Adolor DEF 14A 2010
Statement Pursuant to Section 14(a) of
March 26, 2010
Dear Adolor Stockholder:
It is my pleasure to invite you to Adolor's 2010 Annual Meeting of Stockholders. We will hold the meeting on Tuesday, May 18, 2010, at 8:30 a.m., Philadelphia time, at our corporate headquarters at 700 Pennsylvania Drive, Exton, PA 19341.
During the Annual Meeting, we will discuss each item of business described in the Notice of Annual Meeting and Proxy Statement that follows, update you on important developments in our business and respond to any questions that you may have about the Company.
Your vote is important. Whether or not you plan to attend the Annual Meeting, I hope that you will vote as soon as possible. Please review the instructions on each of your voting options described in the Notice of Internet Availability of Proxy Materials.
On behalf of your Board of Directors, thank you for your continued support and interest in Adolor. I look forward to seeing you at the meeting on May 18.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held On May 18, 2010
TO THE STOCKHOLDERS OF ADOLOR CORPORATION:
The Annual Meeting of Stockholders of Adolor Corporation will be held at the Company's corporate headquarters, 700 Pennsylvania Drive, Exton, PA 19341, on Tuesday, May 18, 2010, at 8:30 a.m., Philadelphia time. At the meeting, the holders of the Company's outstanding Common Stock will act upon the following matters:
All stockholders of record as of the close of business on March 22, 2010, are entitled to notice of the Annual Meeting and to vote at the Annual Meeting and any postponements or adjournments thereof. A list of stockholders of the Company entitled to vote at the Annual Meeting will be available for inspection by any stockholder at the Annual Meeting and during normal business hours at the Company's corporate offices during the 10-day period immediately prior to the date of the Annual Meeting.
This Notice of Annual Meeting, the Proxy Statement and our annual report to stockholders for the year ended December 31, 2009 are available at www.stocktrans.com/eproxy/adolor2010. Information included on this website, other than the Notice of Annual Meeting, the Proxy Statement and the annual report to stockholders for the year ended December 31, 2009 (including our Annual Report on Form 10-K for the fiscal year ended December 31, 2009), is not part of the proxy soliciting materials.
EACH STOCKHOLDER IS URGED TO VOTE BY COMPLETING, SIGNING AND RETURNING
TABLE OF CONTENTS
Our 2010 Notice of Annual Meeting and Proxy Statement and 2009 annual report to stockholders (including our Annual Report on Form 10-K for the year ended December 31, 2009) are available at www.stocktrans.com/eproxy/adolor2010.
Please see "About the Annual Meeting" beginning on page 1 of this Proxy Statement for the following information:
Rules adopted by the Securities and Exchange Commission allow companies to send stockholders a notice of Internet availability of proxy materials, rather than mail them full sets of proxy materials. This year, we chose to mail full packages of proxy materials to stockholders. However, in the future we may take advantage of this new distribution option. If, in the future, we choose to send such notices, they would contain instructions on how stockholders can access our Notice of Annual Meeting and Proxy Statement via the Internet. It also would contain instructions on how stockholders could request to receive their materials electronically or in printed form on a one-time or ongoing basis.
This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors (the "Board") of Adolor Corporation (the "Company" or "Adolor"), for use at the 2010 Annual Meeting of Stockholders (the "Annual Meeting") to be held at the Company's corporate headquarters at the above address on Tuesday, May 18, 2010, at 8:30 a.m., Philadelphia time, and any postponements or adjournments thereof. This Proxy Statement and the accompanying proxy card are being distributed to stockholders on or about April 5, 2010.
ABOUT THE ANNUAL MEETING
At our Annual Meeting, stockholders will act upon the matters outlined in the Notice of Annual Meeting, including the election of the three Class III directors named herein and the ratification of the appointment of KPMG LLP ("KPMG") as independent registered public accountants for the year ending December 31, 2010. In addition, management will report on the performance of the Company and respond to questions from stockholders.
Only stockholders of record at the close of business on March 22, 2010, the record date for the Annual Meeting, are entitled to receive notice of and to participate in the Annual Meeting. If you were a stockholder of record on that date, you will be entitled to vote all of the shares that you held on that date at the Annual Meeting, or any postponements or adjournments of the meeting. The Company's transfer agent, StockTrans, Inc., will tally the vote and certify the results.
Each outstanding share of Adolor Common Stock will be entitled to one vote on each matter considered at the meeting.
Subject to space availability, all stockholders as of the record date, or their duly appointed proxies, may attend the Annual Meeting. If you attend, please note that you may be asked to present valid picture identification, such as a driver's license or passport. If you need directions to the Annual Meeting, please contact the Company's Investor Relations Department at (484) 595-1500.
Please also note that if you hold your shares in "street name" (that is, through a broker or other nominee), you will need to bring a copy of a brokerage statement reflecting your stock ownership as of the record date and check in at the registration desk at the meeting.
A "quorum" is the presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the aggregate voting power of the Common Stock outstanding on the record date and entitled to vote. There must be a quorum present for the meeting to be held. As of the record date, 46,352,683 shares of Common Stock, representing the same number of votes, were outstanding. Thus,
the presence of the holders of Common Stock representing at least 23,176,342 votes will be required to establish a quorum.
Proxies received but marked as "Abstain" or "Withhold" and broker non-votes will be included in the calculation of the number of votes considered to be present at the meeting for purposes of determining whether a quorum exists. Broker non-votes occur when shares held by a broker are not voted with respect to an item because the broker has not received voting instructions from the stockholder and the broker lacks the authority to vote the shares at his/her discretion.
If you complete and properly sign the accompanying proxy card and return it to the Company, it will be voted as you direct. If you are a registered stockholder and attend the meeting, you may deliver your completed proxy card in person. "Street name" stockholders who wish to vote at the meeting will need to obtain a proxy form from the institution that holds their shares.
If you are a registered stockholder (that is, if you hold your stock in certificate form), you also may vote by telephone, or electronically via the Internet, by following the instructions provided in the Notice. The deadline for voting by telephone or electronically is 11:59 p.m., Philadelphia time, on May 17, 2010. If your shares are held in "street name," please contact your broker or nominee to determine whether you will be able to vote by telephone or electronically.
Yes. Even after you have submitted your proxy, you may revoke or change your vote at any time before the proxy is exercised by filing with the Secretary of the Company either a notice of revocation or a duly executed proxy bearing a later date (or by submitting a new proxy via the Internet or by telephone). If you attend the meeting in person, you may request that the powers of the proxy holders be suspended with respect to your shares, although attendance at the meeting will not by itself revoke a previously granted proxy.
The Board's recommendation is set forth together with the description of each item in this Proxy Statement. In summary, the Board recommends a vote:
With respect to any other matter that properly comes before the meeting, the persons named as proxy holders on the proxy card will vote as recommended by the Board or, if no recommendation is given, at their own discretion. Unless you give other instructions on your proxy card, the proxy holders will vote in accordance with the recommendations of the Board.
Item 1: The affirmative vote of a plurality of the votes cast at the Annual Meeting is required for the election of each of the Class III directors. A properly executed proxy marked "Withhold" with respect to the election of one or more directors will not be voted with respect to the director or directors indicated, although it will be counted for purposes of determining whether there is a quorum. As a result, the director nominees receiving the highest number of votes will be elected to the Board.
Item 2: The affirmative vote of the majority of the shares present in person or by proxy at the Annual Meeting and entitled to vote on this matter is required for approval. A properly executed proxy marked "Abstain" with respect to this matter will have the effect of a vote against such matter. Broker non-votes on an item are not counted as shares present and entitled to vote and therefore will not be taken into account in determining the outcome of the vote.
