ARXT Adams Respiratory Therapeutics (MM)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

 

Filed by the Registrant  þ

Filed by a Party other than the Registrant  o

 

Check the appropriate box:

 

      o   Preliminary Proxy Statement

 

      o    Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

      þ   Definitive Proxy Statement

 

      o   Definitive Additional Materials

 

      o   Soliciting Material Pursuant to § 240.14a-12

 

Adams Respiratory Therapeutics, 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

ADAMS RESPIRATORY THERAPEUTICS, INC.
4 MILL RIDGE LANE, MILL RIDGE FARM,
CHESTER, NEW JERSEY 07930

 

Dear Stockholder:

 

You are cordially invited to attend the 2007 Annual Meeting of Stockholders of Adams Respiratory Therapeutics, Inc. The meeting will be held on Friday, December 14, 2007 at 9:00 a.m. local time, at our headquarters located at 4 Mill Ridge Lane, Mill Ridge Farm, Chester, New Jersey 07930.

 

The notice of the meeting and the proxy statement on the following pages cover the formal business of the meeting, which includes the election of three Class III directors and a proposal to ratify the appointment of our independent registered public accounting firm.

 

Your vote is important. Whether or not you are able to attend, it is important that your shares be represented at the annual meeting. We ask that you promptly sign, date and return the enclosed proxy card in the envelope provided, or instruct us by telephone or via the Internet as to how you would like to vote your shares. Returning your proxy card will not prevent you from voting in person at the meeting if you are present and choose to do so.

 

We look forward to your attendance at the meeting.

 

By Order of the Board of Directors,

 

 

Michael J. Valentino

President and Chief Executive Officer

 

November 2, 2007

ADAMS RESPIRATORY THERAPEUTICS, INC.

4 MILL RIDGE LANE, MILL RIDGE FARM,

CHESTER, NEW JERSEY 07930

 

ADAMS RESPIRATORY THERAPEUTICS, INC.

 

 

How many shares must be present to hold the meeting?

 

A quorum must be present at the annual meeting for any business to be conducted. The presence at the annual meeting, in person or by proxy, of the holders of a majority of the shares of common stock outstanding on the record date will constitute a quorum. Proxies received but marked as abstentions or treated as broker non-votes will be included in the calculation of the number of shares considered to be present at the annual meeting.

 

What if a quorum is not present at the meeting?

 

If a quorum is not present at the scheduled time of the annual meeting, the stockholders who are represented may adjourn the annual meeting until a quorum is present. The time and place of the adjourned meeting will be announced at the time the adjournment is taken, and no other notice will be given.

 

Who is entitled to vote?

 

The record date for the annual meeting is Monday, October 22, 2007. Only stockholders of record at the close of business on that date are entitled to vote at the annual meeting. The only class of stock entitled to be voted at the annual meeting is our common stock. Each outstanding share of common stock is entitled to one vote for all matters before the annual meeting. At the close of business on the record date, there were 35,965,200 shares of our common stock outstanding.

 

Am I entitled to vote if my shares are held in “street name”?

 

If your shares are held by a bank or brokerage firm, you are considered the “beneficial owner” of shares held in “street name.” If your shares are held in street name, your bank or brokerage firm (the record holder of your shares) forwarded these proxy materials, along with a voting instruction card, to you. As the beneficial owner, you have the right to direct your record holder how to vote your shares, and the record holder is required to vote your shares in accordance with your instructions. If you do not give instructions to your bank or brokerage firm, it will nevertheless be entitled to vote your shares with respect to “discretionary” items, but it will not be permitted to vote your shares with respect to “non-discretionary” items. In the case of a non-discretionary item, your shares will be considered “broker non-votes” on that proposal.

 

As the beneficial owner of shares, you are invited to attend the annual meeting. However, if you wish to attend the annual meeting, please bring to the meeting your bank or brokerage statement evidencing your beneficial ownership of our stock and a form of photo identification. If you are a beneficial owner, you may not vote your shares in person at the meeting unless you obtain a power of attorney or proxy form from the record holder of your shares.

 

How do I vote?

 

If you are a registered stockholder, meaning that you hold your shares in certificate form or through an account with our transfer agent, American Stock Transfer & Trust Company, and you wish to vote prior to the annual meeting, you have three options. You may vote:

 

 

If your shares are held in street name, your bank or brokerage firm forwarded these proxy materials, as well as a voting instruction card, to you. Please follow the instructions on the voting instruction card to vote your shares.

 

If you are a registered stockholder and you attend the meeting, you may deliver your completed proxy card in person. Additionally, we will pass out written ballots to registered stockholders who wish to vote in person at the meeting. Beneficial owners of shares held in street name who wish to vote at the meeting will need to obtain a power of attorney or proxy form from their record holder to do so.

What does it mean if I receive more than one proxy card?

 

If you receive more than one proxy card, it means that your shares are held in more than one account at the Company’s transfer agent and/or with banks or brokers. Please vote all of your shares.

 

What if I do not specify how my shares are to be voted?

 

If you are a registered stockholder and you submit a proxy but do not provide any voting instructions, your shares will be voted:

 

 

If you hold your shares in street name and do not instruct your bank or brokerage firm how to vote your shares, it may vote your shares as it chooses with respect to discretionary items, including the election of directors and the ratification of the appointment of our independent registered public accounting firm. It will not be able to vote your shares with respect to non-discretionary items, and your shares will be considered broker non-votes on non-discretionary proposals.

 

Can I change my vote after I submit my proxy?

 

Yes, you may revoke your proxy and change your vote:

 

 

 

Your attendance at the meeting itself will not revoke your proxy unless you give written notice of revocation to the Secretary before your proxy is voted or you vote in person at the meeting.

 

Who will count the votes?

 

Our transfer agent will tabulate and certify the votes. A representative of the transfer agent will serve as an inspector of election.

 

How does the board of directors recommend I vote on the proposals?

 

The Adams board of directors recommends that you vote:

 

 

Will any other business be conducted at the meeting?

 

We know of no other business that will be presented at the meeting. However, if any other matter properly comes before the stockholders for a vote at the meeting, the proxy holders will vote your shares in accordance with their best judgment.

 

How many votes are required to elect the director nominees?

 

The affirmative vote of a plurality of the votes cast at the meeting is required to elect the three Class III nominees as directors. This means that the three Class III nominees will be elected if they receive more affirmative votes than any other person. If you vote “Withheld” with respect to one or more nominees, your shares will not be

voted with respect to the person or persons indicated, although they will be counted for purposes of determining whether there is a quorum.

 

What happens if a nominee is unable to stand for election?

 

If a nominee is unable to stand for election, the board of directors may either reduce the number of directors to be elected or select a substitute nominee. If a substitute nominee is selected, the proxy holders will vote your shares for the substitute nominee, unless you have voted “Withheld” with respect to the original nominee.

 

How many votes are required to ratify the appointment of Adams’ independent registered public accounting firm?

 

The ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm requires the affirmative vote of a majority of the shares present at the meeting, in person or by proxy, and entitled to vote.

 

How will abstentions be treated?

 

Abstentions on the ratification of the appointment of our independent registered public accounting firm and other proposals will be treated as shares present for quorum purposes and entitled to vote, so they will have the same practical effect as votes against a proposal.

 

How will broker non-votes be treated?

 

Broker non-votes will be treated as shares present for quorum purposes, but not entitled to vote, so they will not affect the outcome of other proposals that may properly come before the annual meeting.

 

Where can I find the voting results of the annual meeting?

 

We plan to announce preliminary voting results at the annual meeting and to publish final results in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2007, which we will file with the Securities and Exchange Commission, or the SEC.

 

Will I receive a copy of the annual report?

 

With this proxy statement, we have mailed you our Annual Report on Form 10-K for the fiscal year ended June 30, 2007. You may also obtain a copy by writing to our Investor Relations department at 4 Mill Ridge Lane, Mill Ridge Farm, Chester, New Jersey 07930, by accessing the investor relations section of our website at www.adamsrt.com or by accessing the SEC’s EDGAR database at www.sec.gov . Our Annual Report on Form 10-K for the fiscal year ended June 30, 2007 is not incorporated into this proxy statement and is not considered proxy soliciting material.

