InterMune DEF 14A 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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3280 Bayshore Boulevard
Brisbane, California 94005
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of InterMune, Inc.:
Notice Is Hereby Given that the Annual Meeting of Stockholders (Annual Meeting) of InterMune, Inc., a Delaware corporation (the Company), will be held on Tuesday, May 15, 2007, at 9:00 a.m. local time, at 3280 Bayshore Boulevard, Brisbane, California for the following purposes:
1. To elect three directors to hold office until the 2010 annual meeting of stockholders or until their successors are elected;
2. To approve the amendment and restatement of the Companys 2000 Equity Incentive Plan, including an increase in the aggregate number of shares of common stock authorized for issuance under the plan by 1,500,000 shares;
3. To ratify the selection, by the Audit Committee of the Board of Directors, of Ernst & Young LLP as independent auditors of the Company for its fiscal year ending December 31, 2007; and
4. To transact such other business as may properly come before the meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 19, 2007, as the record date for the determination of stockholders entitled to notice of and to vote at this Annual Meeting and at any adjournment or postponement thereof.
By Order of the Board of Directors
April 19, 2007
TABLE OF CONTENTS
3280 Bayshore Boulevard
Brisbane, California 94005
FOR THE 2007 ANNUAL MEETING OF STOCKHOLDERS
MAY 15, 2007
QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING
We sent you this proxy statement and the enclosed proxy card because the Board of Directors of InterMune, Inc. (sometimes referred to as the Company, InterMune, we, our, or us) is soliciting your proxy to vote at the 2007 Annual Meeting of Stockholders (the Annual Meeting). You are invited to attend the Annual Meeting to vote on the proposals described in this proxy statement. However, you do not need to attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card, or follow the instructions below to submit your proxy over the telephone or on the Internet.
The Company intends to mail this proxy statement and accompanying proxy card on or about April 19, 2007 to all stockholders of record entitled to vote at the Annual Meeting.
Only stockholders of record at the close of business on March 19, 2007 will be entitled to vote at the Annual Meeting. At the close of business on the record date, there were 34,360,391 shares of common stock outstanding and entitled to vote.
If, on March 19, 2007, your shares were registered directly in your name with InterMunes transfer agent, Mellon Investor Services LLC, then you are a stockholder of record. As a stockholder of record, you may vote in person at the meeting or vote by proxy. Whether or not you plan to attend the meeting, we urge you to fill out and return the enclosed proxy card or vote by proxy over the telephone or on the Internet as instructed below to ensure your vote is counted.
If, on March 19, 2007, your shares were held in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the Annual Meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request and obtain a valid proxy card from your broker or other agent.
In addition, you are entitled to vote on any other matters that are properly brought before the Annual Meeting.
You may either vote For the nominees to the Board of Directors or withhold your vote for the nominees. For each of the other matters to be voted on, you may vote For or Against or abstain from voting. The procedures for voting are fairly simple:
If you are a stockholder of record, you may vote in person at the Annual Meeting, vote by proxy using the enclosed proxy card, vote by proxy over the telephone, or vote by proxy on the Internet. Whether or not you plan to attend the meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the meeting and vote in person if you have already voted by proxy.
If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from the Company. Simply complete and mail the proxy card to ensure that your vote is counted. Alternatively, you may vote by telephone or over the Internet as instructed by your broker or bank. To vote in person at the Annual Meeting, you must obtain a valid proxy card from your broker, bank, or other agent. Follow the instructions from your broker or bank included with these proxy materials, or contact your broker or bank to request a proxy card.
On each matter to be voted upon, you have one vote for each share of common stock you own as of March 19, 2007.
If we receive a signed and dated proxy card and the proxy card does not specify how your shares are to be voted, your shares will be voted For the election of each of the three nominees for director and For proposals 2, 3 and 4. If any other matter is properly presented at the meeting, your proxy (one of the individuals named on your proxy card) will vote your shares using his or her best judgment.
We will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, our directors and employees and Georgeson Inc. may also solicit proxies in person, by telephone, or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies, but Georgeson Inc. will be paid its customary fee of approximately $7,500 plus out-of-pocket expenses if it solicits proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.
If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.
Yes. You can revoke your proxy at any time before the final vote at the meeting. You may revoke your proxy in any one of four ways:
To be considered for inclusion in next years proxy materials, your proposal must be submitted in writing by December 19, 2007, to InterMunes Secretary, 3280 Bayshore Boulevard, Brisbane, California 94005. If you wish to submit a proposal that is not to be included in next years proxy materials or nominate a director, you must do so between January 16, 2008 and February 15, 2008. You are also advised to review our Bylaws, which contain additional requirements about advance notice of stockholder proposals and director nominations.
Votes will be counted by the Inspector of Election appointed for the Annual Meeting, who will separately count For and (with respect to proposals other than the election of directors) Against votes, abstentions and broker non-votes. In addition, with respect to the election of directors, the Inspector of Election will count the number of withheld votes received by the nominees. If your shares are held by your broker as your nominee (that is, in street name), you will need to obtain a proxy form the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker to vote your shares. If you do not give instructions to your broker, your broker can vote your shares with respect to discretionary items, but not with respect to non-discretionary items. Discretionary items are proposals considered routine under the rules of the New York Stock Exchange (NYSE) on which your broker may vote shares held in street name in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, the shares will be treated as broker non-votes.
A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if at least a majority of the outstanding shares are represented by stockholders present at the meeting or by proxy. On the record date, there were 34,360,391 shares outstanding and entitled to vote. Accordingly, 17,180,196 shares must be represented by stockholders present at the meeting or by proxy to have a quorum.
Your shares will be counted towards the quorum only if you submit a valid proxy vote or vote at the meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. If there is no quorum, either the chairman of the meeting or a majority of the votes present at the meeting may adjourn the meeting to another date.
Preliminary voting results will be announced at the Annual Meeting. Final voting results will be published in the Companys quarterly report on Form 10-Q for the second quarter of 2007.
The Companys Amended and Restated Certificate of Incorporation and Bylaws provide that the Board of Directors (the Board) shall be divided into three classes, with each class having a three-year term. Vacancies on the Board may be filled only by persons elected by a majority of the remaining directors. A director elected by the Board to fill a vacancy (including a vacancy created by an increase in the number of directors) shall serve for the remainder of the full term of the class of directors in which the vacancy occurred and until such directors successor is elected and qualified.
The Board currently consists of eight directors, divided into the three following classes:
At each annual meeting of stockholders, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third subsequent annual meeting of stockholders.
There are three nominees for three Class I positions: Dr. Kabakoff, Mr. Smith and Mr. Welch, each of whom is a current director. Dr. Kabakoff, Mr. Smith and Mr. Welch each have been nominated for and have elected to stand for reelection. Each director to be elected will hold office from the date of their election by the stockholders until the third subsequent annual meeting of stockholders or until his successor is elected and has been qualified, or until such directors earlier death, resignation or removal. Pursuant to the Companys Amended and Restated Certificate of Incorporation, the number of directors has been fixed at eight by a resolution of the Board and the Board currently
consists of seven directors. Our Corporate Governance and Nominating Committee of the Board is in the process of seeking a suitable nominee to fill the vacancy.