Your vote is important. Regardless of whether or not you plan to attend the meeting, please complete, sign and return the enclosed proxy card, or submit your proxy via the Internet or by telephone. If you plan to attend the meeting to vote in person and your shares are registered with the Company's transfer agent in the name of a broker or bank, you must secure a proxy card from the broker or bank assigning voting rights to you for your shares.
The members of the Board of Directors on the date of this Proxy Statement, and the Committees of the Board on which they serve, are identified below:
Each of the above directors, with the exception of Mr. Dougherty, is considered independent. See "How does the Board determine which directors are considered independent?" below.
The Board is led by its Chairman, Mr. Madden, who is considered to be an independent director. The Board believes that separating the roles of Chief Executive Officer and Chairman of the Board is the most appropriate structure for the Company at this time. Having an independent chair of Adolor is a means to ensure that the Chief Executive Officer is accountable for managing the Company in the best interests of stockholders while, at the same time, acknowledging that managing the Board is a separate and time intensive responsibility. The Board also believes that an independent chair can serve to curb conflicts of interests, promote oversight of risk and manage the relationship between the Board and the Chief Executive Officer.
The Board of Directors of the Company met five times during the fiscal year ended December 31, 2009. The Audit, Compensation, and Governance and Nominating Committees met five, four and two times, respectively, during this same period. Each director attended greater than seventy-five percent of the meetings of the Board of Directors and the respective Committee or Committees on which he served during such period. Each director is expected to regularly attend meetings of the Board and his respective Committees, with the understanding that on occasion a director may be unable to attend a meeting.
All directors are expected to make every reasonable effort to attend the Annual Meeting of Stockholders. All of the directors of the Company as of May 12, 2009, attended the 2009 Annual Meeting of Stockholders, with the exception of Mr. Anido. We expect that all of the nominees for election will attend the 2010 Annual Meeting on May 18, 2010.
The bylaws of the Company provide that the Board may designate committees by resolution, each of which shall consist of one or more directors. The Board presently has standing Audit, Compensation, and Governance and Nominating Committees.
Audit Committee. The functions of the Audit Committee are described in detail below under the heading "Report of the Audit Committee." The charter of the Audit Committee is available on the Investor Insights section of the Company's website (www.adolor.com) by selecting "Corporate Governance." The Audit Committee met five times during fiscal 2009.
Mr. Hager has chaired the Audit Committee since 2005. Mr. Hager is qualified as an audit committee financial expert within the meaning of Securities and Exchange Commission ("SEC") regulations. In addition, the Board has determined, in accordance with the listing standards of the NASDAQ Global Market, that Mr. Hager meets the standards of financial sophistication set forth therein and that each other member of the Audit Committee is able to read and understand fundamental financial statements.
All of the members of the Audit Committee are independent within the meaning of SEC regulations, Rule 4200(a)(15) of the listing standards of the NASDAQ Global Market and the Company's Corporate Governance Guidelines.
Compensation Committee. The Compensation Committee annually reviews the performance and total compensation package for the Company's executive officers, including the Chief Executive Officer; considers the modification of existing compensation and employee benefit programs, and the adoption of new plans; administers the terms and provisions of the Company's equity compensation plans; and reviews the compensation and benefits of non-employee directors. The charter of the Compensation Committee is available on the Investor Insights section of the Company's website (www.adolor.com) by selecting "Corporate Governance." The Compensation Committee met four times during 2009. All of the members of the Compensation Committee are independent within the meaning of SEC regulations, the listing standards of the NASDAQ Global Market and the Company's Corporate Governance Guidelines.
Governance and Nominating Committee. The Governance and Nominating Committee (the "Nominating Committee") is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of the Company's Corporate Governance Guidelines. In addition, the Nominating Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Nominating Committee also prepares and supervises the Board's review of director independence and the Board's performance evaluation. The charter of the Nominating Committee is available on the Investor Insights section of the Company's website (www.adolor.com) by selecting "Corporate Governance." The Nominating Committee met two times during fiscal 2009. All of the members of the Nominating Committee are independent within the meaning of SEC regulations, the listing standards of the NASDAQ Global Market and the Company's Corporate Governance Guidelines.
The Board and its committees play an active role in the oversight of risk and the Company's risk management practices. The Audit Committee primarily is responsible for review of financial and compliance risks, with the full Board responsible for other risks. Because of its size and available resources, the Company does not have a dedicated risk management function; rather, certain employees within the Company are charged with responsibility for specific risk areas including operational risks, liquidity risks, legal risks and compliance risks. These individuals make regular reports to the Board
and the Audit Committee on their areas of risk oversight. In addition, the Company's Chief Compliance Officer has a direct reporting relationship to the Audit Committee.
The Nominating Committee considers candidates for Board membership suggested by its members and other Board members, as well as by management and stockholders. The Nominating Committee is authorized to retain third-party executive search firms to identify candidates as necessary. A stockholder who wishes to recommend a prospective nominee for the Board should notify the Company's Secretary in writing and provide the information set forth in Section 1.1.10 of the Company's bylaws. The Nominating Committee also will consider whether to nominate any person nominated by a stockholder pursuant to the provisions of the Company's bylaws relating to stockholder nominations as described in "Additional InformationAdvance Notice Provisions," below.
Once a prospective nominee has been identified, the Nominating Committee makes an initial determination (which may include input from the Chairman of the Board) as to whether to conduct a full evaluation of the candidate. This initial determination is based on whatever information is provided to the Nominating Committee with the recommendation of the prospective candidate, as well as the Nominating Committee's own knowledge of the prospective candidate, which may be supplemented by inquiries to the person making the recommendation or others. The preliminary determination is based primarily on the need for additional Board members to fill vacancies or expand the size of the Board and the likelihood that the prospective nominee can satisfy the evaluation factors described below. If the Nominating Committee determines, in consultation with the Chairman of the Board and other Board members as appropriate, that additional consideration is warranted, it may request that a third-party search firm gather additional information about the prospective nominee's background and experience and report its findings to the Nominating Committee. The Nominating Committee then evaluates the prospective nominee against the standards and qualifications set out in the Company's Corporate Governance Guidelines and its policy on consideration of director candidates, including:
The Nominating Committee also considers such other relevant factors as it deems appropriate, including the current composition of the Board, the balance of management and independent directors, the need for Audit Committee expertise and the evaluations of other prospective nominees. In connection with this evaluation, the Nominating Committee determines whether to interview the prospective nominee and, if warranted, one or more members of the Nominating Committee, and others as appropriate, interview prospective nominees in person or by telephone. After completing this evaluation and interview, the Nominating Committee makes a recommendation to the full Board as to
the persons who should be nominated by the Board, and the Board determines the nominees after considering the recommendation and report of the Nominating Committee.
The Nominating Committee believes in an expansive definition of diversity that includes differences of experience, education and talents, among other things. While the Nominating Committee does not have a formal policy in this regard, as discussed above, it seeks to achieve a range of talents, skills and expertise on the Board and evaluates each nominee with regard to the extent to which he or she contributes to this overall mix.
Pursuant to the Company's Corporate Governance Guidelines, the Nominating Committee is charged with undertaking an annual review of director independence. Under the Guidelines, at least a majority of the directors must satisfy the "independence" requirements of the Securities Exchange Act of 1934 and the NASDAQ Global Market, and all members of the Audit Committee must meet the specific independence requirements for audit committee members under the Sarbanes-Oxley Act of 2002 and the NASDAQ Global Market regulations.
In February 2010, the Nominating Committee undertook its review of director independence. During this review, the Nominating Committee considered whether any transactions and relationships existed between each director or any member of his immediate family and the Company. The Nominating Committee also examined whether any transactions or relationships were present between directors and members of the Company's senior management. The purpose of this review was to determine whether any such transactions or relationships exist and, if so, whether any such transactions or relationships were inconsistent with a determination that the director is independent. There were no such transactions or relationships in 2009.