 

Who pays for solicitation of the proxy?

 

The expense of soliciting proxies, including the cost of preparing, assembling and mailing the material submitted with this proxy statement, will be paid for by us. In addition to solicitations by mail, our directors, officers and regular employees may solicit proxies personally or by telephone, mail or other means, for which no compensation will be paid other than their regular salary or other usual compensation. Arrangements also will be made as appropriate with banks and brokerage houses and other custodians, nominees and fiduciaries to forward solicitation materials to the beneficial owners of the common stock held of record by such persons; we will, upon request, also reimburse such persons for their reasonable expenses in forwarding the solicitation materials.

 

PROPOSAL 1

 

ELECTION OF DIRECTORS

 

In accordance with the terms of our certificate of incorporation, our board of directors is divided into three classes of directors, each serving staggered three-year terms. Our board of directors has fixed the size of our board at nine directors, with three directors in each of Classes I, II and III. Upon expiration of the term of a class of directors, directors for that class are elected to three-year terms at the annual meeting of stockholders in the year in which the term expires. Each director’s term is subject to the election and qualification of his or her respective successor, or such director’s earlier death, resignation or removal. The term of office of three of our current Class III directors, Kirk K. Calhoun, Harold F. Oberkfell and Michael J. Valentino, will expire at the annual meeting, and Messrs. Calhoun, Oberkfell and Valentino are nominees for election to our board of directors. In accordance with the recommendation of the nominating and corporate governance committee, the board of directors recommends that Messrs. Calhoun, Oberkfell and Valentino be elected as Class III directors at the annual meeting. Each of the nominees has consented to being named in this proxy statement and to serve if elected. If elected by the stockholders, the Class III nominees will hold office until our annual meeting of stockholders in fiscal 2011 and until their successors are duly elected and qualified or until their earlier death, resignation or removal. The Class I and Class II directors have one year and two years, respectively, remaining on their terms of office.

 

Directors are elected by a plurality of the votes cast. Shares may not be voted cumulatively, and proxies cannot be voted for a greater number of persons than the number of nominees named. Shares voted prior to the annual meeting by the accompanying proxy card will be voted for the election of the three nominees recommended by the board of directors, unless the proxy card is marked in such a manner as to withhold authority to vote or as to vote for one or more alternate candidates. Votes withheld will not affect the outcome of the election. If any nominee for any reason is unable to serve or will not serve, the persons named as proxies may vote for such substitute nominee as the proxyholders may determine. We are not aware of any nominee who will be unable to, or for good cause will not, serve as a director.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT OUR STOCKHOLDERS VOTE “FOR” PROPOSAL 1, THE ELECTION OF KIRK K. CALHOUN, HAROLD F. OBERKFELL AND MICHAEL J. VALENTINO, THE THREE NOMINEES FOR DIRECTOR, AS OUR CLASS III DIRECTORS.

 

Information regarding Nominees for Director:

 

 

Kirk K. Calhoun has served as a director since October 2005. Mr. Calhoun joined Ernst & Young LLP, a public accounting firm, in 1965 and served as a partner of that firm from 1975 until his retirement in 2002. His responsibilities included both area management and serving clients in a variety of industries, including biotechnology. Mr. Calhoun is a Certified Public Accountant with a background in auditing and accounting. He is currently on the board of directors of Abraxis BioScience, Inc., Aspreva Pharmaceuticals Corporation, and Replidyne, Inc. Mr. Calhoun received a B.S. in Accounting from the University of Southern California in 1965.

 

Harold F. Oberkfell has been a director since April 2004 and our chairman of the board of directors since December 2006. Mr. Oberkfell spent 32 years of his career as an executive with Warner-Lambert Company, retiring in June 2000. Mr. Oberkfell was Vice President and Knowledge Management Officer of Warner-Lambert Company from August 1998 to June 2000 and President of Warner-Lambert Company’s Latin America/Asia sector from September 1994 to August 1998. Prior to that, he held positions at the Parke-Davis division of Warner-Lambert Company, including President of Parke-Davis North America and Vice President of Marketing and Sales. His past affiliations include the National Pharmaceutical Council Board of Directors, the Advisory Committee for Rutgers

University Business School, the University of Medicine and Dentistry of New Jersey Foundation Board of Trustees, and the Biomedical Services Committee of the American Red Cross Board of Governors. Mr. Oberkfell also served on the board of directors of Avanir Pharmaceuticals, Inc. until September 2005.

 

Michael J. Valentino has been our President, Chief Executive Officer and a Director since 2003. Mr. Valentino has more than 30 years of experience in the prescription and consumer pharmaceuticals industry. From 2002 to 2003, Mr. Valentino served as President and Chief Operating Officer of the Global Human Pharmaceutical Division of Alpharma Inc. Mr. Valentino was responsible for all of Alpharma’s pharmaceutical operations in 60 countries worldwide. From 2000 to 2002, he served as Executive Vice President, Global Head of Consumer Pharmaceuticals, for Novartis International AG, where he was responsible for global development of Novartis’s OTC products. Mr. Valentino is currently Vice Chairman of the Board for the Healthcare Institute of New Jersey, a trade association for the research-based pharmaceutical and medical technology industry in New Jersey. Mr. Valentino was Chairman of the Consumer Healthcare Products Association in 2001 and 2002, and currently serves on both its Board of Directors and Executive Committee as a Vice Chairman. Mr. Valentino is a member of the boards of directors of Freedom House, Inc., a non-profit organization focused on rehabilitating drug dependent men and women, and D.A.R.E. New Jersey, Inc., a charitable, non-profit organization which supports and administers local Drug Abuse Resistance Education programs throughout New Jersey. Mr. Valentino was named the New Jersey Ernst & Young Entrepreneur Of the Year ^® 2006 award winner for his leadership and achievement in the field of Life Sciences. He was also the recipient of the D.A.R.E. New Jersey 2006 Future of New Jersey Award.

 

 

Alan W. Dunton, M.D.  has been a director since November 2006. Dr. Dunton has served as the Chief Executive Officer, Panacos Pharmaceuticals, Inc., a biotechnology company dedicated to developing the next generation of antiviral therapeutic products, since January 2007. In 2006, Dr. Dunton served as the non-executive chairman of the board of directors of ActivBiotics, Inc., a privately held biopharmaceutical company. Previously, he was the president and chief executive officer of Metaphore Pharmaceuticals, Inc. from 2003 until 2005, when it merged with ActivBiotics. From 2004 to 2005, Dr. Dunton served as a member of the board of directors of Vicuron Pharmaceuticals until it was acquired by Pfizer, Inc. In 2002 Dr. Dunton served as president, chief operating officer and a director of Emisphere Technologies, Inc., a biopharmaceutical company. Dr. Dunton also presently serves as a member of the board of directors of the following public companies: Targacept, Inc. and MediciNova, Inc. Dr. Dunton holds a M.D. degree from New York University School of Medicine, where he completed his residency in internal medicine. He also was a Fellow in Clinical Pharmacology at the New York Hospital/Cornell University Medical Center.

 

John N. Lilly has been a director since October 2005. Mr. Lilly has served as President of John Lilly Strategic Insights, LLC since 2001, where he acts as a consultant to investment banks and private equity funds on a range of merger and acquisition projects. From 2000 to 2001, he served as the Chief Executive Officer of The Pillsbury Company, and from 1998 to 2000 he served as the President of Pillsbury North America. Prior to his service at The Pillsbury Company, Mr. Lilly held various positions with The Procter & Gamble Company from 1976 to 1998, which included Regional Vice President, Europe, Middle East, Africa and General Export Division (Frankfurt, Germany); and Vice President & General Manager, U.S. Juice Products. Mr. Lilly serves on the board of trustees of the National Public Radio Foundation. He received a M.B.A. from Harvard Business School in 1976 and a B.A. in Economics from Emory University in 1974.