The Company does not have a policy regarding directors attendance at the Annual Meeting. All of the Companys directors who were members of the Board at the time attended the 2006 annual meeting of stockholders.
Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the three nominees named below. In the event that any nominee should be unavailable for election as a result of an unexpected occurrence, such shares will be voted for the election of such substitute nominee as the Board may propose. Each person nominated for election has agreed to serve if elected, and management has no reason to believe that any nominee will be unable to serve. Directors are elected by a plurality of the votes present in person or represented by proxy and entitled to vote at the meeting.
The following table sets forth, for the Class I nominees and our other current directors who will continue in office after the Annual Meeting, information with respect to their ages and position/office held with the Company:
Set forth below is biographical information for the nominee and each person whose term of office as a director will continue after the Annual Meeting.
DAVID S. KABAKOFF has served as a member of the Board since November 2005. Dr. Kabakoff has served as President of Strategy Advisors, LLC, a consulting company, from August 2000 to the present. From January 2001 to June 2005, when it was acquired by Cephalon, Inc., a biotechnology company, Dr. Kabakoff served as the founder, Chairman and Chief Executive Officer of Salmedix, Inc., a biotechnology company. From May 1996 to August 2000, Dr. Kabakoff served in senior executive positions at Dura Pharmaceuticals Inc., a specialty pharmaceuticals company. Dr. Kabakoff is a member of the board of directors of Avalon Pharmaceuticals, Inc. Dr. Kabakoff holds a B.A. in Chemistry from Case Western Reserve University and a Ph.D. in Chemistry from Yale University.
MICHAEL L. SMITH has served as a member of the Board since January 2004. From April 1999 to January 2005, Mr. Smith served as Anthem Blue Cross and Blue Shields executive vice president and chief financial and accounting officer. From 1996 to April 1999, Mr. Smith served as chief operating officer and chief financial officer of American Health Network, a former Anthem Blue Cross and Blue Shield subsidiary. From 1974 to 1995, Mr. Smith held various management positions at Mayflower Group, Inc., most recently as chairman, president and chief executive officer. Mr. Smith is a member of the board of directors of Kite Realty Group Trust, Emergency
Medical Services Corporation, Vectren Corporation and Calumet Specialty Products Partners, L.P. Mr. Smith holds a B.A. in Economics from DePauw University.
DANIEL G. WELCH has served as the President and Chief Executive Officer of the Company and a member of the Board since September 2003. From March 2003 to September 2003, Mr. Welch served as a consultant to Warburg Pincus LLC, a global private equity investment firm. From August 2002 to January 2003, Mr. Welch served as chairman and chief executive officer of Triangle Pharmaceuticals, Inc., a pharmaceutical company. From October 2000 to June 2002, Mr. Welch served as president of the pharmaceutical division of Elan Corporation, PLC. From September 1987 to August 2000, Mr. Welch served in various senior management roles at Sanofi-Synthelabo and its predecessor companies Sanofi and Sterling Winthrop, including vice president of worldwide marketing and chief operating officer of the U.S. business. From November 1980 to September 1987, Mr. Welch was with American Critical Care, a division of American Hospital Supply. Mr. Welch holds a B.S. from the University of Miami and an M.B.A. from the University of North Carolina.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
IN FAVOR OF THE NAMED NOMINEES.
JAMES I. HEALY, M.D., PH.D. has served as a member of the Board since April 1999 and served as the interim Chairman of the Board from October 1999 through January 2000. Dr. Healy joined Sofinnova Ventures in June 2000 as a general partner and managing director. From January 1998 through March 2000, Dr. Healy was a partner at Sanderling Ventures. During 1997, Dr. Healy was supported by a Novartis Foundation bursary award and performed research at Brigham and Womens Hospital. From 1990 to 1997, Dr. Healy was employed by the Howard Hughes Medical Institute and Stanford University. Dr. Healy serves on the board of directors of several private companies. Dr. Healy holds a B.A. in molecular biology and a B.A. in Scandanavian studies, both from the University of California at Berkeley. Dr. Healy holds an M.D. and a Ph.D. from the Stanford University School of Medicine.
WILLIAM R. RINGO, JR. has served as a member of the Board since June 2002 and as Chairman of the Board since May 2003. Mr. Ringo was most recently President and Chief Executive Officer of Abgenix, Inc., a company specializing in the development of therapeutic antibodies, until April 3, 2006 when it was acquired by Amgen, Inc. From October 2006 to the present Mr. Ringo has served as a consultant to Warburg Pincus LLC, a global private equity investment firm and from February 2007 to the present Mr. Ringo has served as a consultant to Sofinnova Ventures. From June 2003 to September 2003, Mr. Ringo served as the interim President and Chief Executive Officer of InterMune. Mr. Ringo joined Eli Lilly & Company in 1973 and served in various capacities for Eli Lilly, including product group president, oncology and critical care products from June 1999 until his retirement in February 2001, president of internal medicine products from January 1998 until June 1999, and president of its infectious diseases business unit from September 1995 until January 1998. Mr. Ringo is a member of the board of directors of Inspire Pharmaceuticals and Allos Therapeutics, Inc. Mr. Ringo holds a B.S. and an M.B.A. from the University of Dayton.
LARS G. EKMAN, M.D., PH.D. has served as a member of the Board since September 2006. Dr. Ekman joined Elan Corporation in 2001 and is the Executive Vice President and President, Global Research and Development. From 1997 to 2001 he was Executive Vice President, Research and Development at Schwartz Pharma AG. From 1984 to 1997, Dr. Ekman was employed in a variety of senior scientific and clinical functions at Pharmacia (now Pfizer). Dr. Ekman is a member of the board of directors of Elan Corporation and ARYx Therapeutics. Dr. Ekman holds an M.D. and a Ph.D. from the University of Gothenburg, Sweden.
JONATHAN S. LEFF has served as a member of the Board since January 2000. Mr. Leff joined Warburg Pincus LLC, a global private equity investment firm, in 1996 and is currently a Managing Director responsible for the firms investment efforts in biotechnology and pharmaceuticals. Mr. Leff serves on the board of directors of Allos Therapeutics, Inc., Altus Pharmaceuticals, Inc, Neurogen Corporation, Sunesis Pharmaceuticals, Inc. and ZymoGenetics, Inc., all of which are publicly held companies. Mr. Leff holds an A.B. in Government from Harvard University and an M.B.A. from Stanford University.
As required under the Nasdaq Stock Market (Nasdaq) listing standards, a majority of the members of a listed companys board of directors must qualify as independent, as affirmatively determined by the Board. The Board consults with the Companys counsel to ensure that the Boards determinations are consistent with all relevant securities and other laws and regulations regarding the definition of independent, including those set forth in pertinent listing standards of the Nasdaq, as in effect from time to time.
Consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his family members, and the Company, its senior management and its independent auditors, the Board affirmatively has determined that all of the Companys directors are independent directors within the meaning of the applicable Nasdaq listing standards, except for Mr. Welch, the Companys current Chief Executive Officer.