As a result of the review conducted by the Nominating Committee, the Board affirmatively determined that all of the directors are independent, with the exception of Mr. Dougherty. Mr. Dougherty is considered an inside director because of his employment as an executive of the Company.
Under its charter, the Compensation Committee has the authority to review and determine executive officer and non-employee director compensation. Specifically, the charter provides that the Compensation Committee shall:
To assist it in carrying out its responsibilities in 2009, the Compensation Committee retained Radford Surveys + Consulting ("Radford"), an outside compensation consulting firm affiliated with Aon. Specifically, the Compensation Committee engaged Radford to provide information, analyses and advice on all matters related to the compensation of the Company's executive officers.
With respect to non-employee director compensation, Radford provides publicly-available information with respect to director cash retainer fees, annual equity compensation, committee service fees and per meeting fees, among other things, at comparable companies.
The Compensation Committee considers the advice of Radford and, in certain instances, the recommendations of management, before it determines executive and non-employee director compensation. Following approval, the Compensation Committee submits its compensation decisions to the independent members of the Board for ratification. For additional information concerning executive officer and non-employee director compensation, please see the "Compensation of Executive Officers and DirectorsCompensation Discussion and Analysis" beginning on page 13 of this Proxy Statement.
The Compensation Committee has the authority to delegate all or a portion of its duties and authority related to executive compensation to subcommittees. In 2009, the Compensation Committee did not exercise this right to delegate authority.
Although recently there has been increased scrutiny of risk and whether companies' compensation programs contribute to unnecessary risk taking, the Company has historically maintained a level of prudence associated with its compensation programs and expects to continue to do so. The Company has evaluated whether its executive and broad-based compensation programs contribute to unnecessary risk taking and has concluded that the risks arising from these programs are not reasonably likely to have a material adverse effect on the Company.
The Company compensates its non-employee directors through a mix of base cash compensation, restricted shares paid in lieu of cash compensation and stock option grants. For a more complete description of our compensation program for non-executive directors, including details of amounts earned in 2009, please see the "Non-employee Director Compensation" beginning on page 31 of this Proxy Statement.
Stockholders may communicate with the Company's Board by sending their communications to Adolor Corporation Board of Directors, c/o Secretary, 700 Pennsylvania Drive, Exton, PA 19341. The Nominating Committee has approved a process for handling letters received by the Company and addressed to independent members of the Board. Under that process, the Secretary reviews all such correspondence and regularly forwards to the Board a summary of all such correspondence and copies of all correspondence that, in the opinion of the Secretary, deal with the functions of the Board or its committees or that he otherwise determines require the Board's attention. Directors may at any time review a log of all correspondence received by the Company that is addressed to members of the Board and request copies of any such correspondence. Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of the Company's Chief Compliance Officer and handled in accordance with procedures established by the Audit Committee with respect to such matters.
The Company has a Code of Business Conduct that is applicable to all directors, officers and employees of the Company. The Code of Business Conduct also covers financial and non-financial business practices and procedures and applies to the Company's CEO, Chief Financial Officer and certain other employees of the Company responsible for accounting and financial reporting. The Code of Business Conduct is available on the Investor Insights section of the Company's website (www.adolor.com) by selecting "Corporate Governance" and then "Code of Business Conduct." The Company intends to post amendments to, or waivers from, its Code of Business Conduct (if any and to the extent applicable to the Company's CEO, principal financial officer or principal accounting officer) at this location on its website.
Yes. Under its charter, the Audit Committee is responsible for reviewing and approving all related-party transactions that would require disclosure under SEC rules. Under these rules and the Company's policy, a "related-party transaction" is a transaction in which the Company participates and in which a related party has a direct or indirect material financial interest, other than transactions involving less than $120,000 in any calendar year. In determining whether to approve or ratify a related party transaction, the Audit Committee will take into account whether the transaction is on terms no less favorable to the Company than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party's interest in the transaction, as well as any other factors the Audit Committee deems appropriate. During 2009, there were no related-party transactions that were required to be approved by the Audit Committee or disclosed in this Proxy Statement.
No. The Nominating Committee conducts a rigorous evaluation of the Board and its Committees that it believes provides a sound basis for determining if each director continues to be an active and positive contributor to the Board. Directors who do not actively and positively contribute to the Board, regardless of age, will not be nominated for re-election at the Annual Meeting or will be asked to resign from the Board.
Under the Sarbanes-Oxley Act of 2002, the Audit Committee is responsible for the appointment, compensation and oversight of the work of the Company's independent registered public accountant. As part of this responsibility, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent registered public accountant to assure that the provision of such services does not impair the registered public accountant's independence from the Company. To implement these provisions of Sarbanes-Oxley, the SEC has issued rules specifying the types of services that an independent registered public accountant may not provide to its audit client, as well as the audit committee's administration of the engagement of the independent registered public accountant. Accordingly, the Audit Committee has adopted, and the Board has ratified, the Audit and Non-audit Services Pre-approval Policy that sets forth the procedures and conditions pursuant to which services proposed to be performed by the independent registered public accountant may be pre-approved.
Under the Audit and Non-audit Services Pre-approval Policy, the Audit Committee considers whether services performed by the independent registered public accountant are consistent with the SEC's rules on auditor independence. The Audit Committee also considers whether the independent registered public accountant is best positioned to provide the most effective and efficient service, for reasons such as its familiarity with the Company's business, people, culture, accounting systems, risk profile and other factors, and whether the service might enhance the Company's ability to manage or control risk or improve audit quality. All such factors are considered as a whole, and no one factor is necessarily determinative.
The Audit and Non-audit Services Pre-approval Policy provides for the annual pre-approval of specifically described categories of services (Audit, Audit-related, Tax and All Other) to be performed by the independent registered public accountant and an expected range of fees associated with each such category. The term of any pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifies a different period. If a proposed service has not been pre-approved as part of the annual pre-approval process, the Audit Committee must specifically pre-approve the service and its expected range of fees. The Audit and Non-audit Services Pre-approval Policy also delegates pre-approval authority to the Chair of the Audit Committee. There were no exceptions to the Audit and Non-audit Services Pre-approval Policy in 2009.
During 2009, the Company's independent registered public accountant, KPMG, performed certain non-audit services for the Company. The Audit Committee has considered whether the provision of these non-audit services is compatible with maintaining KPMG's independence. Please see "Item 2Ratification of Appointment of KPMG LLP as Independent Registered Public Accountants for the Year Ending December 31, 2010" for further detail regarding aggregate fees billed to us by KPMG.
Adolor's corporate governance practices and policies are available on the Investor Insights section of the Company's website (www.adolor.com) by selecting "Corporate Governance."
NOTWITHSTANDING ANYTHING TO THE CONTRARY, THE REPORTS OF THE AUDIT COMMITTEE AND THE COMPENSATION COMMITTEE HEREIN SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS PROXY STATEMENT INTO ANY FILING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, EXCEPT TO THE EXTENT THAT THE COMPANY SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE, AND SHALL NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
The Audit Committee of the Company's Board of Directors is composed of three independent directors and operates under a written charter adopted by the Board that is designed to comply with rules adopted by the NASDAQ Global Market and the SEC. The Audit Committee charter was last reviewed in December 2009 and last revised in December 2008. A copy of the written charter is available on the Investor Insights section of the Company's website (www.adolor.com) by selecting "Corporate Governance." The current members of the Audit Committee are Dr. Gemayel, Mr. Hager (chair) and Mr. Nickelson.