 

Donald J. Liebentritt has been a director since February 2005. He has been a Senior Advisor with Equity Group Investments, L.L.C., or EGI, a private investment firm, since January 2006, and had been President of EGI from 2000 through 2005. He is also an officer and director of various private affiliates of EGI. He is the President and a

member of the Board of Managers of Chai Trust Company, an Illinois registered trust company. Until March 2006, Mr. Liebentritt was the Chief Executive Officer and President (since December 2002) and a Director (since May 2002) of First Capital Financial, L.L.C., a manager of publicly held investment funds. From May 2000 until December 2002, Mr. Liebentritt was a Vice President of First Capital Financial, L.L.C. Mr. Liebentritt was a director of Home Products International from December 2004 to March 2007. In September 2005, he was named to the board of directors and elected chairman of Rewards Network, Inc., a provider of loyalty and rewards programs for the restaurant industry. He has also been a director of Children’s Oncology Services, Inc. since October 2003. Mr. Liebentritt is a licensed attorney in the State of Illinois. He received a bachelor’s degree from Loyola University of Chicago in 1972 and his law degree from the University of Chicago in 1976.

 

 

Jane L. Delgado, Ph. D., M.S.  has been a director since April 2007. Dr. Delgado has served as the President and Chief Executive Officer of the National Alliance for Hispanic Health, the nation’s largest and oldest organization of health and human service providers to Hispanics, since 1985. From 1979 to 1985, she served in the Immediate Office of the Secretary of the U.S. Department of Health and Human Services. Dr. Delgado serves as a trustee of the Kresge Foundation, Patient Safety Institute and Lovelace Respiratory Research Institute. She is also an advisor to the American Academy of Family Physicians and to the March of Dimes. Dr. Delgado received her M.A. in Psychology from New York University, was awarded her Ph.D. in Clinical Psychology from State University of New York Stony Brook, and an M.S. in Urban Policy Sciences from the W. Averell Harriman School of Urban and Policy Sciences at State University of New York Stony Brook.

 

Joan P. Neuscheler has been a director since 2002. Ms. Neuscheler has 18 years of experience in private equity investing as an officer of Tullis-Dickerson & Co., Inc., a healthcare-focused venture capital firm. Since July 1998, Ms. Neuscheler has been the President of Tullis-Dickerson & Co., Inc. Prior to joining Tullis-Dickerson, Ms. Neuscheler’s previous experience included three years in public accounting with Arthur Andersen and five years experience as Chief Financial Officer for Magnant Re Intermediaries, Inc. Ms. Neuscheler is a director of Interpharm Holdings, Inc., a developer, manufacturer and distributor of generic prescription strength and over-the-counter drugs, and a number of privately held companies. She received her B.B.A. and her M.B.A. from Pace University.

 

Mark R. Sotir has been a director since April 2007. Mr. Sotir has served as a Managing Director, Equity Group Investments, L.L.C., or EGI, a privately-held investment firm, since November 2006. Prior to joining EGI, he was the Chief Executive Officer of Sunburst Technology Corporation, a leading independent distributor of educational software, from August 2003 to November 2006. Prior to joining Sunburst, Mark held various positions with the Budget Group, Inc., a $3 billion car and truck rental business with more than 13,000 employees, from 1995 to February 2003. He began his career at The Coca-Cola Company, working in several brand management and sales capacities, including managing the $800 million Minute Maid orange juice business. Mark received a Bachelor’s Degree in Economics from Amherst College and holds a Master’s Degree from Harvard Business School.

 

THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE

 

Meetings and Committees of the Board of Directors

 

As of the date of this proxy statement, our board of directors consists of nine directors. We are required to comply with the listing standards, including the corporate governance rules, of the NASDAQ Global Select Market, or NASDAQ, in order to maintain the listing of our common stock on NASDAQ. The NASDAQ rules require our board of directors to be composed of a majority of independent directors, as that term is defined by NASDAQ rules. As the date of this proxy statement, the board of directors has determined that directors Calhoun, Delgado, Dunton, Liebentritt, Lilly, Neuscheler, Oberkfell, and Sotir, encompassing a majority of the board of directors, each satisfy the independence requirements of the applicable NASDAQ rules.

 

The board of directors maintains the following three standing committees, each of which were established at the time of our July 2005 initial public offering: (1) the audit committee, (2) the compensation committee, and (3) the nominating and corporate governance committee. During fiscal 2007, our board of directors held 21 meetings, and each director, with the exception of William C. Pate who served on our board of directors until April 2007, attended at least 75% of the aggregate of all applicable board and committee meetings. While we do not require board members to attend the annual meeting of stockholders, such attendance is expected pursuant to Company policy. All of our directors who were serving on the board at that time attended the 2006 annual meeting of stockholders.

 

The following table shows, for fiscal 2007, the membership of each board committee and the number of meetings held by each committee:

 

 

 

 

 

Audit Committee

 

Our audit committee’s responsibilities include:

 

 

The audit committee has the sole and direct responsibility for appointing, evaluating and retaining our independent registered public accounting firm and for overseeing their work. All audit services and non-audit services, other than de minimis non-audit services, to be provided to us by our independent registered public accounting firm must be approved in advance by our audit committee.

 

The members of our audit committee are Kirk K. Calhoun, John N. Lilly and Mark R. Sotir, and each member of the audit committee meets the definitions of independence for membership on the audit committee as established by the SEC and NASDAQ. Mr. Calhoun serves as chairperson of the audit committee. The board of directors has determined that Mr. Calhoun is an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K. From July 1, 2006 until December 15, 2006, Joan P. Neuscheler served as a member of the audit committee, when she was replaced by William Pate. On April 19, 2007, Mr. Pate resigned from our board of directors. Mr. Sotir was appointed to the audit committee on May 2, 2007. On August 17, 2007, our board of directors amended and restated the Audit Committee Charter, a copy of which is included as Appendix A to this proxy statement and is posted on our website at www.adamsrt.com .

 

Compensation Committee

 

Our compensation committee’s responsibilities include:

 

 

The members of our compensation committee are Alan W. Dunton, M.D., Donald J. Liebentritt and Joan P. Neuscheler. Ms. Neuscheler serves as chairperson of the compensation committee. Each member of the compensation committee meets the definition of independence established by NASDAQ. Harold Oberkfell served as a member of our compensation committee until his appointment as the chairman of our board of directors on December 15, 2006, and his vacancy was filled by Mr. Liebentritt. William C. Pate served as a member of the compensation committee until December 15, 2006, when he was replaced by Dr. Dunton. We have adopted a Compensation Committee Charter, which is posted on our website at www.adamsrt.com .

Nominating & Corporate Governance Committee

 

Our nominating and corporate governance committee’s responsibilities include:

 

 

The nominating and corporate governance committee identifies nominees through business contacts and has the authority to retain a professional search firm and other advisors to assist in identifying nominees. Candidates are evaluated on several qualifications, including level of education, business experience, character and integrity to ensure that our board of directors reflects a variety of complementary backgrounds and experiences, primarily in the areas of management and leadership. If the nominating and corporate governance committee determines that a candidate has the necessary qualities, the Chief Executive Officer and at least one member of the nominating and corporate governance committee must interview the candidate, and other members of the board of directors also have the opportunity to interview the candidate. Based on the candidate’s background and interviews, the nominating and corporate governance committee decides whether to recommend the candidate to the board of directors for approval by stockholders or, in the case of vacancies on the board of directors, for approval by the board of directors. The nominating and corporate governance committee also reviews incumbent directors considered for re-election based on that director’s service to the Company during the term, including the number of meetings attended and level of participation.

 

Although we have a policy regarding consideration of director candidate recommendations from our stockholders, we have not received director candidate recommendations for the annual meeting from our stockholders. According to our policy, any recommendations received from stockholders will be evaluated in the same manner that potential nominees suggested by board members are evaluated. We do not intend to treat stockholder recommendations in any manner different from other recommendations. A stockholder who wishes to recommend a person to the nominating and corporate governance committee for nomination by us must submit written notice by mail to the Nominating and Corporate Governance Committee, c/o Secretary, Adams Respiratory Therapeutics, Inc., 4 Mill Ridge Lane, Mill Ridge Farm, Chester, New Jersey 07930. We must receive the written recommendation at least 150 calendar days but no less than 120 calendar days prior to the first anniversary of the date of our notice of annual meeting sent to stockholders in connection with the previous year’s annual meeting. The recommendation must include (i) the candidate’s name, age, business address and other contact information, (ii) a complete description of the candidate’s qualifications, experience, background and affiliates, as would be required to be disclosed in a proxy statement pursuant to Regulation 14A of the SEC, (iii) a sworn or certified statement by that candidate that he or she consents to being named as a nominee in the proxy statement and to serve as a director if elected, and (iv) the name and address of the stockholder of record making the recommendation.