In March 2004, the Board approved an amended Corporate Governance Guidelines and Code of Director Conduct and Ethics to ensure that the Board will have the necessary authority and practices in place to review and evaluate the Companys business operations as needed, to make decisions that are independent of the Companys management, and to ensure honest and ethical conduct by the members of the Board. The guidelines are also intended to align the interests of directors and management with those of the Companys stockholders. The Corporate Governance Guidelines and Code of Director Conduct and Ethics sets forth the practices the Board will follow with respect to Board composition and selection, Board meetings and involvement of senior management, chief executive officer succession planning and selection, Board compensation, committees, self-assessment, interaction with outside parties, orientation and continuing education and ethical conduct. The Corporate Governance Guidelines and Code of Director Conduct and Ethics may be viewed on our Internet website at http://www.intermune.com/pdf/governance_guidelines.pdf.
During 2006, the Board met eleven times, including by telephone conference, and acted by unanimous written consent five times. No director attended fewer than 75% of the aggregate of the total number of meetings of the Board (held during the period for which he was a director) and the total number of meetings held by all committees of the Board on which he served (during the period that he served as a committee member). The Board has an Audit Committee, a Compensation Committee, a Corporate Governance and Nominating Committee and a Compliance/Qualified Legal Compliance Committee.
The Audit Committee of the Board oversees the Companys corporate accounting and financial reporting processes, the systems of internal accounting and financial controls and audits of financial statements, the quality and integrity of financial statements and reports, and the qualifications, independence and performance of the firms engaged as independent outside auditors. For this purpose, the Audit Committee performs several functions. Among other things, the Audit Committee:
The Board annually reviews the Nasdaq listing standards definition of independence for Audit Committee members and has determined that all members of the Companys Audit Committee are independent, as independence is currently defined in Rule 4350(d)(2)(A)(i) and (ii) of the Nasdaq listing standards. The Board has determined that Mr. Smith qualifies as an audit committee financial expert, as defined in applicable Securities and Exchange Commission (SEC) rules. In March 2007, the Board approved an amended Audit Committee charter, which can be found on our corporate website at http://www.intermune.com/pdf/charter_audit_committee.pdf. The Audit Committee is currently composed of Dr. Healy, Dr. Kabakoff and Mr. Smith. In 2006, the Audit Committee met fourteen times. (Please see Audit Committee Report below.)
The Compensation Committee approves the type and level of compensation for officers and employees of the Company, administers the Companys stock option plans and performs such other functions regarding compensation as the Board may delegate. The Compensation Committee approves all compensation, including stock options, for the Companys vice presidents and above, and all stock option grants to non-vice president employees and consultants for greater than or equal to 20,000 shares of common stock. In March 2004, the Board approved an amended Compensation Committee charter, which can be found on our corporate website at http://www.intermune.com/pdf/charter_compensation_committee.pdf. The Board has authorized a subcommittee comprised of the Companys Chief Executive Officer, Chief Financial Officer and General Counsel to grant new hire stock options for less than 20,000 shares of common stock to non-executive committee employees and consultants. (Please see Compensation Committee Report below.) The Compensation Committee is currently composed of Messrs. Ekman, Leff and Ringo. Each of Messrs. Ekman, Leff and Ringo are considered to be independent as independence is currently defined in Rule 4200(a)(15) of the Nasdaq listing standards. In 2006, the Compensation Committee met six times.
The Corporate Governance and Nominating Committee develops and implements policies and procedures and oversees corporate governance matters, including the evaluation of Board performance and processes, and recommends qualified candidates for Board membership to the Board for nomination to the Board and election by the stockholders. Our Corporate Governance and Nominating Committee charter, which the Board amended in March 2004, can be found on our corporate website at http://www.intermune.com/pdf/charter_governance_nominating_committee.pdf. The Corporate Governance and Nominating Committee is composed of Messrs. Kabakoff, Leff and Smith, and met two times in 2006. All members of the Corporate Governance and Nominating Committee are independent (as independence is currently defined in Rule 4200(a)(15) of the Nasdaq listing standards).
For Board membership, the Corporate Governance and Nominating Committee takes into consideration applicable laws and regulations (including those of Nasdaq), diversity, age, skills, experience, integrity, ability to make independent analytical inquires, understanding of the Companys business and business environment, willingness to devote adequate time and effort to Board responsibilities and other relevant factors.
The Corporate Governance and Nominating Committee reviews candidates for director in the context of the current composition, skills and expertise of the Board, the operating requirements of the Company and the interests of stockholders. In the case of new director candidates, the Corporate Governance and Nominating Committee determines whether the nominee must be independent for Nasdaq purposes, which determination is based upon applicable Nasdaq listing standards and applicable SEC rules and regulations. The Corporate Governance and Nominating Committee then uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. The Company paid fees to a professional search firm in
2006 to assist the Corporate Governance and Nominating Committee in the process of identifying and evaluating new director candidates. The Corporate Governance and Nominating Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the functions and needs of the Board. The Corporate Governance and Nominating Committee meets to discuss and consider such candidates qualifications. All members of the Corporate Governance and Nominating Committee, the Chief Executive Officer and the Chairman then interview candidates that the Corporate Governance and Nominating Committee believes have the requisite background, before recommending a nominee to the Board, which votes to elect the nominees.
The Corporate Governance and Nominating Committee will consider director candidates recommended by stockholders. To date, the Corporate Governance and Nominating Committee has not received a director nominee from any stockholder. Stockholders who wish to recommend individuals for consideration by the Corporate Governance and Nominating Committee to become nominees for election to the Board may do so by delivering a written recommendation by certified mail only, c/o the Chairman or Secretary, at the following address: InterMune, Inc., 3280 Bayshore Boulevard, Brisbane, California 94005 no sooner than 120 days and no later than 90 days prior to the anniversary date of the mailing of the Companys proxy statement for the last annual meeting of stockholders. Submissions must include the full name of the proposed nominee, a description of the proposed nominees business experience for at least the previous five years, complete biographical information, a description of the proposed nominees qualifications as a director and a representation that the nominating stockholder is a beneficial or record owner of the Companys stock. Any such submission must be accompanied by the written consent of the proposed nominee to be named as a nominee and to serve as a director if elected. In 2006, the Corporate Governance and Nominations Committee met two times.
In March 2004, the Board amended the charter of the Compliance Committee and renamed it the Compliance/Qualified Legal Compliance Committee. Our Compliance/Qualified Legal Compliance Committee charter can be found on our corporate website at http://www.intermune.com/pdf/charter_compliance.pdf. The Compliance/Qualified Legal Compliance Committee oversees corporate compliance, including development, implementation, administration and enforcement of the Companys compliance programs and reviewing the Companys compliance with its policies and all applicable laws. The Compliance/Qualified Legal Compliance Committee ensures the confidential receipt, retention and consideration of any report of evidence of a material violation by the Company or any officer, director, employee or agent of the Company by attorneys appearing and practicing before the SEC. The Compliance/Qualified Legal Compliance Committee is composed of Messrs. Ekman, Healy and Ringo. In 2006, the Compliance/Qualified Legal Compliance Committee met three times.
In March 2007, the Board created a Science Committee. The members of this committee are currently in the process of drafting the committees charter for the Science Committee. The Science Committee is composed of Dr. Healy, Dr. Ekman and Dr. Kabakoff.
In March 2005, the Board created the Business Development/Finance Committee as an ad-hoc committee of the Board to advise the Board on matters involving business development partnering and other financial matters of the Company. The Special Business Development/Finance Committee is composed of Messrs. Smith, Kabakoff and Leff. In 2006, the Special Business/Finance Committee met three times.