Management is responsible for the preparation, presentation and integrity of the Company's financial statements, accounting and financial reporting principles, internal controls and procedures designed to ensure compliance with accounting standards, applicable laws and regulations. The Company's independent registered public accountants are responsible for performing an independent audit of the Company's financial statements in accordance with the standards of the Public Company Accounting Oversight Board and issuing a report thereon. The Audit Committee's responsibility is to monitor and oversee these processes, including the selection of the Company's independent registered public accountants.
The functions performed by the Audit Committee are not intended to duplicate or to certify the activities of management and the independent registered public accountants, nor can the Audit Committee certify that the independent registered public accountants are "independent" under applicable rules. The Audit Committee serves a Board-level oversight role, in which it provides advice, counsel and direction to management and the independent registered public accountants on the basis of the information it receives, its discussions with management and the independent registered public accountants and the experience of the Committee's members in business, financial and accounting matters.
In this context, the Audit Committee met and held discussions periodically in 2009 with management and the independent registered public accountants, including meetings with the independent registered public accountants during which management was not present. Management represented to the Audit Committee that the Company's financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the Audit Committee has reviewed and discussed the financial statements with management and the independent registered public accountants. The Audit Committee discussed with the independent registered public accountants matters required to be discussed by Statement on Auditing Standards No. 61, as amended by Statement on Auditing Standards No. 90.
The Company's independent registered public accountants also provided to the Audit Committee the written disclosures and letter required by applicable requirements of the Public Company Accounting Oversight Board regarding the communications of the independent registered public accountants with the Audit Committee concerning independence, and the Audit Committee discussed with the independent registered public accountants that firm's independence.
Based upon the Audit Committee's discussion with management and the independent registered public accountants and the Audit Committee's review of the representations of management and the report of the independent registered public accountants to the Audit Committee, the Audit Committee recommended that the Board of Directors include the audited financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
This Compensation Discussion and Analysis ("CD&A") section provides information regarding the compensation program in place in 2009 for the Company's President and Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO") and the three most highly-compensated executive officers other than the CEO and CFO as of December 31, 2009 (collectively, the "Named Executive Officers" or "NEOs"). It includes information regarding, among other things, how compensation decisions are made, the overall objectives of our compensation program, a description of the various components of compensation that we provide and other information pertinent to understanding our executive officer compensation program.
Governance Relating to Executive Compensation Decisions
The Compensation Committee of our Board of Directors (the "Committee") consists of three independent members of the Board of Directors and has responsibility for reviewing and approving all compensation decisions for the NEOs. The Committee submits its decisions to the independent members of the Board for ratification. The Committee acts pursuant to a written charter that has been approved by our Board. In connection with these duties, the Company's Human Resources Department supports the Committee in its work. In addition, the Committee retained Radford, an outside compensation consulting firm with substantial experience in the life sciences industry, to advise the Committee on all matters related to the compensation of the NEOs. The following summarizes the roles of each of the key participants in the executive compensation decision-making process.
Board of Directors
Objectives of Our Compensation Program
The compensation program for our NEOs is designed to attract, retain and reward talented executives who can contribute to the Company's long-term success and thereby build value for our stockholders. In general terms, the Committee believes that by placing greater weight on variable pay incentives and longer-term compensation, rather than base salary compensation, it will more effectively align the interests of executives with the Company's stockholders. Furthermore, this emphasis enables the Company to attract executives who are willing to sacrifice current earnings and the retirement benefits generally offered by larger companies for potential long-term gains in a less stable and riskier environment. The Committee believes that Adolor stockholders share a similar risk profile.
We strive to closely align the compensation paid to our executive officers with the performance of the Company on both a short-term and long-term basis. The compensation program for executive officers consists of the following principal components:
The Committee believes that our stockholders are best served when we can attract and retain talented executives by providing compensation packages that are competitive but fair. The Committee seeks to structure a compensation program for NEOs that delivers total cash compensation that is generally at the 50th percentile of certain "Collected Market Data," as more fully described below. The long-term equity compensation is generally targeted between the 50th and 75th percentile of the Collected Market Data. At the same time, the Committee believes it is important to provide its NEOs with the opportunity to exceed this level for achievement of key strategic initiatives and superior operational performance as evidenced by such benchmarks as research and development program progress, revenue growth and management of capital.
By providing our executives with a mix of equity and cash compensation, the Committee believes it can better align the interests of our executives with the short- and long-term interests of our stockholders. While there is no pre-established target for the allocation of equity and cash compensation, the Committee believes that the current mix of compensation programs for the NEOs strikes the correct balance between equity and cash compensation and is aligned with the Company's stated pay philosophy. The Committee believes that, by delivering a significant percentage of compensation in the form of equity, the level of executive compensation will correlate with the creation of long-term value for our stockholders as measured by stock price appreciation. Depending on whether, and to what extent, established strategic, financial and operational goals are achieved, the actual split between cash and equity compensation in any given year could vary from the target levels. For 2009, the mix of compensation between cash and equity as reflected in the Summary Compensation Table was approximately 49% and 51%, respectively, for the CEO and approximately 64% and 36%, respectively, for the other NEOs.
The equity component of our compensation plan for our NEOs historically has taken the form of stock options and, to a limited extent, deferred stock units ("DSUs") or performance-based restricted
stock units or DSUs that are triggered upon specified clinical, regulatory or commercial milestones. We believe these are appropriate instruments to drive long-term stockholder value, provide retention incentives to our NEOs and manage our equity shares in an efficient manner.
Collected Market Data. The Collected Market Data consist of the total compensation delivered by certain comparable publicly-traded biotechnology companies with which we compete for executive talent (the "Peer Group"), as well as additional data provided by Radford, including the Radford Global Life Sciences Survey of compensation data.
In late 2008 and again in late 2009, Radford assisted the Committee in updating the Peer Group for competitive pay and performance benchmarking. The Peer Group is developed by reference to a number of criteria, including: number of employees; last fiscal year revenue; market capitalization; business model; and therapeutic area and stage of development. The appropriateness of the Peer Group is reviewed annually by the Committee against these criteria. Based on this review, companies may be excluded due to acquisitions or changes in trading status or size; likewise, relevant peer companies may be added. The 2008 Peer Group, which consisted of 21 companies, was considered when determining the NEO base salaries for 2009 and the equity awards granted in January 2009 (applicable to the 2008 fiscal year). The 2009 Peer Group was considered when establishing the NEO base salaries for 2010 and for the equity awards made in December 2009 (applicable to the 2009 fiscal year).
The 2009 Peer Group consists of the following 20 companies*:
Material Tax and Accounting Implications of the NEO Compensation Program
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), generally disallows a tax deduction to public companies for certain compensation in excess of $1 million paid to the company's Chief Executive Officer and the three other most highly compensated executive officers. Specified compensation, including qualified performance-based compensation, will not be subject to the deduction limit if certain requirements are met. Where possible, the Committee generally seeks to structure compensation amounts and plans that meet the requirements for deductibility under this provision. Specifically, the Committee has taken steps to qualify the stock option awards as performance-based compensation for this purpose. While the Committee believes it is important to consider Section 162(m), it also believes that stockholder interests are best served by not restricting the Committee's discretion and flexibility in crafting the executive compensation program, even though such programs could result in non-deductible compensation expenses.
The Committee also considers the accounting implications to the Company of its executive compensation decisions, including, among other things, the financial statement impact of equity compensation awards as determined pursuant to Financial Accounting Standards Board Accounting Standards Codification 718, Stock Compensation ("ASC 718").
Discussion and Analysis of our 2009 Compensation Program and Awards
This section describes and analyzes each of the elements of our compensation program for our NEOs, including why the Committee chooses to include these items in the compensation program, the details of the compensation amounts granted to NEOs in 2009 and the Committee's rationale for awarding these compensation amounts.