 

The nominating and corporate governance committee is also responsible for reviewing developments in corporate governance practices, evaluating the adequacy of our corporate governance practices and reporting and making recommendations to the board of directors concerning corporate governance matters.

 

The members of our nominating and corporate governance committee are Jane L. Delgado, Ph. D., M.S., Alan W. Dunton, M.D., Donald Liebentritt and John N. Lilly. Mr. Liebentritt serves as chairperson of the nominating and corporate governance committee and as our lead independent director. Each member of the nominating and corporate governance committee meets the definition of independence established by NASDAQ. Mr. Oberkfell served as a member of our nominating and corporate governance committee until his appointment as chairman of our board of directors on December 15, 2006 and his vacancy was filled by Mr. Lilly. Dr. Dunton and Dr. Delgado were appointed to the nominating and corporate governance committee effective December 15, 2006 and May 2, 2007, respectively. We have adopted a Nominating and Corporate Governance Committee Charter, a copy of which is posted on our website at www.adamsrt.com .

Stockholder Communications with the Board of Directors

 

Stockholders may send communications to the whole board of directors or any of its members by sending such communications to Adams Respiratory Therapeutics, Inc., c/o Secretary, 4 Mill Ridge Lane, Mill Ridge Farm, Chester, New Jersey 07930. Communications should be sent by overnight or certified mail, return receipt requested. We will forward such communications to the board of directors or specific members of the board, as directed in the stockholder communication.

 

 

 

 

The following table provides additional information about equity awards granted to our non-employee directors during fiscal 2007.

 

 

 

The aggregate number of option and stock awards (restricted stock and deferred common stock) outstanding and held by each non-employee director as of June 30, 2007 is indicated in the table below.

 

 

Our non-employee director compensation plan, under which we compensate our non-employee directors, provides that each non-employee director receives a $75,000 annual retainer, payable $25,000 in cash and $50,000 in restricted stock units. These amounts are credited to directors quarterly beginning with each year’s annual stockholders’ meeting. The restricted stock units vest in full at the first annual stockholders’ meeting following the date of grant, or earlier in the case of certain terminations or change in control events. Upon vesting, the restricted stock units will automatically convert into deferred stock units, which will not be converted into our common stock until six months following a director’s termination of board service. Non-employee directors also receive $1,500 for each board and committee meeting attended in person, or $750 for meetings attended by video or telephone conference. The chairperson of each of the compensation and the nominating and corporate governance committees receives a supplemental $5,000 retainer, and the chairperson of the audit committee receives a supplemental $7,500 retainer.

 

Each non-employee director who joins our board of directors receives a nonstatutory stock option exercisable for 8,000 shares (if he or she joins the board of directors more than six months prior to the next annual stockholders’ meeting) or 4,000 shares (if he or she joins the board of directors on the date of a stockholders’ meeting or less than six months before the next annual stockholders’ meeting) of common stock with an exercise price equal to the fair market value per share of our common stock on the grant date. This stock option vests in three equal annual installments on the first, second and third anniversaries of the director’s date of election or appointment to our board of directors. In addition, at each annual stockholders’ meeting, each non-employee director receives a nonstatutory stock option exercisable for 4,000 shares of common stock with an exercise price equal to the fair market value per share of our common stock on the grant date. Such stock options fully vest at the first annual stockholders’ meeting following the date of grant, or earlier in the case of certain terminations or change in control events.

 

We do not pay separate director’s compensation to our employee directors, but we do have other compensatory arrangements with them for services other than as a director, which are described in the sections of this proxy statement captioned “Compensation of Executive Officers.”

 

 

Michael J. Valentino has been our President, Chief Executive Officer and a director since 2003. Please refer to the biography of Mr. Valentino provided under “Election of Directors — Information regarding Nominees for Director-Nominees for Election of Class III Directors for a Three-Year Term Expiring at the Annual Meeting of Stockholders to be held in Fiscal 2011,” above.

 

Rita M. O’Connor has been our Chief Financial Officer and Treasurer since February 2007. Prior to that, Ms. O’Connor was our Senior Vice President and Corporate Controller since July 2006, our Vice President and Controller from August 2005 and July 2006, and our Executive Director, Controller from November 2004 to August 2005. Before she joined us in November 2004, Ms. O’Connor spent seven years at Schering-Plough Corporation in a series of positions of increasing responsibility within the corporate global finance department. Most recently at Schering-Plough Corporation, she was senior director planning & reporting within the corporate controller’s group. Ms. O’Connor began her career in the audit department at Deloitte and Touche, where she progressed to audit manager, including a two-year program in Deloitte’s National Office technical accounting research department. Ms. O’Connor has a B.S. degree in accounting from Rutgers University and is a certified public accountant.

 

Robert D. Casale has been our Chief Operating Officer since October 2006. Mr. Casale was our Executive Vice President, Chief Marketing and Development Officer from May 2005 to October 2006 and our Vice President of Business Development and Consumer Marketing from 2004 to May 2005. Prior to joining us, Mr. Casale was affiliated with Philosophy IB, a management consulting firm, from May 2001 to February 2004. From September 2000 to April 2001, Mr. Casale served as Vice President, Business Development and Strategic Planning, for the Consumer Healthcare Division of Pfizer Inc. and, in that capacity, led development of a strategic plan for the newly merged Pfizer Inc. and Warner-Lambert Company consumer businesses. Mr. Casale began his healthcare career at Warner-Lambert Company, where he held various positions, including Vice President of Marketing for upper respiratory and gastrointestinal consumer products and Global Vice President for Warner-Lambert Company’s OTC gastrointestinal and skin care businesses, from July 1993 to August 2000. Mr. Casale received a bachelor’s degree in business administration and English from Rutgers College in 1980 and a Juris Doctorate, with honors, from Rutgers Law School in 1983.

 

Walter E. Riehemann has served as our General Counsel since October 2006 and our Executive Vice President, Chief Compliance Officer and Secretary since May 2005. Mr. Riehemann was our Chief Legal Officer from May 2005 to October 2006 and our Vice President, General Counsel and Secretary from 2003 to May 2005. Prior to joining us, he was with the international law firm of Holland & Knight LLP from 2002 to 2003. From 2000 to 2002, Mr. Riehemann served as President and Chief Executive Officer of Dawson Managers, Inc., a management consulting firm engaged in corporate restructuring and providing interim management services to start-up and troubled companies, and from 1995 to 2000, he served in a variety of positions with RISCORP, Inc., most recently as President and General Counsel. From 1993 to 1995, Mr. Riehemann was an associate with the law firm of Powell

Goldstein LLP. Mr. Riehemann earned a bachelor’s degree, cum laude, from Chadron State College in Chadron, Nebraska in 1987 and a Juris Doctorate, summa cum laude, from The Ohio State University College of Law in 1990.

 

John S. Thievon has served as our Executive Vice President, Sales and Corporate Accounts since July 2007, and served as our Executive Vice President, Sales and Business Development from October 2006 to June 2007. Mr. Thievon was our Executive Vice President, Commercial Operations from May 2005 to October 2006 and our Vice President, Sales and Professional Marketing from 2000 to May 2005. From January 1999 to May 2000, Mr. Thievon held various positions with us, including Northeast Regional Business Director and Director of Marketing. Prior to joining us, Mr. Thievon held various positions with IMS Health Incorporated, including Account Manager, Account Director, and Director of Sales Training from January 1995 to December 1998. From 1990 to 1994, he served as a Sales Representative with Ortho Pharmaceuticals Inc. Mr. Thievon graduated from Pace University with a Bachelor of Business Administration degree, with a concentration in marketing.