The Board provides a procedure for stockholders to send written communications to the Board or any of the directors. Stockholders may send written communications to the Board or any of the directors by certified mail only, c/o the Chairman or Secretary, InterMune, Inc., 3280 Bayshore Boulevard, Brisbane, California 94005. All such written communications will be compiled by the Chairman or Secretary of the Company and submitted to the Board or the individual directors, as the case may be, within a reasonably timely period.
The Board has approved a Code of Business Conduct and Ethics (the Code) applicable to all of our employees, including our chief executive officer, chief financial officer and controller, and to the members of the Board. The purpose of this Code is to deter wrongdoing and to promote:
(1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
(2) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications that we make;
(3) compliance with applicable governmental laws, rules and regulations;
(4) the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code;
(5) the prompt public disclosure of any waivers under either Code granted to any of our executive officers, including our chief executive officer, chief financial officer and controller; and
(6) accountability for adherence to the Code.
The Code of Business Conduct and Ethics is available on our corporate website at: http://webcentral.intermune.com/tip/Code%20of%20Conduct.pdf. If the Company grants any waiver from a provision of the Code with respect to any Company officer at the level of Vice President or above, the Company will promptly disclose the nature of the waiver along with the reasons for the waiver.
The Audit Committee, currently composed of Dr. Healy, Dr. Kabakoff and Mr. Smith, oversees the Companys financial reporting process on behalf of the Board. The Audit Committee meets with the independent auditors, currently Ernst & Young LLP, with and without management present, to discuss the results of Ernst & Young LLPs examinations and evaluation of the Companys internal controls and the overall quality of the Companys financial reporting.
The members of the Audit Committee are appointed by and serve at the discretion of the Board. The Audit Committee held 14 meetings during 2006. The Audit Committee also met privately with Ernst & Young LLP five times.
The Companys management team has the primary responsibility for the financial statements and the reporting process, including the system of internal controls and disclosure controls and procedures. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited financial statements in the Annual Report on Form 10-K with management and the unaudited financial statements in the Quarterly Reports on Form 10-Q, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.
The Audit Committee is responsible for reviewing, approving and managing the engagement of the independent auditors, including the scope, extent and procedures of the annual audit and compensation to be paid, and all other matters the Audit Committee deems appropriate, including the auditors accountability to the Board and the Audit Committee. The Audit Committee reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of the Companys accounting principles and
1 The material in this report is not soliciting material, is not deemed filed with the SEC and is not to be incorporated by reference in any filing of the Company under the Securities Act of 1933 (the Securities Act) or the Exchange Act of 1934 (the Exchange Act), whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
such other matters as are required to be discussed with the Audit Committee under generally accepted auditing standards and those matters required to be discussed by SAS 61.
In addition, the Audit Committee discussed with the independent auditors the auditors independence from management and the Company, including the matters and disclosures received in the written disclosures and the letter from the independent auditors required by the Independence Standards Board, including without limitation Standard No. 1, and has considered the compatibility of non-audit services with the auditors independence. The Audit Committee also discussed with the Companys independent auditors the overall scope and plans for their audits and the Audit Committee reviewed and made non-material changes to the Committees charter.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board (and the Board approved) that the audited financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2006 for filing with the U.S. Securities and Exchange Commission. The Audit Committee has also retained Ernst & Young LLP as the Companys independent auditors for fiscal year 2007.
During 2006, management documented, tested and evaluated the Companys internal control over financial reporting pursuant to the requirements of the Sarbanes-Oxley Act of 2002. The Audit Committee was kept apprised of the Companys progress by management and the independent auditors at each regularly scheduled committee meeting as well as at specially-scheduled meetings. At the conclusion of the assessments, management and Ernst & Young LLP each provided the Audit Committee with its respective report on the effectiveness of the Companys internal control over financial reporting. The Committee reviewed managements and the independent auditors evaluations that were included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Management has identified significant deficiencies during its assessment of internal controls over financial reporting and has presented its plan to remediate the deficiencies to the Audit Committee. The Audit Committee will receive regular updates from management regarding the remediation efforts.
Michael L. Smith Chairman
James I. Healy
David S. Kabakoff
APPROVAL OF AN AMENDMENT TO THE INTERMUNE, INC.
2000 EQUITY INCENTIVE PLAN, AS AMENDED, TO INCREASE THE NUMBER OF SHARES
AUTHORIZED FOR ISSUANCE
In January 2000, the Board adopted, and the stockholders subsequently approved, the Companys 2000 Equity Incentive Plan (the Incentive Plan). In June 2002, the stockholders approved an amendment of the Incentive Plan to increase the aggregate number of shares reserved for issuance under the Incentive Plan by 2,500,000 shares. As a result of this amendment, as of December 31, 2002, there were an aggregate of 6,278,226 shares reserved for issuance under the Incentive Plan. In March 2003, the Board amended the Incentive Plan, subject to stockholder approval, to add 1,300,000 shares of common stock to the share reserve to increase the aggregate number of shares authorized for issuance under the Incentive Plan from 6,278,226 shares to 7,578,226 shares. However, the Companys stockholders did not approve this amendment at the Companys 2003 annual meeting of stockholders, and the increase was not implemented. In March 2004, the Board adopted an amendment to the Incentive Plan that added 1,000,000 shares of common increase to the share reserve to increase the aggregate number of shares authorized for issuance under the Incentive Plan from 6,278,226 shares to 7,278,226 shares and the stockholders approved this amendment at the Companys 2004 annual meeting of stockholders.
As of April 2, 2007, options (net of canceled or expired options) covering 6,449,022 shares had been granted under the Incentive Plan, and only 829,204 shares of the Companys common stock (plus any shares that might in
the future be returned to the Incentive Plan as a result of the reacquisition of unvested shares, or as a result of cancellations or expirations of options) remained available for future grant under the Incentive Plan. In March 2007, the Board adopted the amendment and restatement of the Incentive Plan, subject to stockholder approval, which would include the following changes to the Incentive Plan:
The Board adopted the amendment and restatement of the Incentive Plan to further align the interests of employees and management with those of the Companys stockholders, to provide the Company with more flexibility in granting equity incentives to current and new employees, and to ensure that the Company can continue to grant equity incentives at levels determined appropriate by the Board.
During the last fiscal year, under the Incentive Plan, the Company granted to all current executive officers as a group, options to purchase 427,250 shares of common stock at exercise prices ranging from $15.19 to $19.01 per share and 202,500 shares of common stock with a market value on the date of grant equal to $19.30, and to all employees (excluding executive officers) as a group, options to purchase 979,466 shares at exercise prices ranging from $14.41 to $22.62 per share and 221,950 shares of common stock with a market value on the date of grant ranging from $19.30 to $22.16.
During the last fiscal year, no options were granted under the Incentive Plan to any directors, except for Mr. Welch who was an executive officer on the date of the grant. (For information regarding stock option grants to non-employee directors under the Companys 2000 Non-Employee Directors Stock Option Plan, see Executive Compensation Compensation of Directors. For information regarding stock option grants to certain executive officers of the Company, see Executive Compensation Stock Option Grants and Exercises.)