Total cash compensation is delivered in the form of base salary and annual cash incentive awards or bonuses under a performance-based Incentive Compensation Plan (the "ICP") approved by the Board. Base salary is included in the Company's NEO compensation package because the Committee believes it is both necessary and appropriate that some portion of the compensation be provided to NEOs in a form that is fixed and liquid. Performance-based bonuses under the ICP are included in the package because they permit the Committee to incentivize our NEOs in any particular year to pursue particular objectives that the Committee believes are consistent with the overall goals and strategic direction that the Board has set for our Company and that also are aligned with stockholder interests. The components comprising the cash portion of total compensation are described below.
Salary. In setting salaries, the Committee is generally mindful of its overall goal of keeping base salary compensation for its executive officers at the 50th percentile of base salary compensation paid by companies in the Collective Market Data. Because the Company's business is becoming more complex and the industry and general economic environment has become more challenging, the Committee takes particular care to ensure that these factors are recognized in the calculation of base salary. While we seek to target the 50th percentile, we reserve the right to pay base salaries at a higher percentile to entice or retain select executives with particular skill sets and/or experience.
Merit increases are typically approved each year in December or January for the upcoming fiscal year. In addition, the Committee will review and approve salaries at the time of a promotion or other change in responsibilities. Increases in salary are based on an evaluation of an individual's performance compared to the individual performance goals set forth in the ICP, contribution and level of pay compared to the Collected Market Data. For the NEOs other than the CEO, our CEO makes recommendations to the Committee concerning adjustments to salary. As the value of the annual bonus is expressed as a multiple of base salary, a higher base salary will result in a higher bonus award, assuming the same level of achievement against goals.
For 2009, our CEO's base salary was set by the Committee at $437,750, which is at approximately the 25th percentile of CEO base salaries reflected in the Collected Market Data. Salaries for our other NEOs employed as of December 31, 2009, ranged from $248,000 to $437,750. The Committee believes that the base salaries of Messrs. Webster and Limongelli are consistent with the 50th percentile of executive base salaries reflected in the Collective Market Data for comparable positions; for Dr. Salinas, the base salary is above the 50th percentile and for Mr. Maurer, the base salary is below the 50th percentile. In December 2009, the Compensation Committee and the Board approved an increase of 2% in base salaries for 2010 over 2009 levels for each of the NEOs, except for Mr. Maurer, who received a 6% increase in his base salary.
For 2009, base salary of the CEO constituted approximately 79% of his total cash compensation (excluding all other compensation); for the other NEOs, base salaries constituted approximately 81% to
88% of the total cash compensation (excluding all other compensation), with bonuses in each case constituting the remaining portion of cash compensation.
Bonus Plan. Our NEOs participate in a cash bonus plan, the ICP. This plan provides cash compensation to NEOs only if, and to the extent that, annual performance conditions set by the Committee are achieved. Whether, and to what extent, bonuses under the ICP are paid depends entirely on the extent to which the established corporate objectives contained within the ICP for that year are attained. The Committee believes that the achievement of these objectives ultimately will contribute to the long-term success of the Company.
The corporate objectives referenced in the ICP are developed with input from management, the Committee and the Board. Management, including the NEOs, develops preliminary recommendations for the Committee's review. The Committee then reviews management's preliminary recommendations and establishes the final ICP goals and weightings, which are intended to reflect the most important strategic, operational and financial objectives for the Company. The final corporate objectives and weightings are then ratified by the independent members of the Board. In establishing final goals, the Committee strives to ensure that the incentives provided pursuant to the ICP are consistent with the strategic goals set by the Board for the Company, that the objectives set are sufficiently ambitious to provide a meaningful incentive and to ensure that bonus payments, assuming target levels of performance are attained, will be consistent with the overall philosophy of the executive compensation program established by the Committee. The Committee reserves the discretion to reduce or not pay bonuses under the ICP, even if the relevant performance targets are met, or to increase the bonus amount awarded under the ICP.
The ICP and the corporate objectives for 2009 (the "2009 Corporate Objectives") were approved by the Board at its January 2009 meeting. The 2009 Corporate Objectives consisted of the following three components:
In addition to the nearer-term focus of the commercial and financial objectives, the Board felt that a 35% weighting on R&D objectives provided a strong incentive to focus on attaining goals that it believes will further the creation of long-term value for Adolor stockholders. The Committee believes that the combination of the performance objectives within the 2009 ICP created a significantly high hurdle for achievement by each NEO.
Each year, the Committee also considers the target bonuses under the ICP for each NEO in light of several factors, including:
The target bonus percentage in 2009 for the CEO was 55% of base salary, which is at the 50th percentile of target bonus percentages in the Peer Group. In setting this target bonus percentage, the Committee considered that Mr. Dougherty's base salary was at approximately the 25th percentile of the Peer Group and that, even with a bonus payout at target, his total cash compensation would be only at the 25th percentile for the Peer Group. For the other NEOs, the target bonus was 30% of base salary for Messrs. Webster, Limongelli and Maurer, which is at the 25th percentile of the Peer Group, and 50% of base salary for Dr. Salinas, which is above the 75th percentile of the Peer Group.
The actual amount of an ICP bonus award is determined based on the level of achievement against the pre-established corporate objectives, as well as an assessment of individual performance. The ICP provides the NEOs with the opportunity to earn bonuses that exceed target levels for exceeding performance objectives and, conversely, penalizes the NEOs for missing these objectives. For 2009, a minimum ICP score of 60% was required for any awards to be paid under the ICP. At the end of each fiscal year, the Committee is responsible for assessing the performance of each NEO against the ICP performance criteria and determining the level of awards, if any, under the ICP. The CEO provides his recommendations to the Committee with respect to the performance and award levels, if any, under the ICP for each NEO other than the CEO. The Committee will make its own determination, which it then presents to the independent members of the Board for approval.
For 2009, the Committee assessed the level of achievement for each of the 2009 Corporate Objectives. With respect to the commercial objective, the Board considered ENTEREG net sales in 2009 which were below the approved 2009 budget. For the R&D objectives, the Committee considered, among other things, the following in assessing achievement against the established goals:
With respect to the financial objective, the Committee considered both the Company's execution of an amendment to the collaboration agreement with Glaxo Group Limited, which resulted in the receipt by the Company of approximately $9 million, and the favorable variance achieved against budgeted expenditures.
In assessing performance against the 2009 Corporate Objectives, it was determined that the Company had achieved at a level equal to approximately 65%. The Committee then also considered certain other factors outside of the ICP including the actual sales level and the Company's stock price performance during 2009. In light of these considerations, the Committee exercised its discretion to reduce the level of targeted payout under the ICP to 50% of the target bonus levels. The dollar
amount of the ICP award for 2009 to the CEO was $120,381; for the other NEOs, the ICP awards ranged from $39,060 to $109,438.
The Committee felt that the final split between base salary and bonuses awarded for 2009 under the ICP appropriately reflects the individual and Company performance delivered by each of the NEOs.
Long-term Incentive Compensation
The Committee believes that placing a significant emphasis on equity compensation will better align the interests of NEOs with our stockholders.
Types of Equity Awards. Equity awards to our NEOs can be made pursuant to our Amended and Restated 2003 Stock-Based Incentive Compensation Plan (the "2003 Plan) and, up until February 4, 2010, our Amended and Restated 1994 Equity Compensation Plan (the "1994 Plan"), both of which have been approved by Adolor stockholders. The Plans provide for awards in the form of incentive stock options and non-qualified stock options (collectively, "stock options"). The 2003 Plan also provides for deferred and restricted stock awards. In determining the mix of stock options and deferred stock, the Committee considers the following factors: the total shares available under the Plans and the most efficient use of the available shares; Peer Group comparisons; and retention of the NEOs.