 

Peter D. Wentworth, Ph.D.  has been our Executive Vice President, Human Resources, since December 2006. Prior to joining us, Dr. Wentworth served as a Vice President, Human Resources of Pfizer Inc.’s Global Consumer Healthcare Division from February 2001 to December 2006. From 1991 to 2000, Dr. Wentworth held senior Human Resource positions within divisions of the Warner-Lambert Company, including VP Human Resources-Consumer Healthcare North America, VP Human Resources — Tetra, and various other HR positions. From 1984 to 1991, Dr. Wentworth held a variety of HR management positions in PepsiCo. From 1983 to 1984, he was an Organizational Research Consultant within Merrill Lynch & Co. Dr. Wentworth began his professional career in 1980 as a management consultant for HR Strategies, Inc. Dr. Wentworth is a member of the Human Resource Planning Society, the Metropolitan New York Association for Applied Psychology, the American Psychological Association, and the Society for Industrial and Organizational Psychology. He serves on the Executive Committee of the Board of Directors for the Morris County Chamber of Commerce in New Jersey, and has served on the Executive Committee of The Conference Board’s Council for Divisional Human Resource Executives. Dr. Wentworth received his B.A. Degree in Psychology from the University of Vermont. He also holds a Master’s Degree and Doctorate in Industrial and Organizational Psychology from Wayne State University.

 

Helmut H. Albrecht, M.D.  joined us in 2004 and serves as our Senior Vice President for Research and Development. Prior to joining us, Dr. Albrecht was Vice President of Global Preclinical and Clinical Development and Drug Safety at Novartis Consumer Health from August 2003 to October 2004, and from November 2000 to August 2003, he served as Vice President for Research and Development for OTC (in North America). Before joining Novartis, Dr. Albrecht held leadership positions in the area of pharmaceutical medicine involving prescription and OTC products as well as dietary supplements at SmithKline Beecham Consumer Health (1996-2000), Procter & Gamble OTC Health Care and P&G Pharmaceuticals, Altana Pharmaceuticals (Byk Gulden Pharma Group) in Germany, and Altana Inc. in Melville, New York. Dr. Albrecht earned a doctorate of medicine, magna cum laude, from the University of Heidelberg. He also holds a Master of Science degree in management and policy, an advanced New York State certificate in health care management from SUNY at Stony Brook and a diploma in pharmaceutical medicine. Dr. Albrecht is a fellow, as well as a previous board member, of the Faculty of Pharmaceutical Medicine.

 

 

 

The discussion below is intended to help you understand the detailed information provided in those tables and put that information into context within our overall compensation program.

 

Compensation Philosophy and Objectives

 

Our compensation philosophy serves as a blueprint for managing compensation for all of our employees. The compensation philosophy is exhibited by the specific objectives and principles that we follow in setting base pay, annual incentives, and long-term incentives. Collectively, our compensation objectives, principles and practices are intended to drive profitable growth for our stockholders at a level sufficient to justify and sustain the aggregate costs of our compensation programs.

 

The primary objectives of our compensation program are to:

 

 

We follow the following specific principles as we design our compensation program:

 

 

How We Determine and Assess Executive Compensation

 

Our compensation committee, which we refer to as the Committee in this Compensation Discussion and Analysis, assists our board of directors in discharging its responsibilities relating to compensation of our executive officers. Each of the three members of the Committee is independent as that term is defined in the listing standards of The Nasdaq Global Select Market and in the director independence standards adopted by our board of directors.

We believe that their independence from management allows the Committee members to provide unbiased consideration of various elements that could be included in an executive compensation program and apply independent judgment about which elements and designs best achieve our compensation objectives. The Committee utilizes a number of resources, tools, and metrics, as described below, in order to develop a compensation program that is fair to our executives and stockholders.

 

The Committee retains its own independent compensation consultant, Frederic W. Cook & Co., Inc., or FWCook. FWCook does not provide any other service to the company, except as to matters related to executive compensation activities with approval of the Committee.

 

To assess the competitiveness of our executive compensation program, the Committee reviews the pay of similarly situated executives at the companies in our compensation comparison group or “peer group” as discussed later in this section. The Committee then reviews the results of this analysis in the context of our company to ensure they are consistent with our strategic plan, financial objectives, and stockholder interests. Short-term compensation, which includes both a fixed base salary and annual at-risk performance based compensation, is generally targeted to provide compensation at the median (50th percentile) of our peer group when both the company’s and the executive officer’s performance reach predetermined target levels, which we refer to as performance at “target.” In contrast, long-term compensation is generally targeted to provide compensation from above the median to the upper quartile of our peer group based upon the extent to which both the company’s and executive officer’s performance reaches or exceeds target. Long-term compensation is targeted above the median because of the higher performance/risk orientation in the components of the long-term incentive awards relative to market practice.

 

Prior to the beginning of each fiscal year, FWCook provides the Committee with information that captures the levels of total compensation and individual components of pay (base salary and short- and long-term incentive potential) for executives within our peer group who have duties and responsibilities similar to our executives. Information sources used by FWCook include public data from our peer group companies as well as broader data on trends and emerging industry practices. The peer group companies are selected for their similarity to us in both size and complexity (based on sales, market capitalization and other financial measures) and represent the types of companies with which we historically compete for executive talent. The Committee and FWCook also review the composition of the peer group periodically.

 

The Committee reviews each element of our named executive officers’ compensation on an annual basis to determine the relative competitiveness of our compensation program against the 25th, 50th and 75th percentile of our peer group, as discussed below. Each element of compensation and total compensation is then reviewed across our executive ranks to ensure internal consistency, as appropriate.

 

At the beginning of each fiscal year, our Chief Executive Officer, or our CEO, evaluates the financial and strategic performance of our named executive officers against our strategic operating plan and the executive’s individual performance objectives for the prior fiscal year. The CEO, in consultation with the Executive Vice President, Human Resources, then develops compensation recommendations for our named executive officers, other than himself. Factors that the CEO weighs in making individual compensation recommendations include:

 

 

After completing his evaluation, the CEO presents his findings and compensation recommendations to the Committee for review and consideration. In addition to the CEO’s findings and recommendations, the Committee reviews and considers a compensation “tally sheet” for each named executive officer. The tally sheet presents the total value of compensation when both individual and the company’s performance is at target, as well as the value of the named executive’s outstanding equity awards at various stock prices and the value realized by the named executive officer from exercise of stock options from our initial public offering through the review date. The tally sheet also presents an estimate of the compensation that would be delivered if the named executive officer’s employment were terminated voluntarily, involuntarily or as a result of a change in control.

The Committee finds tools like the internal tally sheets and the review of external market practices to be helpful in its analysis of the executive compensation program. In determining specific levels of compensation, the Committee focuses on the individual elements of our executive compensation as well as both the total value and sustainability of the compensation program. It also considers how our programs compare against similarly situated executives in our peer group, company performance relative to our internal operating plan, and company performance in comparison to the peer group companies. The Committee, in its sole discretion, determines the level of payout to each named executive officer under our short- and long-term compensation programs for the completed fiscal year, and establishes company and CEO’s performance targets for review by our board of directors for the new fiscal year. In turn, our CEO establishes individual performance targets for each of the other named executive officers.

 

The Committee conducts a performance review of the CEO on the same basis described above for all other executive officers following the end of the fiscal year. For the Committee’s review, the CEO prepares a written analysis of his accomplishments keyed to the business and individual goals established for the prior fiscal year. At a Committee meeting, the CEO presents his personal performance results for the prior fiscal year, recommends goals for the new fiscal year, and responds to any questions that may arise. At the completion of his self performance review, the Committee discusses the CEO’s performance review without the CEO present and determines the CEO’s compensation based on performance against objectives and reference to peer company compensation provided by the Committee’s independent compensation consultants.

 

The Committee has responsibility for setting performance targets and payout scales for all of the company’s incentive compensation programs. While performance targets are initially developed by management, and reflect the one-year and multi-year strategic business operating plans previously reviewed with the board of directors, the Committee, with full board input as needed, reviews, amends, and approves management’s recommendations.