In order to address potential shareholder concerns regarding the number of options, stock appreciation rights or stock awards we intend to grant in a given year, the board of directors commits to our stockholders that, for the next three fiscal years (commencing on January 1, 2007) it will not grant a number of shares subject to options, stock appreciation rights or stock awards to employees or non-employee directors greater than an average of 4.5% (the limit Institutional Shareholder Services will apply to Intermune in 2007) of the number of shares of our common
stock that we believe will be outstanding over such three year period. For purposes of calculating the number of shares granted in a year, stock awards will count as equivalent to (1) 1.5 option shares, if our annual stock price volatility is 53% or higher, (2) two option shares if our annual stock price volatility is between 25% and 52%, and (3) four option shares if our annual stock price volatility is less than 25%.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2
The essential features of the Incentive Plan are outlined below:
The Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, stock bonuses and restricted stock purchase awards (collectively awards). Incentive stock options granted under the Incentive Plan are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the IRC). Non-statutory stock options granted under the Incentive Plan are not intended to qualify as incentive stock options under the IRC. (See Federal Income Tax Information for a discussion of the tax treatment of awards.)
The Board adopted the Incentive Plan to provide a means by which employees, directors and consultants of the Company and its affiliates may be given an opportunity to purchase stock in the Company, to assist in retaining the services of such persons, to secure and retain the services of persons capable of filling such positions and to provide incentives for such persons to exert maximum efforts for the success of the Company and its affiliates. All of the approximately 150 employees, directors and consultants of the Company and its affiliates are eligible to participate in the Incentive Plan.
The Board administers the Incentive Plan. Subject to the provisions of the Incentive Plan, the Board has the power to construe and interpret the Incentive Plan and to determine the persons to whom and the dates on which awards will be granted, the number of shares of common stock to be subject to each award, the time or times during the term of each award within which all or a portion of such award may be exercised, the exercise price, the type of consideration and other terms of the award.
The Board has the power to delegate administration of the Incentive Plan to a committee, composed of one or more members of the Board. In the discretion of the Board, a committee may consist solely of two or more outside directors in accordance with Section 162(m) of the IRC or solely of two or more non-employee directors in accordance with Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the Exchange Act). The Board has delegated administration of the Incentive Plan to the Compensation Committee of the Board. As used herein with respect to the Incentive Plan, the Board refers to any committee the Board appoints as well as to the Board itself.
The regulations under Section 162(m) of the IRC require that the directors who serve as members of the committee must be outside directors. The Incentive Plan provides that, in the Boards discretion, directors serving on the committee may be outside directors within the meaning of Section 162(m). This limitation would exclude from the committee directors who are (i) current employees of the Company or an affiliate, (ii) former employees of the Company or an affiliate receiving compensation for past services (other than benefits under a tax-qualified pension plan), (iii) current and former officers of the Company or an affiliate, (iv) directors currently receiving direct or indirect remuneration from the Company or an affiliate in any capacity (other than as a director), and (v) any other person who is otherwise not considered an outside director for purposes of Section 162(m).
Pursuant to the March 2007 amendment and subject to stockholder approval of this Proposal, an aggregate of 8,778,226 shares of common stock have been reserved for issuance under the Incentive Plan. If awards granted under the Incentive Plan expire or otherwise terminate without being exercised, the shares of common stock not acquired pursuant to such awards again become available for issuance under the Incentive Plan. If the Company reacquires unvested stock issued under the Incentive Plan, the reacquired stock will again become available for reissuance under the Incentive Plan. The aggregate number of shares of common stock issuable under the Incentive Plan pursuant to the exercise of all incentive stock options may not exceed 10,000,000 shares.
Incentive stock options may be granted under the Incentive Plan only to employees (including officers) of the Company and its affiliates. Employees (including officers), directors and consultants of both the Company and its affiliates are eligible to receive all other types of awards under the Incentive Plan.
No incentive stock option may be granted under the Incentive Plan to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of the Company or any affiliate of the Company, unless the exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and the term of the option does not exceed five years from the date of grant. In addition, the aggregate fair market value, determined at the time of grant, of the shares of common stock with respect to which incentive stock options are exercisable for the first time by a participant during any calendar year (under the Incentive Plan and all other such plans of the Company and its affiliates) may not exceed $100,000. No employee may be granted options under the Incentive Plan exercisable for more than 1,000,000 shares of common stock during any calendar year (Section 162(m) Limitation).
The following is a description of the permissible terms of options under the Incentive Plan. Individual option grants may be more restrictive as to any or all of the permissible terms described below.
Exercise Price; Payment. The exercise price of incentive stock options may not be less than 100% of the fair market value of the stock subject to the option on the date of the grant and, in some cases (see Eligibility above), may not be less than 110% of such fair market value. The exercise price of non-statutory options may not be less than 100% of the fair market value of the stock on the date of grant. If options were granted to covered executives with exercise prices below fair market value, deductions for compensation attributable to the exercise of such options could be limited by Section 162(m) of the IRC. (See Federal Income Tax Information.) As of April 2, 2007, the closing price of the Companys common stock as reported on the Nasdaq Global Market (the NASDAQ) was $25.11 per share.
The exercise price of options granted under the Incentive Plan must be paid either in cash at the time the option is exercised or at the discretion of the Board, (i) by delivery of other common stock of the Company, (ii) pursuant to a deferred payment arrangement (iii) by a net exercise of the option, (iv) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of shares, results in either the receipt of cash by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds, or (v) in any other form of legal consideration acceptable to the Board.
Option Exercise. Options granted under the Incentive Plan may become exercisable in cumulative increments (vest) as determined by the Board. Shares covered by currently outstanding options under the Incentive Plan typically vest as follows: one quarter of the grant vests after the first year, and the remainder vests monthly for three years during the participants employment by, or service as a director or consultant to, the Company or an affiliate (collectively, service). Shares covered by options granted in the future under the Incentive Plan may be subject to different vesting terms. The Board has the power to accelerate the time during which an option may vest or be exercised. In addition, options granted under the Incentive Plan may permit exercise prior to vesting, but in such event the participant may be required to enter into an early exercise stock purchase agreement that allows the Company to repurchase unvested shares, generally at their exercise price, should the participants service terminate
before vesting. To the extent provided by the terms of an option, a participant may satisfy any federal, state or local tax withholding obligation relating to the exercise of such option by a cash payment upon exercise, by authorizing the Company to withhold a portion of the stock otherwise issuable to the participant, by delivering already-owned common stock of the Company or by a combination of these means.
Term. The maximum term of options under the Incentive Plan is ten (10) years, except that in certain cases (see Eligibility above) the maximum term is five (5) years. If approved by the stockholders, the proposed amendments to the Incentive Plan will change the maximum term of an option to seven (7) years. Options under the Incentive Plan generally terminate three months after termination of the participants service unless (i) such termination is due to the participants permanent and total disability (as defined in the IRC), in which case the option may, but need not, provide that it may be exercised (to the extent the option was exercisable at the time of the termination of service) at any time within 12 months of such termination; (ii) the participant dies before the participants service has terminated, or within three months after termination of such service, in which case the option may, but need not, provide that it may be exercised (to the extent the option was exercisable at the time of the participants death) within 18 months of the participants death by the person or persons to whom the rights to such option pass by will or by the laws of descent and distribution; or (iii) the option by its terms specifically provides otherwise. A participant may designate a beneficiary who may exercise the option following the participants death. Individual option grants by their terms may provide for exercise within a longer period of time following termination of service.
