about the elements of Fiscal 2010 compensation, the Committee not only considered available market information about each element but also considered aggregate compensation for each executive. Base salary provided core compensation to executives, but it was accompanied by:

 

·           the potential for incentive-based cash compensation based upon our attainment of Fiscal 2010 operating income, other targeted corporate goals and individual or departmental objectives,

 

·           various forms of equity compensation, including some grants based upon Fiscal 2010 sales growth results and upon our return on invested capital results,

 

·           various benefits and perquisites, and

 

·           the potential for post-termination compensation under certain circumstances.

 

Summary of Fiscal 2010 Compensation Elements

 

The table below provides detailed information regarding each element of the Fiscal 2010 compensation program.

 

		Compensation Element Overview		Purpose of the Compensation Element
Base Salary		Base salary pays for competence in the executive role. An executive’s salary level depends on the decision making responsibilities, experience, work performance, achievement of key goals and team building skills of each position, and the relationship to amounts paid to other executives at peer companies.		To provide competitive fixed compensation based on sustained performance in the executive’s role and competitive market practice.
Short-Term Incentives		Annual Incentive Bonus Plan (AIBP) The AIBP program rewards with cash awards for annual achievement of overall corporate objectives, and specific individual or departmental operational objectives.  In Fiscal 2010, objectives for the Officers were tied to Lannett’s achievement of operating income targets, other targeted corporate goals and individual objectives.		To motivate and focus our executive team on the achievement of our annual performance goals.

 

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		Compensation Element Overview		Purpose of the Compensation Element
Long-Term Incentives		Stock Options Stock options reward sustained stock price appreciation and encourage executive retention during a three-year vesting term and a ten-year option life.   Restricted Stock Restricted stock rewards sustained stock price appreciation and encourages executive retention during its three-year vesting term.   The value of participants’ restricted stock increases and decreases according to Lannett’s stock price performance during the vesting period and thereafter.		We strive to deliver a balanced long-term incentive portfolio to executives, focusing on (a) share price appreciation, (b) retention, and (c) internal financial objectives.   The primary objectives of the overall design are: to align management interests with those of stockholders,   to increase management’s potential for stock ownership opportunities (all awards are earned in shares),   to attract and retain excellent management talent, and   to reward growth of the business, increased profitability, and sustained stockholder value.

 

		Compensation Element Overview		Purpose of the Compensation Element
Benefits		In General Executives participate in employee benefit plans available to all employees of Lannett, including health, life insurance and disability plans. The cost of these benefits is partially borne by the employee, but mostly paid by the Company.		These benefits are designed to attract and retain employees and provide security for their health and welfare needs. We believe that these benefits are reasonable, competitive and consistent with Lannett’s overall executive compensation program.
		401(k) Plan Executives may participate in Lannett’s 401(k) retirement savings plan, which is available to all employees. Lannett matches contributions to the Plan, at a rate of $.50 on the dollar up to 8% of base salary.   Life Insurance Lannett provides life insurance benefits to all employees. The coverage amount for executives is one times base compensation up to a limit of $115,000 and premiums paid for coverage above $50,000 are treated as imputed income to the executive.   Disability Insurance Lannett provides short-term and long-term disability insurance to employees which would, in the event of disability, pay an employee 60% of his or her base salary with limits.

 

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		Compensation Element Overview		Purpose of the Compensation Element
Perquisites		Lannett does not utilize perquisites or personal benefits extensively. The few perquisites that are provided complement other compensation vehicles and enable the Company to attract and retain key executives. These perquisites include: automobile allowances in various amounts to key executives.		We believe these benefits better allow us to attract and retain superior employees for key positions.

 

		Compensation Element Overview		Purpose of the Compensation Element
Post-Termination Pay		Severance Plan Lannett’s Severance Pay Plan is designed to pay severance benefits to an executive for a qualifying separation. For the Chief Executive Officer, the Severance Pay Plan provides for a payment of three times the sum of base salary plus a pro rated annual cash bonus for the current year calculated as if all targets and goals are achieved.		The Severance Pay Plan is intended (1) to allow executives to concentrate on making decisions in the best interests of Lannett (or any successor organization in the event that a change of control is to occur), and (2) generally alleviate an executive’s concerns about the loss of his or her position without cause.
		For the other named executive officers, the Severance Pay Plan provides for a payment of eighteen months of base salary plus a pro rated annual cash bonus for the current year calculated as if all targets and goals are achieved.