 

 

This peer group was established in 2005 prior to our initial public offering. In terms of size, our revenues, market capitalization and number of employees were generally consistent with the median to 75th percentile of our peer group. The Committee reviews the peer group periodically to make sure it remains reasonable in light of our size, performance, and business model. We also look for any significant changes within the individual peer companies themselves that may make a particular company less relevant as a peer company for compensation planning purposes. The Committee last reviewed our peer group in 2007 and approved changes for fiscal 2008 that are addressed later in this section under “Material Changes to the Compensation & Benefits Program for Fiscal 2008”.

 

Role of Executive Officers in the Compensation Process

 

Management plays an important role in our compensation program by providing insight into the types of incentives that would be most effective in motivating our business team leaders and helping to identify the performance metrics that are most influential in our ability to achieve our business goals. For example, with the input of management, the Committee selected earnings per share, or EPS, and pre-tax margin, or Margin, as the primary performance measures in our long-term performance awards granted last year. However, our executive officers do not participate in setting their own pay or pay opportunities. From a procedural standpoint, our executive

officers may prepare meeting information for the Committee in advance of each meeting, as needed. Our Executive Vice President, Human Resources participates in each Committee meeting and provides analyses of current compensation policies and practices and presents management recommendations to the Committee for their independent consideration. Our CEO participates in Committee meetings, at the Committee’s request, to provide:

 

 

As described above, our CEO annually reviews the performance of each named executive officer other than himself and submits to the Committee his compensation recommendations. The Committee then exercises its discretion to determine the appropriate level of compensation to be awarded to each such named executive officer.

 

Elements of Our Executive Compensation Program

 

Our executive compensation program has three principle elements: base salary, annual incentives and long-term incentives. The base salary program provides basic economic security for our employees, while the annual and long-term incentive compensation programs are designed to reward performance measured against goals and standards established by the Committee and to encourage executives to increase shareholder value. In addition to these three principle elements of our pay program, we provide a qualified 401(k) retirement plan, a nonqualified deferred compensation plan for executives, and certain other benefits, including limited perquisites.

The elements of our fiscal 2007 compensation program can be summarized as follows:

 

 

Base Salary.   Base pay reflects the external market value of a particular job, as well as the experiences and qualifications that an individual brings to the job. The Committee establishes merit increases based on a named executive officer’s leadership and performance over the previous year, as well as his or her potential for development and performance in the future. For fiscal 2007, named executive officer base salaries were generally targeted at the 50 ^th  percentile of our peer group, consistent with our stated compensation philosophy.

 

Annual Incentives.   The purpose of annual performance-based bonuses is to motivate our named executive officers and to provide financial incentive to them to achieve goals related to both our company performance and their own personal performance. Payment of bonuses is based on two factors: bonus pool funding and individual performance.

First, each participant in the plan is assigned a target bonus opportunity expressed as a percentage of his or her base salary. The funding of the bonus pool for all participants is determined by the company’s performance against financial and strategic performance targets set at the beginning of the fiscal year based on our annual operating plan. For example, if the company achieved 100% of its financial and strategic objectives, the bonus pool would be funded with an amount equal to 100% times the aggregate target bonus opportunity of each participant. The potential range for bonus pool funding is 0% to 200% of participants’ target bonus opportunities. In setting the financial and strategic objectives that are used in funding the bonus pool, the Committee and the board of directors approve specific objectives and milestones that are most critical in terms of our ability to meet our annual operating plan and long-term strategic plan. In establishing the performance targets, the Committee sets challenging performance targets to provide an incentive for strong performance and to drive our growth and stockholder value.

 

For fiscal 2007, the performance measures used for funding our annual bonus plan consisted of the following specific and measurable financial and strategic objectives:

 

 

Second, each executive’s individual performance assessment determines his or her actual bonus payout from the bonus pool. As our chief executive officer, Mr. Valentino’s performance goals are the same as the overall financial and strategic goals used in funding the annual bonus plan, as identified above. Each of our other named executive officers was assigned at the beginning of the year a number of specific goals and objectives that are reflective of their individual roles and responsibilities, and that are aligned with the overall business financial and strategic goals. For example, as our chief operating officer, Mr. Casale had a number of individual goals ranging from launching new products to providing incremental sales, to progressing research and development in order to deepen our pipeline of future products, to assessing and completing business transactions such as product licensing agreements, acquisitions, and expansion of our technology platforms. Ms. O’Connor’s goals, as chief financial officer and treasurer, focused upon strengthening our financial capabilities and practices, and ranged from implementing a new payroll system, integrating the accounting practices following the acquisition of our manufacturing plant, ensuring our financial and business practices conform to Sarbanes-Oxley requirements, to improving the financial latest estimate and reporting processes. In his capacity as general counsel, chief compliance officer, and corporate secretary, Mr. Riehemann’s goals ranged from working with our board of directors to strengthen overall governance procedures, overseeing Sarbanes-Oxley compliance efforts, leading outside counsel and lobbying efforts to ensure our company’s interests are effectively represented with the FDA and government agencies, to negotiating contracts associated with acquisitions and licensing deals, to building the legal and regulatory functions and capabilities for our company. As executive vice president of sales and corporate accounts, Mr. Thievon’s goals included managing the transition required in the repurchase of our manufacturing assets and operations, launching all new products into the trade, expanding our sales force to build greater geographic presence and our capacity to handle new product launches, to enhancing the training provided to the sales force, and building our ability to penetrate the managed care market.

 

The Committee evaluates the company’s performance against the overall financial and strategic goals. The Committee’s determination establishes both Mr. Valentino’s performance assessment and the bonus pool funding for the other named executive officers. Mr. Valentino evaluates the performance of each of the named executive officers other than himself against their individual goals and objectives. The assessment of achievement on certain goals is necessarily more subjective than for other goals that may be financial or otherwise quantitative in nature. If it is determined that an executive met but did not exceed target performance expectations, the executive’s individual bonus would be 100% of the target bonus opportunity assigned to him or her, adjusted for the bonus funding available based on overall company performance, as discussed above. Variations in individual performance affect a participant’s share of the overall bonus pool.

Based on the Committee’s assessment of the company’s performance in fiscal 2007, the bonus pool was funded at 90% of target for our named executive officers employed at the end of the fiscal year.

 

The actual bonuses paid to our named executive officers for fiscal 2007 are summarized in the following table. In aggregate, the sum of the actual bonuses awarded approximates 90% of the sum of the target awards.

 

 

 

 

Long-Term Incentives.   We provide long-term incentives to our named executives through our 2005 Long-Term Incentive Plan. In addition, some previously granted awards remain outstanding under our 1999 Long-Term Incentive Plan. Our long-term incentive plans are equity-based incentive programs designed to attract and retain our executives. The plans are also designed to link our executives’ personal interests with those of our stockholders by motivating them to improve the market value of our common stock over a number of years. The Committee believes that equity ownership by executives furthers our compensation objective of aligning long-term financial interests of executives with those of our stockholders.

 

Incentive plan equity grant timing is determined by the Committee, and it has been the practice to make the equity grants within 60 days of the close of each fiscal year. The fiscal 2007 grant was approved in August 2006. This timing allows the Committee the opportunity to assess our prior fiscal year performance, and to review external competitive practice. While the grants are made in one fiscal year, the size of the grant reflects services rendered and performance in the prior fiscal year, and is also intended to promote retention and maximum performance in the current and future fiscal years.

 

To determine the aggregate long-term incentive budget, the Committee reviewed peer group data to determine what proportion of total shares outstanding and market capitalization is typically used for employee compensation programs. In addition to considering potential dilution implications, the Committee also considered the aggregate expense associated with the awards and the impact on earnings per share. The Committee then examined market data by employee classification level to develop target grant guidelines for eligible employees at each eligibility level. In addition to the competitive data, the Committee also reviewed the value of outstanding equity awards held by each named executive officer and other individual factors, including each executive’s role and importance to the company, the degree of retention risk and difficulty of replacement, past and expected future performance, and the role in the succession planning process and readiness for promotion to a higher level.

 

For fiscal 2007, the long-term incentive awards to our named executive officers were split equally between time-based stock options and performance shares, to focus the named executive officers on creation of stockholder value and achievement of longer-term operating objectives.