The option term generally is not extended in the event that exercise of the option within these periods is prohibited. A participants option agreement may provide that if the exercise of the option following the termination of the participants service would be prohibited because the issuance of stock would violate the registration requirements under the Securities Act of 1933, as amended (the Securities Act), then the option will terminate on the earlier of (i) the expiration of the term of the option, or (ii) three months after the termination of the participants service during which the exercise of the option would not be in violation of such registration requirements.
Transferability. The participant may not transfer an incentive stock option otherwise than by will or by the laws of descent and distribution. During the lifetime of the participant, only the participant may exercise an incentive stock option. The Board may grant non-statutory stock options that are transferable generally to the extent provided in the stock option agreement. Shares subject to repurchase by the Company under an early exercise stock purchase agreement may be subject to restrictions on transfer that the Board deems appropriate.
Payment. Currently, the Board determines the purchase price under a stock purchase award, but the purchase price may not be less than the par value of the shares subject to the stock purchase award. The purchase price of stock acquired pursuant to a stock purchase award under the Incentive Plan must be paid either (i) in cash at the time of purchase or at the discretion of the Board, (ii) pursuant to a deferred payment arrangement or (iii) in any other form of legal consideration acceptable to the Board.
Vesting. Shares of stock sold or awarded under the Incentive Plan may, but need not be, subject to a repurchase option in favor of the Company in accordance with a vesting schedule as determined by the Board. The Board has the power to accelerate the vesting of stock acquired pursuant to a restricted stock purchase agreement under the Incentive Plan.
Restrictions on Transfer. Rights under a stock purchase award may not be transferred except where such assignment is required by law or expressly authorized by the terms of the applicable stock purchase award agreement.
Payment. A stock bonus award may be granted in consideration of past service without a cash payment.
Vesting. Shares of stock awarded as a stock bonus under the Incentive Plan may, but need not be, subject to forfeiture to the Company in accordance with a vesting schedule as determined by the Board. The Board has the power to accelerate the vesting of stock acquired pursuant to a stock bonus award under the Incentive Plan.
Restrictions on Transfer. Rights under a stock bonus award may not be transferred except where such assignment is required by law or expressly authorized by the terms of the applicable stock bonus award agreement.
The aggregate number of shares that may be issued pursuant to stock purchase awards and stock bonus awards may not exceed 30% of the share reserve as determined at the time of each grant of such an award.
Transactions not involving receipt of consideration by the Company, such as a merger, consolidation, reorganization, stock dividend or stock split, may change the type(s), class(es) and number of shares of common stock subject to the Incentive Plan and outstanding awards. In that event, the Incentive Plan will be appropriately adjusted as to the type(s), class(es) and the maximum number of shares of common stock subject to the Incentive Plan and the Section 162(m) Limitation, and outstanding awards will be adjusted as to the type(s), class(es), number of shares and price per share of common stock subject to such awards.
In the event of (i) the sale, lease, license or other disposition of all or substantially all of the assets of the Company (including without limitation, dissolution or liquidation of the Company), (ii) a merger or consolidation in which the Company is not the surviving corporation, or (iii) a reverse merger in which the Company is the surviving corporation but the shares of common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise (collectively, corporate transaction), any surviving or acquiring corporation may continue or assume awards outstanding under the Incentive Plan or may substitute similar awards. If any surviving or acquiring corporation does not assume such awards or substitute similar awards, then with respect to awards held by participants whose service with the Company or an affiliate has not terminated, the vesting of such awards (and, if applicable, the time during which such awards may be exercised) will be accelerated in full and the awards will terminate if not exercised (if applicable) at or prior to the effective date of the corporate transaction. With respect to any other stock awards outstanding under the Incentive Plan, such stock awards will terminate if not exercised (if applicable) prior to such event.
The Board may amend the terms of one or more outstanding options or any other stock awards at any time.
The Board may not, without first obtaining the approval of the Companys stockholders (i) reduce the exercise price of any outstanding option under the Incentive Plan, (ii) cancel any outstanding option under the Incentive Plan and replace it with an option with a lower exercise price, (iii) accept any outstanding option in exchange for a new option with a lower exercise price, or (iv) take any other action that is treated as a repricing under generally accepted accounting principles.
The Board may suspend or terminate the Incentive Plan without stockholder approval or ratification at any time or from time to time. Unless sooner terminated, the Incentive Plan will terminate on January 30, 2010.
The Board may also amend the Incentive Plan at any time or from time to time. However, no amendment will be effective unless approved by the stockholders of the Company within 12 months before or after its adoption by the Board to the extent such approval is necessary to satisfy the requirements of Section 422 of the IRC or any Nasdaq or securities exchange listing requirements. The Board may submit any other amendment to the Incentive Plan for stockholder approval, including, but not limited to, amendments intended to satisfy the requirements of
Section 162(m) of the IRC regarding the exclusion of performance-based compensation from the limitation on the deductibility of compensation paid to certain executive officers.
Incentive Stock Options. Incentive stock options under the Incentive Plan are intended to be eligible for the favorable federal income tax treatment accorded incentive stock options under the IRC.
There generally are no federal income tax consequences to the participant or the Company by reason of the grant or exercise of an incentive stock option. However, the exercise of an incentive stock option may increase the participants alternative minimum tax liability, if any.
If a participant holds stock acquired through exercise of an incentive stock option for more than two years from the date on which the option is granted and more than one year from the date on which the shares are transferred to the participant upon exercise of the option, any gain or loss on a disposition of such stock will be a long-term capital gain or loss.
Generally, if the participant disposes of the stock before the expiration of either of these holding periods (a disqualifying disposition), then at the time of disposition the participant will realize taxable ordinary income equal to the lesser of (i) the excess of the stocks fair market value on the date of exercise over the exercise price, or (ii) the participants actual gain, if any, on the purchase and sale. The participants additional gain or any loss upon the disqualifying disposition will be a capital gain or loss, which will be long-term or short-term depending on whether the stock was held for more than one year.
To the extent the participant recognizes ordinary income by reason of a disqualifying disposition, the Company will generally be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the IRC and the satisfaction of a tax reporting obligation) to a corresponding business expense deduction in the tax year in which the disqualifying disposition occurs.
Non-statutory Stock Option, Stock Purchase Awards and Stock Bonus Awards. Non-statutory stock options, stock purchase awards and stock bonus awards granted under the Incentive Plan generally have the following federal income tax consequences.
There are no tax consequences to the participant or the Company by reason of the grant. Upon acquisition of the stock, the participant normally will recognize taxable ordinary income equal to the excess, if any, of the stocks fair market value on the acquisition date over the purchase price. However, to the extent the stock is subject to certain types of vesting restrictions, the taxable event will be delayed until the vesting restrictions lapse unless the participant elects to be taxed on receipt of the stock. With respect to employees, the Company is generally required to withhold from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Subject to the requirement of reasonableness, the provisions of Section 162(m) of the IRC and the satisfaction of a tax reporting obligation, the Company will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the participant.