Equity Compensation Awards for 2009. In connection with the review of executive compensation for 2009, the independent members of the Board granted the stock options and DSUs to the NEOs shown in the table below. The stock options vest annually in equal parts of 1/4th of the grant amount beginning one year after the date of grant, have a 10-year term and an exercise price of $1.34, which was the closing price of our Common Stock on the date of grant. The shares underlying the DSUs will vest 40% on December 15, 2011 with the remaining 60% vesting on December 15, 2013.
The stock options and DSUs granted in December 2009 to the NEOs of the Company are as follows:
In determining the level of equity awards granted to the NEOs in December 2009, the Committee put emphasis on its desire to retain the current management team in light of the business challenges facing the Company and to align the interests of the NEOs with the Company's stockholders.
Equity Compensation Awards for 2008. In connection with its review of executive compensation in 2008 and as previously disclosed in the CD&A included in the 2009 Proxy Statement, the independent members of the Board granted the following stock options and DSU awards on January 6, 2009:
The stock options have a 10-year term and an exercise price of $1.77, which was the closing price of our Common Stock on the date of grant. The stock option awards vest over four years at the rate of 1/48th of the shares subject to the option per month. The DSUs awarded to the NEOs (with the exception of Mr. Maurer) will vest in full at such time as the quarterly net sales of ENTEREG as measured through the quarterly period ending June 30, 2010 and as reported in the Company's Form 10-Q and/or Form 10-K (as the case may be) filed with the SEC are equal to or in excess of $12.5 million for two consecutive fiscal quarterly periods. The shares underlying Mr. Maurer's award of DSUs will vest over four years at the rate of 1/4 of the shares per year.
Practices Regarding the Grant of Options. The Company generally has followed a practice of making all annual stock option grants to its executive officers on a single date each year. For the last several years, at its regularly scheduled meeting usually in December or early January, the Board has ratified the annual option grants made by the Committee. For 2009, the Board's last regularly scheduled meeting occurred on December 15, 2009. At a meeting prior to the last Board meeting, the Committee approves these annual grants, subject to the ratification by the Board. The dates of the Board and Committee meetings are determined approximately a year in advance based on the Board members availability for a meeting. We do not otherwise have any program, plan or practice to time annual option grants to our executives in coordination with the release of material non-public information.
While the bulk of our stock option awards to NEOs have historically been made pursuant to our annual grant program, the Committee retains the discretion to make additional awards to NEOs at other times, in connection with the initial hiring of a new officer, for retention purposes or otherwise. There were no such awards made to NEOs in 2009. The Committee generally follows the practice of making awards outside of the annual grants only during a time when our NEOs would be permitted, pursuant to our insider trading policy, to trade in our securities. Other than in this respect, we do not have any program, plan or practice to time equity awards in coordination with the release of material non-public information.
401(k) Profit Sharing Plan. Under the Adolor Corporation 401(k) Savings Plan & Trust (the "401(k) Plan"), a tax-qualified retirement savings plan, all employees, including our NEOs, may contribute up to 90 percent of regular earnings on a before-tax basis into their 401(k) Plan accounts, subject to the limits imposed by the IRS. In addition, under the 401(k) Plan, we may determine to make a matching contribution to a participating employee's account. We have determined to match an amount equal to $0.50 for each dollar contributed by participating employees on the first six percent of their regular earnings, subject to any limitations imposed by the IRS. Because we do not sponsor a defined benefit pension plan, the 401(k) Plan matching contribution allows Adolor to remain
competitive with other companies in its industry that provide retirement savings vehicles for their executives and employees. Adolor employees vest in all matching contributions made by the Company under the 401(k) Plan ratably over a four-year period. As of December 31, 2009, approximately 80% of the Company's employees participated in the 401(k) Plan.
Letter Agreements. The Company has entered into letter agreements with each NEO that provide for payments and other benefits if the officer's employment is involuntarily terminated by the Company for any reason other than "Cause," death or "Disability," as these terms are defined in the letter agreements. These letter agreements also provide for payments and other benefits upon a qualifying event or circumstances after there has been a "Change in Control" (as defined in the agreements) of the Company. The Committee reviews and approves the terms of each letter agreement prior to execution and believes that the terms contained in these agreements are reasonable and customary for agreements of this type. Additional information regarding the letter agreements, including a definition of key terms and a quantification of benefits that would have been received by our NEOs had termination occurred on December 31, 2009, is found under the heading "2009 Potential Payments Upon Termination or Change in Control" on page 28 of this Proxy Statement.
The Committee believes that these letter agreements are an important part of overall compensation for our NEOs. The Committee believes that these agreements will help to secure the continued employment and dedication of our NEOs, notwithstanding any concern that they might have at such time regarding their own continued employment, prior to or following a change in control. The Committee also believes that these agreements are important as a recruitment and retention device, as many of the biotechnology and pharmaceutical companies with which we compete for executive talent have similar agreements in place for their executive officers.
The Compensation Committee of the Board of Directors of Adolor Corporation oversees the Company's compensation program on behalf of the Board. In fulfilling its oversight responsibilities, the Committee reviewed and discussed with management the Compensation Discussion and Analysis set forth in this Proxy Statement.
In reliance on the review and discussions referred to above, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Company's Proxy Statement to be filed in connection with the Company's 2010 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee are Drs. Goddard and Nash and Mr. Nickelson. There are currently no compensation committee interlocks or insider participation on the Compensation Committee.
The following table summarizes the compensation of the Company's NEOs for the years ended December 31, 2009, 2008 and 2007.
The table below sets forth certain information with respect to plan-based awards granted during the year ended December 31, 2009, to each of the NEOs listed in the Summary Compensation Table above.
Narrative to Summary Compensation and Grants of Plan-Based Awards Tables
We have employment agreements with each of our NEOs. For a more complete description of these agreements, please see the section of this Proxy Statement entitled "2009 Potential Payments Upon Termination or Change in Control."
Base salaries for each NEO are reviewed and approved on at least an annual basis by the Compensation Committee. In December 2009, the Compensation Committee approved the following salaries for 2010: Mr. Dougherty $446,505; Mr. Webster $341,445; Mr. Limongelli $341,445; Mr. Maurer $262,880; and Dr. Salinas $446,505. These amounts are not reflected in the summary compensation table above.
In early 2009, the Compensation Committee approved the 2009 ICP, which provided our NEOs with the opportunity to earn a cash incentive award if certain pre-established objectives were attained. For 2009, each NEO earned a bonus amount that was at a level equal to approximately 50% of the target bonus levels established under the 2009 ICP. The bonus amounts earned by the NEOs are reported as "Non-Equity Incentive Plan Compensation" in the Summary Compensation Table above.
On January 4, 2008, Mr. Dougherty received a grant of 120,000 stock options, as well as a performance-based stock option award, the amount of which was to be determined by reference to the date by which the Company secured U.S. Food and Drug Administration ("FDA") approval of ENTEREG. The performance-based stock option became subject to vesting on May 20, 2008 upon FDA approval of ENTEREG and will vest over three years following May 20, 2008 at the rate of 1/36th of the shares subject to the option per month. The stock options expire on January 4, 2018. Mr. Dougherty also received a grant of performance-based DSUs on January 4, 2008 under the Company's 2003 Plan. The amount of the award and the vesting of such award were determined by reference to the date on which the FDA approved ENTEREG for the treatment of postoperative ileus. Under the terms of the award, Mr. Dougherty received 8,000 shares of common stock following FDA approval of ENTEREG in May 2008.