 

Stock Options.   Our named executive officers received 50% of their long-term incentive award value in the form of stock options. Stock options encourage retention and closely align the interests of executives with those of stockholders in that value is gained by the executive only to the extent that the stock rises in value beyond the exercise price established on the grant date. We believe that stock options continue to be a useful tool for executive officers because such officers understand the greater leverage potential of options and therefore better appreciate their value as reflected in the “fair value” for financial accounting purposes. The stock options granted in fiscal 2007 vest in equal increments over three years, beginning one year from the date of the grant, and expire 10 years from the date of grant.

Performance Shares.   Our named executive officers received 50% of their long term incentive award value in the form of performance-based restricted stock units, which we refer to as “performance shares.” Performance shares are shares of restricted stock that vest based on the achievement of pre-determined goals and continued employment. We introduced performance shares into our long-term incentive program to reduce fixed expense, strengthen the linkage between longer-term financial performance and earned compensation, and improve the overall balance of the compensation program. Our named executive officers will earn the performance shares, in whole or in part, on June 30, 2008, based on our cumulative EPS and average pre-tax margin over the two fiscal years beginning July 1, 2006 and ending June 30, 2008, as follows:

 

 

 

 

Performance under each performance measure is independent of performance under the other and the results are added together. For example, if actual cumulative EPS results in 25% of the target award being earned and actual average pre-tax margin results in 50% of the target award being earned, a total of 75% of the target award will be earned. The actual number of shares earned may range from 0% to 150% of target.

 

At the end of the two-year performance period, 50% of any performance shares earned will be distributed and 50% of any performance earned shares will be subject to an additional one-year continued service requirement to support the retention objective.

 

Consistent with our philosophy to set challenging objectives, the two-year performance targets established for performance share vesting were aggressive: two-year cumulative earnings per share of $3.60, and two-year average pre-tax margin of 24%. Based on current actual reported earnings per share of $0.82 for fiscal 2007, and reported pre-tax margin of 14% for fiscal 2007, the two-year cumulative earnings per share and the two-year average pre-tax margin targets are not expected to be met. In line with the payout matrix above, we do not expect the performance shares from the fiscal 2007 grant to vest, and such shares will likely be forfeited in fiscal 2008.

 

Other Executive Benefits, including Severance Benefits, Perquisites, and Deferred Compensation

 

Income Security Agreements.   During fiscal 2007 our named executive officers, with the exception of Mr. Valentino, were parties to income security agreements which entitled them to specified benefits in the event of the termination of their employment under specified circumstances, including termination following a change in control of the company. Many change-in-control transactions result in significant organizational changes, particularly at the executive officer level. As a result, a potential or actual change-in-control transaction creates uncertainty regarding the continued employment of our executive officers. The Committee believes that it is prudent to encourage our executive officers to remain employed with the company during important times, such as in the context of a change in control, and the income protection provided by these agreements in the event of a termination allows us to do so. We also believe that offering these benefits helps us compete for talent and attract talent from larger consumer and pharmaceutical companies with more extensive compensation, benefits and retirement savings plans.

 

Our change-in-control benefits incorporate a “double-trigger.” That is, a change in control alone does not trigger benefits; rather, benefits are paid only if the employment of the executive is terminated by us or our successor without cause or by the executive for good reason during a specified period before or after the change in control. The “double trigger” maximizes stockholder value by not triggering severance solely due to the occurrence of a change in control, and provides appropriate protections to executives to evaluate and provide objective advice to the company in a transaction that would result in a change in control in which they may lose their jobs. To further

protect our interests, and in the event benefits are triggered, the executive officers are subject to non-competition, non-solicitation (of employees and customers), and confidentiality agreements.

 

The income security agreements provide benefits of one year of base salary continuation and one year of health benefits continuation. Mr. Valentino is not party to an income security agreement. Instead, he has an employment agreement that includes certain severance benefits (as discussed below). For more information on the benefits our named executive officers would receive in the event of their termination, see the table entitled “Potential Payments Upon Termination or Change in Control”.

 

Employment Agreement with Mr. Valentino.   We employ Mr. Valentino as our Chief Executive Officer and President pursuant to an employment agreement that was effective August 11, 2003. The employment agreement provides for a five-year term of employment, subject to automatic renewals for additional one-year periods. However, either we or Mr. Valentino may cause the agreement to cease to automatically extend by giving notice to the other party within six months prior to the expiration of the term.

 

Under the employment agreement, either we or Mr. Valentino may terminate his employment at any time. The employment agreement also terminates upon his death or disability. Upon termination for any reason, Mr. Valentino will receive any amounts earned or due but unpaid through the date of termination, including base salary and benefits, which we refer to as the accrued benefits. If Mr. Valentino voluntarily resigns, other than for good reason or disability, he would be entitled to the accrued benefits and he would have up to three months after his termination to exercise his vested stock options. If the agreement were terminated due to Mr. Valentino’s death, his estate would be entitled to the accrued benefits and would have up to one year to exercise his vested stock options. If his employment were terminated by reason of Mr. Valentino’s disability, he would be entitled to the accrued benefits and he would have the full remaining option term to exercise his vested stock options. In the case of a disability termination, he would also be entitled to a prorated target bonus for the year of termination, continuation for up to 12 months in our group health and life insurance benefits, and, in the event of a sale of the company or a substantial asset sale occurring within nine months after his termination due to disability, a variable transaction bonus not to exceed $2.5 million.

 

If we terminate Mr. Valentino’s employment without cause or if he terminates his employment for good reason, Mr. Valentino would be entitled to the accrued benefits and he would have the full remaining option term to exercise his vested stock options. He would also be entitled to continuation for up to 24 months in our group health and life insurance benefits, a severance payment equal to two times the sum of his base salary plus his target bonus, and, in the event of a sale of the company or a substantial asset sale occurring within nine months after his termination, a variable transaction bonus not to exceed $2.5 million.

 

We also entered into a confidentiality and non-competition agreement with Mr. Valentino on August 11, 2003. Under this agreement, Mr. Valentino agrees not to disclose confidential information and, for a period of 24 months following the termination of Mr. Valentino’s employment, not to compete with us or recruit our employees.

 

Severance Agreement with Mr. Becker.   Mr. Becker resigned effective February 28, 2007. Mr. Becker was a long-term employee and contributed to our growth. To ensure a smooth transition and access to Mr. Becker’s knowledge and experience for a two-year period, we entered into a separation and independent consulting agreement with him. Under this agreement, Mr. Becker receives $5,000 per month for 24 months of consulting services. In addition, he received a severance payment of $95,000 six months and one day following his termination date, and will receive monthly severance payments of $15,333.33 through February 2009.

 

Employee Benefits and Perquisites.   We provide various employee benefits and perquisites to promote the health, well-being and financial security of our executive officers, as well as all employees. We compete for talent at all levels against companies extending beyond our executive compensation peer group, and therefore we compare our benefits programs against larger consumer healthcare and pharmaceutical companies as well.

 

We continue to limit the perquisites available to our executive officers. For example, we do not provide pension arrangements, post-retirement health coverage, or similar benefits to our executive officers or other employees. We generally offer our named executive officers the same employee benefits and perquisites offered to all employees, as summarized in the table below. Changes for fiscal 2008 are noted below and are discussed later under “Material Changes to the Compensation & Benefits Program for Fiscal 2008.”

 

 

 

Deferred Compensation Plan.   We provide a deferred compensation plan to allow employees who are director-level management and above to save for retirement or other personal financial goals in a tax efficient manner with minimal incremental cost to the company. The Adams Respiratory Therapeutics, Inc. 2006 Deferred Compensation Plan permits participants to defer on a pre-tax basis the receipt of up to 100% of their annual base salary and annual bonus into a rabbi trust account established with Merrill Lynch. Participants may select from a variety of investment alternatives offered through Merrill Lynch. For more information refer to the table entitled “2007 Nonqualified Deferred Compensation Table” in this proxy statement.