Upon disposition of the stock, the participant will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon acquisition (or vesting) of the stock. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one year. Slightly different rules may apply to participants who acquire stock subject to certain repurchase options or who are subject to Section 16(b) of the Exchange Act.
Potential Limitation on Company Deductions. Section 162(m) of the IRC denies a deduction to any publicly held corporation for compensation paid to certain covered employees in a taxable year to the extent that compensation to such covered employee exceeds $1 million. It is possible that compensation attributable to awards, when combined with all other types of compensation received by a covered employee from the Company, may cause this limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified performance-based compensation, are disregarded for purposes of the deduction limitation. In accordance with Treasury Regulations issued under Section 162(m), compensation attributable to stock options and stock appreciation rights will qualify as performance-based
compensation if the award is granted by a compensation committee comprised solely of outside directors and either (i) the plan contains a per-employee limitation on the number of shares for which such awards may be granted during a specified period, the per-employee limitation is approved by the stockholders, and the exercise price of the award is no less than the fair market value of the stock on the date of grant, or (ii) the award is granted (or exercisable) only upon the achievement (as certified in writing by the compensation committee) of an objective performance goal established in writing by the compensation committee while the outcome is substantially uncertain, and the award is approved by stockholders.
Awards to purchase restricted stock and stock bonus awards will qualify as performance-based compensation under the Treasury Regulations only if (i) the award is granted by a compensation committee comprised solely of outside directors, (ii) the award is granted (or exercisable) only upon the achievement of an objective performance goal established in writing by the compensation committee while the outcome is substantially uncertain, (iii) the compensation committee certifies in writing prior to the granting (or exercisability) of the award that the performance goal has been satisfied and (iv) prior to the granting (or exercisability) of the award, stockholders have approved the material terms of the award (including the class of employees eligible for such award, the business criteria on which the performance goal is based, and the maximum amount or formula used to calculate the amount payable upon attainment of the performance goal).
The following table provides certain information as of December 31, 2006 regarding our equity compensation plans, all of which have been approved by our stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2
The Audit Committee has selected Ernst & Young LLP as the Companys independent auditors for the fiscal year ending December 31, 2007 and has further directed that management submit the Audit Committees selection of independent auditors for ratification by the stockholders at the Annual Meeting. Ernst & Young LLP has audited the Companys financial statements since January 2000. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to
respond to appropriate questions. In the event the stockholders do not ratify such appointment, the Board of Directors will reconsider its selection.
Audit Fees. The aggregate fees billed by Ernst & Young LLP for the audit of the Companys financial statements, review of the Companys interim financial statements, review of SEC registration statements, issuance of comfort letters and consents for the year ended December 31, 2006 were $663,442, and for the year ended December 31, 2005 were $640,000.
Audit-Related Fees. The aggregate fees billed by Ernst & Young LLP for audit-related services (which included consultations on various transactions) for the year ended December 31, 2006 were $25,000, and for the year ended December 31, 2005 were $90,900, as follows:
Tax Fees. The aggregate fees billed by Ernst & Young LLP in relation to the preparation and review of the Companys income tax returns and for general tax advice provided for the year ended December 31, 2006 were $0, and for the year ended December 31, 2005 were $88,665, as follows:
All Other Fees. Ernst & Young LLP did not provide any other services to the Company during 2006 or 2005.
Pursuant to the Audit Committees charter, the Audit Committee reviews, and prior to initiation of services, approves all non-audit services provided to the Company by the independent auditors, and considers the possible effect of such services on the independence of such auditors. The Audit Committee by prior resolution may pre-approve non-audit services. The Audit Committee has determined that the non-audit services provided by Ernst & Young LLP in 2006 were compatible with maintaining the auditors independence. The Audit Committee has pre-authorized the Company to engage Ernst & Young LLP to perform up to $25,000 in non-audit/tax services in 2007, and authorized the Chairman of the Audit Committee to pre-approve the engagement of Ernst & Young LLP to perform additional non-audit/tax services of up to $25,000 for the Company. Ernst & Young LLP may not perform any additional non-audit/tax services except as pre-authorized by the Audit Committee or its Chairman.
Stockholder ratification of the Audit Committees selection of Ernst & Young LLP as the Companys independent auditors is not required by the Companys Bylaws or otherwise. However, the Board is submitting the selection of Ernst & Young LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee and the Board will reconsider whether or not to retain that firm. Even if the selection is ratified, the Audit Committee may engage different independent auditors at any time during the year if it determines that such a change would be in the best interests of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of the Companys common stock as of March 1, 2007 (except as otherwise noted) by (i) each director and nominee for director; (ii) each of the executive officers named in the Summary Compensation Table below (the Named Executive Officers); (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company based on publicly available records to be beneficial owners of more than five percent of its common stock.
Section 16(a) of the Exchange Act of 1934 (the Exchange Act) requires the Companys directors and executive officers, and persons who own more than 10% of a registered class of the Companys equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
To the Companys knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 2006, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.
Compensation Discussion and Analysis (CD&A)
The Compensation Committee (the Committee), which is composed entirely of independent directors, as independence is defined in NASD Marketplace Rule 4200(a)(15) of the Nasdaq listing standards, administers the Companys executive and equity compensation programs. The role of the Committee is to (i) oversee the Companys compensation and benefit plans and policies, (ii) administer its stock plans (including reviewing and approving equity grants to all Company employees and making recommendations to the Board of Directors of the Company (the Board) for equity grants to the Companys executive officers) and (iii) review annually all compensation matters relating to the Companys executive officers, including those relating to the Chief Executive Officer and the other executive officers named in the Summary Compensation Table below (the Named Executive Officers) and make recommendations to the Board, which has responsibility for approving all compensation matters relating to the Companys executive officers, including the Chief Executive Officer.
The charter of the Committee (the Charter) reflects the above described responsibilities, and the Committee, the Corporate Governance and Nominating Committee and the full Board annually review and periodically revise the Charter as necessary. The full text of the Charter is posted on the Companys website at http://www.intermune.com/pdf/charter_compensation_committee.pdf and is attached to this analysis as Attachment 1. The Committees membership is determined by the Corporate Governance and Nominating Committee and the full Board.
The members of the Committee during the period from January 1, 2006 to May 24, 2006 were Mr. William Halter, Mr. Jonathan Leff and Mr. William Ringo, Jr. The members of the Committee from May 24, 2006 to September 19, 2006 were Mr. Leff, Mr. Ringo and Dr. Kabakoff. Dr. Lars Ekman replaced Dr. Kabakoff on the Committee on September 19, 2006. Mr. Leff has been chairman of the Committee since February 23, 2000. The Committee is now composed of Mr. Leff, Dr. Ekman and Mr. Ringo. There were 6 meetings of the Committee during 2006, including 3 executive sessions with the Committee members only.
The following members of company management regularly attend meetings of the Committee: Dan Welch, Chief Executive Officer, Robin Steele, Senior Vice President for Legal Affairs, General Counsel and Secretary and Howard Simon, Senior Vice President for Human Resources and Corporate Services and Associate General Counsel for the purpose of providing analysis, information, and recommendations on various human resources and compensation matters as they may impact the company. These employees do not participate in specific executive compensation matters where the Committee is engaged in setting their compensation or determining their awards under the companys programs.