Upon the commencement of their employment with the Company in 2008, Messrs. Webster and Limongelli and Dr. Salinas received grants of 125,000, 125,000 and 150,000 stock options, respectively, with per share exercise prices of $5.32, $3.39 and $5.64, respectively. Dr. Salinas also received a performance-based deferred share award for 25,000 shares at that time that vests as follows: (i) 12,500 shares on the filing under his direction of an Investigational New Drug Application ("IND") with the FDA for a product candidate that was not a current IND development target at the time he joined the Company; and (ii) 12,500 shares on initiation of the first pivotal Phase 3 study for a product candidate (other than alvimopan or any combination product containing alvimopan) for the Company during his employment as Chief Medical Officer.
In January 2009, Messrs. Dougherty, Webster, Limongelli and Maurer and Dr. Salinas received stock options of 160,000, 60,000, 70,000, 50,000 and 80,000, respectively, that vest over four years at the rate of 1/48th of the shares subject to the option per month (assuming continued employment), expire ten years after the grant date and have a per share exercise price of $1.77. Messrs. Dougherty, Webster and Limongelli and Dr. Salinas also received performance-based DSUs of 40,000, 25,000, 25,000 and 40,000, respectively, that vest in full at such time as the quarterly net sales of ENTEREG as measured through the quarterly period ending June 30, 2010 and as reported in the Company's Form 10-Q and/or Form 10-K (as the case may be) filed with the SEC are equal to or in excess of $12.5 million for two consecutive fiscal quarterly periods. The terms of the performance-based DSUs do not provide for the right to vote or receive dividends or other distributions in respect of our Common Stock prior to the
lapse of the restrictions. Mr. Maurer received a restricted stock award of 15,000 shares that vests 25% per year over four years, with the first vesting occurring on January 6, 2010.
In December 2009, Messrs. Dougherty, Webster, Limongelli and Maurer and Dr. Salinas received stock options of 240,000, 70,000, 90,000, 70,000 and 120,000, respectively, that vest 25% per year over four years beginning one year after the date of grant, expire ten years after the grant date and have a per share exercise price of $1.34. Messrs. Dougherty, Webster, Limongelli and Maurer and Dr. Salinas also received restricted stock awards of 150,000, 45,000, 60,000, 45,000 and 80,000, respectively. The restricted stock awards vest 40% on December 15, 2011 and 60% on December 15, 2013.
Salary and Bonus in Proportion to Total Compensation
For 2009, approximately 48% of our CEO's total compensation was delivered in the form of base salary and incentive bonus; for the other NEOs employed by the Company at year-end, the percentages ranged from approximately 59% to 66% of total compensation. As noted in the "Compensation Discussion and Analysis," we believe that our current compensation program aligns the interests of our NEOs with the interests of our stockholders, while also permitting the Compensation Committee to incentivize the NEOs to pursue specific performance goals. Please see the section of this Proxy Statement entitled "Compensation Discussion and Analysis" for a description of our compensation program and overall compensation philosophy.
Outstanding Equity Awards at Fiscal Year-End 2009
We have entered into letter agreements with each of our NEOs that provide for compensation and benefits in the event that the NEO's employment with us is terminated, including terminations in connection with a Change in Control (as described below) of Adolor. To be covered by the letter agreements, an NEO must be either terminated by the Company "without cause" or the NEO must terminate his employment for "good reason." A termination by the Company of an NEO for "cause" would not trigger any liability to an NEO under the letter agreement. The letter agreements define "cause" as:
For an act to be considered "intentional" or "gross negligence," an NEO must act in bad faith and without reasonable belief that the act or omission was in the best interest of the Company.
Under the agreements, "good reason" will exist if, without the NEO's written consent:
Any of the following situations would constitute a "Change of Control" under the letter agreements:
In the case of a termination due to death of an NEO, an NEO's estate will be entitled to receive the continuation of the NEO's base salary through the end of the month in which the NEO's death occurs and a pro-rated bonus payment for the year of death (based on the bonus paid in the preceding calendar year). The estate also will receive any benefits available under any program (including life insurance) maintained by the Company that cover the NEO.
The letter agreements are intended to comply with the requirements of Section 409A of the Code, which generally provides that any payments required to be made under the letter agreements would be delayed for a period of six months following the termination of employment.
The following table sets forth our lump-sum payment obligations under the letter agreements upon a termination of the employment of our NEOs under various scenarios. The table assumes termination on December 31, 2009 and payment of such termination obligations as provided for in the letter agreements.
The Company compensates its non-employee directors through a mix of cash compensation and stock option grants. The elements of the non-employee directors' compensation are as follows:
Annual Retainers/Meeting Fees:
Stock Option Compensation:
Under the Company's 2003 Plan, the initial grant of 25,000 stock options to a non-employee director is made at the time of the earlier to occur of such director's appointment as a director by the Board or first election to the Board by stockholders. This initial award vests over a three-year period, with 33.3% becoming exercisable on each anniversary of the grant date. Upon the date of re-election to the Board at the Annual Meeting, a non-employee director will receive an annual grant of 20,000 stock options that vest in full on the first anniversary of the date of grant. The Board of Directors also may grant options to non-employee directors in addition to the automatic grants described above. Stock options granted to non-employee directors have a ten-year term and are granted with an exercise price equal to the fair market value of our Common Stock on the date of grant.
On January 6, 2009, Mr. Madden and each of the other non-employee directors received a grant of stock options to purchase 45,000 and 30,000 shares of Common Stock, respectively, at an exercise price of $1.77 per share. The options vest in two equal annual installments on the anniversary of the grant date.
On May 12, 2009, each non-employee director received an annual grant of stock options to purchase 20,000 shares of Common Stock at an exercise price of $2.20 per share, which will become fully exercisable as of May 12, 2010.
The Company also reimburses directors for travel expenses incurred in connection with attending Board, committee and stockholder meetings and for other Company business-related expenses. The Company does not provide retirement benefits or other perquisites to non-employee directors under any current program. Mr. Dougherty receives no remuneration for his service as a director.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of the Company's Common Stock as of February 15, 2010 (except as noted) by (i) the NEOs and the Company's directors; (ii) owners of more than five percent of the outstanding shares of the Company's Common Stock; and (iii) all executive officers and directors as a group. As of February 15, 2010, there were 46,352,683 shares of Common Stock outstanding.
subject to such options to the total number of shares issued and outstanding on February 15, 2010 for such individual.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that each director and executive officer of the Company, and any other person who owns more than ten percent of the Company's Common Stock, file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock of the Company. Such directors, executive officers and greater-than-ten-percent stockholders are required by regulation to furnish the Company with copies of such reports. To the knowledge of the Company, based solely upon its review of reports furnished to it, as well as written representations from its directors and executive officers to the effect that no other such reports were required to be filed, each covered person met all fiscal 2009 Section 16(a) filing requirements.
Our Amended and Restated Certificate of Incorporation and Restated Bylaws provide that our business will be managed by a Board of Directors, with the number of directors to be fixed by the Board of Directors from time to time. Our Amended and Restated Certificate of Incorporation divides our Board of Directors into three classes: Class I, Class II and Class III. The directors in each class serve terms of three years and until their respective successors have been elected and have qualified.
The term of office of one class of directors expires each year in rotation so that one class is elected at each annual meeting of stockholders for a three-year term. The term of the three Class III directors, Paul Goddard, Ph.D., Claude H. Nash, Ph.D. and Donald Nickelson, expires at this 2010 Annual Meeting. The term of the three Class I directors, Armando Anido, Michael R. Dougherty and George V. Hager, Jr., expires at our 2011 Annual Meeting. The term of the three Class II directors, Georges Gemayel, Ph.D., David M. Madden and Guido Magni, M.D., Ph.D., expires at our 2012 Annual Meeting.