 

Material Changes to the Compensation & Benefits Program for Fiscal 2008

 

In fiscal 2007 we completed a review of our compensation, benefits and perquisites, and the Committee has approved certain changes for fiscal 2008 to keep our compensation benefits in line with our general compensation principles and objectives. As a result of the changes, our compensation and benefits program:

 

 

Introduction of New Peer Group Companies.   In fiscal 2007, the Committee reviewed and approved a new group of peer companies for reference in developing compensation plans, practices, and executive officer compensation and assessing competitiveness for fiscal 2008. FWCook advised the Committee during the selection of the peer companies. The previous set of peer companies was selected in 2005 prior to our initial public offering, and the Committee determined that a review was appropriate given changes in certain companies in the original

group (e.g., KOS Pharmaceuticals was acquired by Abbott Laboratories; Connectics was acquired by Stiefel Laboratories). In addition, several companies in the peer group were eliminated due to their business model (i.e., generic drugs; non healthcare-related). We have grown significantly since our initial public offering and there have been changes in the way we do business, including our reacquisition of our manufacturing facilities.

 

In developing the revised peer group, the Committee employed the following selection criteria:

 

 

 

The new peer group is comprised of 15 companies, eight of which were also in the former peer group. Former peer companies are designated with an asterisk (*).

 

 

In terms of size, our revenue and market capitalization approximate the median of the peer companies and the number of employees falls between the 25 ^th  percentile and median.

 

Change-in-Control Agreements.   In fiscal 2007, each of our named executive officers, other than Mr. Valentino, was party to an income security agreement, as discussed above. Effective July 1, 2007 (the first day of our 2008 fiscal year), the income security agreements were terminated and replaced with change-in-control agreements. The Committee believes that the change-in-control agreements are more reflective of competitive practice and provide more appropriate income protection. The change-in-control agreements are designed to provide an incentive to our named executive officers to remain with the company during the uncertainties inherent in change-of-control transactions. The agreements contain a double trigger which provides for severance benefits only in the event of a change-in-control and subsequent involuntary termination of employment.

 

The key changes compared to the prior income security agreement include:

 

 

We believe that the estimated overall cost of the new change-in-control agreements is reasonable relative to industry practice.

 

Long Term Incentive Plan Design.   Our named executive officers’ fiscal 2008 long-term incentive awards will feature several new elements. We are a growth-oriented company, and our long-term incentive plan is designed to provide incentives consistent with our business strategy, operating environment, and competitive practices in our peer group. The overall target value of long-term incentive awards for executive officers continues to be market-driven with reference to our peer companies and reflects other factors such as affordability and our profitability. The

Committee has implemented two significant changes for the long-term incentive awards for the executive officers, outlined below.

 

 

The components of the fiscal 2008 grant differ from previous long term incentive grants with the introduction of time-based restricted stock equaling 33.3% of the award value. The purpose of introducing time-based restricted stock is to:

 

 

The performance metrics used to determine the payout of the performance share component of the award have also been revised to align with key investor metrics and with our operating environment. The Committee elected to use average net sales growth and average earnings per share growth as the new performance metrics. Net sales growth provides an incentive for long-term investment in new products and provides a reward for growing the business. Earnings per share growth rewards effective cost management and is closely aligned with the interests of our stockholders.

 

Severance Pay Plan.   We have established the Adams Respiratory Therapeutics, Inc. Severance Pay Plan in order to provide transitional income to certain employees who are involuntarily terminated under certain conditions. Prior to the approval of this plan for fiscal 2008, we had no formal severance pay policy in effect. We believe that having a severance plan is consistent with our high performance environment. We want our management to be able to make objective assessments of employee performance, or to structure the business in ways optimal for business performance, with the knowledge that if employees are terminated for certain reasons, they will leave the company with a certain level of financial security. The level of benefit is geared to the level of the employee and the reason for the termination. Named executive officers would receive 52 weeks base salary and prorated annual bonus if their job is eliminated, and 26 weeks base salary and no annual bonus if terminated for poor performance. In the event of a change in control, the terms of the Change-in-Control Agreements will apply. In no event will an executive receive benefits under both the Severance Pay Plan and the Change-in-Control Agreement simultaneously.

 

Other Benefits.   As noted above, we eliminated both the Executive Medical Reimbursement Plan and the Executive Car Policy as of July 1, 2007, and we restructured the company-provided golf club memberships to eliminate any special advantages for our executives.

 

Tax, Accounting and Other Considerations

 

Section 162(m) of the Internal Revenue Code places a limit of $1 million on the amount a public company may deduct in any one year with respect to compensation paid to its chief executive officer or certain other top executive officers. This limit does not apply to us for a period of time after our initial public offering. In anticipation of the time that we will become subject to the deduction limits of Section 162(m), the Committee will consider various alternatives for preserving the deductibility of compensation payments and benefits to the extent reasonably practicable and to the extent consistent with our overall compensation objectives.

Compensation Committee Report

 

The compensation committee has reviewed and discussed the Compensation Discussion and Analysis, or CD&A, required by Item 402(b) of Regulation S-K with management, and, based on such review and discussions, the compensation committee recommended to the board of directors that the CD&A be included in this Proxy Statement for the 2007 Annual Meeting of Stockholders for filing with the SEC.

 

By the compensation committee of the board of directors:

 

Joan P. Neuscheler, Chairperson

Alan W. Dunton, M.D.

Donald J. Liebentritt

 

 

 

 

 

 

 

 

 

 

Employment Contracts and Change in Control Arrangements

 

Employment Agreement with Mr. Valentino

 

We employ Mr. Valentino as our Chief Executive Officer and President pursuant to an employment agreement that became effective August 11, 2003. The employment agreement provides for a five-year term of employment, subject to automatic renewals for additional one-year periods. However, either we or Mr. Valentino may cause the agreement to cease to automatically extend by giving notice to the other party within six months prior to the expiration of the term.

 

Under the agreement, Mr. Valentino receives a minimum base salary of $31,250 per month, annualized to $375,000, subject to increases upon an annual review by our board of directors. The employment agreement also provides that Mr. Valentino is entitled to participate in all benefit programs, including insurance and retirement plans, available to members of our executive management team. The agreement further provides for:

 

 

Under the employment agreement, either we or Mr. Valentino may terminate his employment at any time. The employment agreement also terminates upon the death or disability of Mr. Valentino. Upon termination, Mr. Valentino will receive any amounts earned or due but unpaid through the date of termination, including base salary and benefits. Additionally, if Mr. Valentino voluntarily resigns, other than for good reason or disability, he may exercise his vested stock options for three months following the date he terminates his employment. If the agreement terminates by reason of death or disability, Mr. Valentino (or his estate, as the case may be) will be entitled to continued exercisability of his vested stock options for one year following his death or, upon disability, for the remainder of the options’ original terms. Upon disability, Mr. Valentino is also entitled to continued benefits that may apply, a prorated target bonus and, in the event of a specified transaction occurring within nine months of termination due to disability, a transaction bonus.

 

However, if we terminate his employment without cause or if Mr. Valentino terminates his employment for good reason, Mr. Valentino has the right to receive an additional payment equal to two times the sum of his base salary plus his target discretionary bonus, a transaction bonus if a specified transaction occurs within nine months after termination, and the right to the continued exercisability of his vested stock options for the remainder of their original terms.

 

Confidentiality and Noncompetition Agreement

 

We also entered into a confidentiality and noncompetition agreement with Mr. Valentino on August 11, 2003. Under this agreement, Mr. Valentino agrees not to disclose confidential information and, for a period of 24 months following the termination of Mr. Valentino’s employment, not to compete with us or recruit our employees.

 

Termination and Change of Control Agreements

 

Until July 1, 2007, we had income security agreements in place with Helmut Albrecht, Robert Casale, Rita O’Connor, Walter Riehemann, John Thievon and Peter Wentworth. Until his resignation, we also had an income security agreement in place with David Becker. Under these agreements, if, within one year after a change in control, we terminated any of these individuals without cause or if any of these individuals resigned for good reason (as defined in the agreements), he or she would have received severance benefits in an amount equal to his earned but unpaid salary, any awarded but unpaid bonus from the previous fiscal year and one year of annual base salary. In addition, the individual and his or her dependents would have continued to receive health benefits for one year

following the date of termination. The income security agreements also provided that these individuals agreed not to disclose confidential information or, for one year after termination, compete with us or recruit our employees.