 

The use of the above compensation tools enables Lannett to reinforce its pay for performance philosophy as well as to strengthen its ability to attract and retain high-performing executive officers. The Committee believes that this combination of programs provides an appropriate mix of fixed and variable pay, balances short-term operational performance with long-term stockholder value creation, and encourages executive recruitment and retention in a high-performance culture.

 

Market Data and Our Peer Group

 

In determining 2009 and 2010 compensation for the named executive officers, the Committee relied on market data provided by its consultants. This information was principally related to two groups of peer companies similar in size to Lannett with revenues one-half (1/2) to double (2x) that of Lannett. Companies were also added that were deemed business peers. One peer group (Peer Group A) consists of twenty-nine (29) pharmaceutical companies on a national scale. The other peer group (Peer Group B) consists of twelve (12) pharmaceutical companies in the Philadelphia and Northeast Region. Information on these companies was derived from two sources: (1) the consultant and broader market survey data analysis, and (2) publicly-available information appearing in the proxy statements of these companies. The members of the Peer Groups were:

 

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Peer Group A		Peer Group B
Akorn Inc.		Auxilium Pharma Inc
Balchem Corp.		BMP Sunstone Corp
Barr Pharmaceuticals Inc.		Cambrex Corp
Bentley Pharmaceuticals		Emergent Biosolutions Inc.
Biomarin Pharmaceuticals Inc.		Enzon Pharmaceuticals Inc.
Bradley Pharmaceuticals Inc.		Hi Tech Pharmacal Co. Inc.
Caraco Pharmaceutical Labs		Interpharm Holdings Inc.
Chattem Inc.		NPS Pharmaceuticals Inc.
Cubist Pharmaceuticals Inc.		Orasure Technologies Inc.
Impax Laboratories Inc.		Osi Pharmaceuticals Inc.
Indevus Pharmaceuticals Inc.		Par Pharmaceutical Cos. Inc.
Inspire Pharmaceuticals Inc.		Sucampo Pharmaceuticals Inc.
Intermune Inc.
Ista Pharmaceuticals Inc.
Kensey Nash Corp.
Mattrix Initiatives Inc.
Medicines Co.
Nektar Therapeutics
Neogen Corp.
Noven Pharmaceuticals Inc.
Obagi Medical
Pain Therapeutics Inc.
Pozen Inc.
Questcor Pharmaceuticals Inc.
Salix Pharmaceuticals Ltd.
Santarus Inc.
Valeant Pharmaceuticals Intl.
Vertex Pharmaceuticals Inc.
Vivus Inc.

 

The Committee plans to evaluate the Peer Group periodically and revise it as necessary to ensure that it continues to be appropriate for benchmarking our executive compensation program.

 

Base Salary

 

Base salaries for the named executive officers are intended, in general, to approach median salaries for similarly situated executives among Peer Group companies. A number of additional factors are considered, however, in determining base salary, such as the executive’s individual performance, his or her experience, competencies, skills, abilities, contribution and tenure, internal compensation consistency, the need to attract new, talented executives, and the Company’s overall annual budget. Base salaries are generally reviewed on an annual basis.

 

Base salary increases were granted to Mr. Bedrosian for $34,490 effective on August 31, 2009, Mr. Smith for $6,050 effective on August 31, 2009, and Mr. Schreck for $17,289 effective on August 31, 2009, based on their performance.  Mr. Ruck was promoted to Vice President of Finance and Chief Financial Officer from Corporate Controller effective on October 13, 2009 and received a salary increase of $40,000 in connection with such promotion.  Mr. Kovary was hired on September 8, 2009 as Vice President of Operations and therefore did not receive a salary increase.

 

Fiscal 2010 Annual Incentive Bonus Plan

 

Design

 

In November 2006, the Committee approved the 2007 Annual Incentive Bonus Plan (or “AIBP”) program. This program allowed executive officers the opportunity to earn cash awards upon the accomplishment of the Fiscal 2010 operating income goal, other targeted corporate goals and a number of individual objectives. The relative weighting of these objectives for each executive was fifty percent (50%) for operating income, twenty-five percent (25%) for other targeted corporate goals, twenty percent (20%) for individual objectives and five percent (5%) based on CEO and Committee discretion.  For the CEO, the five percent (5%) discretionary portion will be determined by the Committee.

 

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