Director candidates were nominated by the Nominating Committee of the Board of Directors. Stockholders also are entitled to nominate director candidates for the Board of Directors in accordance with the procedures set forth above under the heading "Governance of the CompanyHow does the Board select nominees for the Board?" The Nominating Committee of our Board of Directors did not receive a recommendation for a director nominee from any stockholder of our Common Stock by December 1, 2009.
At the Annual Meeting, three Class III directors are to be elected. Each of the nominees listed below has consented to being named as a nominee for director of the Company and has agreed to serve if elected. Each Class III director will be elected to serve until our 2013 Annual Meeting and until his respective successor has been elected and has qualified. If any nominee becomes unavailable to serve at the time of the 2010 Annual Meeting, the shares represented by proxy will be voted for any substitute nominee designated by the Board of Directors. Director elections are determined by a plurality of the votes cast and abstentions will not be counted for the purposes of the election of directors. Unless otherwise specified by the stockholders, the shares of stock represented by the proxy will be voted for election of the three Class III directors.
Set forth below is information regarding each nominee for Class III director.
NOMINEES FOR DIRECTOR
Incumbent Class III Directors
Incumbent Class I Directors to Continue in Office for Terms Expiring in 2011
Incumbent Class II Directors to Continue in Office for Terms Expiring in 2012.
The Audit Committee has reappointed KPMG as the Company's independent registered public accountants for the year ending December 31, 2010, and the Board of Directors has directed that management submit the selection of KPMG as independent registered public accountants for ratification by the stockholders at the Annual Meeting. Stockholder ratification of the selection of KPMG as the Company's independent registered public accountants is not required by Adolor's bylaws, Delaware corporate law or otherwise. The Board has elected to seek such ratification as a matter of good corporate practice. Should the stockholders fail to ratify the selection of KPMG as independent registered public accountants, the Board or Audit Committee may reconsider whether to retain that firm for fiscal 2010.
Representatives of KPMG are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions.
The following table sets forth the aggregate fees billed by KPMG to the Company for:
The Audit Committee's policy is to pre-approve the engagement of KPMG to render all audit and tax-related services for the Company, as well as any changes to the terms of the engagement. The Audit Committee also will pre-approve all non-audit related services proposed to be provided by the Company's independent registered public accountants. The Audit Committee reviews the terms and description of, and budget for, the engagement. The request for services must be specific as to the particular services to be provided. Requests are aggregated and submitted to the Audit Committee in one of the following ways: requesting approval of services at a meeting of the Audit Committee, through a written consent or by a designated member of the Audit Committee. All services performed by KPMG in 2009 were pre-approved by the Audit Committee in accordance with the Audit and Non-audit Services Pre-approval Policy.
The Board is not aware of any matters not set forth herein that may come before the meeting. If, however, further business properly comes before the meeting in accordance with the Company's bylaws, the persons named in the proxies will vote the shares represented thereby in accordance with their judgment on such matters. The chairman of the meeting may refuse to allow the transaction of any business not presented, or to acknowledge the nomination of any person not made, in compliance with the foregoing procedures.
Proxy Solicitation Costs
The cost of soliciting proxies will be borne by the Company. In addition to the use of the mails, proxies may be solicited by telephone by officers, directors and a small number of regular employees of the Company who will not be specially compensated for such services. The Company also has requested banks, brokers and other custodians, nominees and fiduciaries to solicit proxies from beneficial owners, where appropriate, and will reimburse such persons for reasonable expenses incurred in that regard. We may engage a professional proxy solicitation firm to assist us with the solicitation of proxies prior to the Annual Meeting. If we do engage such a firm, we do not expect to pay more than $50,000 plus expenses for its services.
Advance Notice Provisions
Under the Company's bylaws, no business may be brought before an Annual Meeting unless it is specified in the notice of the meeting or is otherwise brought before the meeting at the direction of the Board or by a stockholder entitled to vote who has delivered written notice to the Secretary of the Company not earlier than the close of business on the one hundred and twentieth day nor later than the close of business on the ninetieth day prior to the first anniversary of the preceding year's Annual Meeting. In addition, any stockholder who wishes to submit a nomination to the Board must deliver written notice of the nomination within this time period and comply with the information requirements in the bylaws relating to stockholder nominations. See "Governance of the CompanyHow does the Board select nominees for the Board?" for additional information about stockholder nominations. These requirements are separate from and in addition to requirements that a stockholder must meet to have a stockholder proposal included in the Company's Proxy Statement.
Stockholder Proposals for the 2011 Annual Meeting
Stockholders interested in submitting a proposal for inclusion in the proxy materials for the Annual Meeting of Stockholders in 2011 may do so by following the procedures prescribed in SEC Rule 14a-8. To be eligible for inclusion, stockholder proposals must be received by the Secretary of the Company at its offices at 700 Pennsylvania Drive, Exton, PA 19341, no later than December 7, 2010.
Annual Report on Form 10-K
The Company will furnish without charge to each person whose proxy is being solicited, upon the request of such person, a copy of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009, including the financial statements and schedules thereto, but excluding exhibits. Requests for copies of such report should be directed to Investor Relations, Adolor Corporation, 700 Pennsylvania Drive, Exton, PA 19341, (484) 595-1500. The Annual Report on Form 10-K is being mailed with this Proxy Statement, but does not constitute a part of this Proxy Statement.
[FORM OF PROXY CARD]
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS, MAY 18, 2010
The undersigned hereby appoints Michael R. Dougherty and John M. Limongelli, or either one of them acting singly in the absence of the other, with full power of substitution, the proxy or proxies of the undersigned to attend the Annual Meeting of Stockholders of Adolor Corporation to be held on May 18, 2010, and any postponements or adjournments thereof, to vote all shares of stock that the undersigned would be entitled to vote if personally present in the manner indicated below and on any other matters properly brought before the Annual Meeting of Stockholders to be held on May 18, 2010 or any postponements or adjournments thereof, all as set forth in the Proxy Statement dated March 26, 2010.
This proxy/voting instruction card is solicited on behalf of the Board of Directors of Adolor Corporation pursuant to a separate Notice of Annual Meeting and Proxy Statement dated March 26, 2010, receipt of which is hereby acknowledged. When properly executed, this proxy will be voted as directed, or if no direction is given, will be voted for all nominees named in Item 1 and for Item 2 and will grant authority to the proxy holder to vote upon such other business as may properly come before the Annual Meeting or any postponements or adjournments thereof.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ITEMS 1 AND 2 BELOW:
PLEASE SEE BELOW FOR TELEPHONE AND INTERNET VOTING INSTRUCTIONS. IF YOU VOTE BY TELEPHONE OR INTERNET, PLEASE DO NOT MAIL BACK THIS PROXY CARD.
Please mark your votes as indicated in this example: x
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF.
YOUR VOTE IS IMPORTANT VOTE TODAY IN ONE OF THREE WAYS:
1. VOTE BY TELEPHONE: After you call the phone number below, you will be asked to enter the control number at the bottom of the page. You will need to respond to only a few simple prompts. Your vote will be confirmed and cast as directed.
Call toll-free in the U.S. or Canada at 1-866-578-5350 on a touch-tone telephone
2. VOTE BY INTERNET:
Log-on to www.votestock.com
Enter your control number printed below
Vote your proxy by checking the appropriate boxes
Click on Accept Vote
3. VOTE BY MAIL: If you do not wish to vote by telephone or over the Internet, please complete, sign, date and return the above proxy card in the pre-paid envelope provided.
YOUR PROXY CONTROL NUMBER IS:
You may vote by telephone or Internet 24 hours a day, 7 days a week.
Internet and telephone voting is available through 11:59 p.m., Philadelphia time, on May 17, 2010.
Your telephone or Internet vote authorizes the named proxies to vote in the same manner as if you marked, signed and returned your proxy card.