The Committees philosophy is to use executive compensation to attract and retain executive officers capable of leading the Company to fulfill its business objectives by offering competitive compensation opportunities that reward individual contributions as well as overall corporate performance. Further, the Committee believes that the compensation paid to the executive officers should be closely linked to the performance of the Company on both a short-term and a long-term basis, and that such compensation should allow the Company to attract and retain key personnel who are critical to the Companys long-term success. Thus, the Committee structures the compensation of
the Companys executive officers to ensure that a significant amount of their compensation opportunity is directly related to factors that influence stockholder value, including the Companys stock price performance.
As detailed below, the principal elements of the Companys executive compensation program for its executive officers include:
Total compensation for the Companys Named Executive Officers includes base salary, annual incentives and long-term incentives. Annual incentive compensation may consist of cash incentive bonuses or equity components, each based on satisfying corporate goals established for the year by the Board as well as on meeting individual performance objectives set by the Chief Executive Officer or the Compensation Committee. In addition, Named Executive Officers may receive long-term incentive compensation in the form of grants of options to purchase shares of the Companys common stock, with exercise prices set at fair market value on the date of grant, or grants of restricted shares of the Companys common stock to reinforce long-term decision making and a focus on stockholder value creation.
The Committee believes that at the Companys current business stage as a research and development biotechnology Company, traditional measures of corporate performance, such as earnings per share or sales growth, do not readily apply in reviewing performance of Company and the executives officers. Therefore, in addition to traditional measures of performance, in making recommendations to the Board regarding the compensation of the Companys Named Executive Officers, the Committee looks to other indicia of performance, such as the progress of the Companys research and clinical trial development programs, management of Company assets, generation and protection of intellectual property assets, regulatory developments, corporate development activities, and success in securing capital sufficient to allow the Company to achieve its objectives.
Assessment of performance on these qualitative factors necessarily involves a subjective assessment by the Committee and/ or Board of corporate performance. Moreover, the Committee does not base its recommendations to the Board regarding executive compensation on any single performance factor, but rather considers several factors and evaluates both corporate and individual performance. In addition, total compensation paid by the Company to its executive officers is designed to be competitive with the range of compensation packages paid to the executive management of other companies of comparable size, complexity and geographical location in the biotechnology industry. Toward that end, each year the Committee reviews various independent industry surveys, consults with an independent executive compensation consultant who reports directly to the Compensation Committee, and gathers data to prepare its recommendations to the Board.
The Committee believes that the midpoint salary, target bonus levels and target long-term equity incentive award values should be set in part by reference to the competitive practices of a select peer group of biotechnology companies and also the broader biotechnology industry, based upon available survey data. The Committee utilizes a peer group of biotechnology companies, many of which are also located in the San Francisco Bay Area, which reflects the primary talent market for all positions within the Company as well as the cost of living factors that influence compensation levels in each unique biotechnology market. The Committee considered company size as measured by headcount, business complexity, research and development portfolio and other criteria to choose these companies. Based on these criteria, the companies that were selected by the Committee for 2006 consist of: Arena Pharmaceuticals, BioMarin Pharmaceuticals, Cubist Pharmaceuticals, CV Therapeutics, Exelixis, Human Genome
Sciences, Idenix Pharmaceuticals, Medarex, MGI Pharma, Myriad Genetics, NPS Pharmaceuticals, Nuvelo, Onyx Pharmaceuticals, OSI Pharmaceuticals, Pharmion, Renovis, Telik, Theravance, United Therapeutics and ZymoGenetics. The Committee chose this group of peers because the Company primarily competes with this group for employees, including executive officers, and the relatively high cost of living in the San Francisco Bay Area compared to other areas of the country.
The Committee also uses a broader biotechnology industry survey data consisting primarily of national companies in the industry that best align with our market capitalization, drug pipeline, capital burn rate and number of total employees in determining the competitive positioning of pay for recommendation to the Board. The peer group and broader biotechnology industry benchmark can change from time to time based on the criteria stated above as part of the Committees review of our compensation practices. Collectively, the peer group and survey data form the market benchmarks for determining compensation programs, practices and levels. In addition to reviewing executive officers compensation against the benchmarks, the Committee also considers recommendations from the Chief Executive Officer regarding total compensation for those executives reporting directly to him. Management provides the Committee with historical and prospective breakdowns of the total compensation components for each executive officer to inform their decisions.
The Committee believes that the Companys compensation practices in 2006 were successful in achieving the goals of motivating and retaining (and, where necessary, recruiting) a strong executive management team. As noted later in this discussion, the Board has determined that the Company performed successfully against its 2006 corporate objectives. In addition, with one exception, the Companys executive management team experienced no turnover in 2006. In that one instance, the Companys former Chief Financial Officer, Norman Halleen, left the Company to become Chief Executive Officer of a start-up company in the surgical device field, and the Company was successful in attracting as his replacement John Hodgman, former Chief Executive Officer and Chief Financial Officer of Cygnus, Inc.
In addition to the external benchmarks, the Committee considers internal pay equity among and between members of the Companys executive management team in determining compensation-related recommendations to make to the Board. In doing so, the Committee considers, with regard to each member of the executive management team, the individuals span of control, potential impact on the Companys key programs, number of direct and indirect reports, budgetary responsibility, relative skills within the individuals area of expertise and industry experience.
In examining long-term incentives for the executive officers and the Chief Executive Officers the Compensation Committee examines the equity holdings of each named executive, including an analysis of the vested/ unvested equity value and holdings for an executive. This information is used in determining equity compensation actions that may be made to ensure the program reinforces a commitment to long-term decision making, the retention objectives for the named officers and the future contribution that is expected by the incumbents.
The Committee has reviewed total summary compensation information for each of the Named Executive Officers in 2006 consisting of all components of the Named Executive Officers 2006 compensation, including current pay (salary and bonus), outstanding equity awards, benefits, perquisites and potential change-in-control severance payments. The Committee will incorporate in 2007, the use of specific information in the annual review of executive compensation when determining any executive compensation actions that may be considered.
The Committee recognizes the importance of establishing sound principles for the development and administration of compensation and benefits programs, and has taken actions to ensure that it effectively carries out its responsibilities as well as maintain strong links between executive pay and the Companys performance.
As further described below, examples of actions that the Committee has taken include:
In addition to using the Companys Human Resources, Finance and Legal departments, the Committee engaged Radford Surveys & Consulting, a division of Aon Corporation, as its independent outside compensation consultant (Radford) The consultant reports directly to the Committee, to advise the Committee on all material matters relating to executive, equity and employee compensation. In 2006, Radford surveyed the peer group companies and benchmarked executive compensation practices among those companies, and across the defined benchmarks to determine the Companys competitive position with regard to executive compensation including examining cash compensation, incentive plan design, long-term incentive program, equity dilution and contractual obligations, under the Companys programs. Radford also provided services in examining the Companys overall compensation program to ensure alignment with the Companys strategy, compensation philosophy and fairness in the administration of the plan. Other ad hoc requests may be made to Radford, as advisor to the Committee in addressing compensation matters concerning the Board, and executive offers.
Neither Radford nor Aon Corporation advises the Company or management of the Company, and neither receives any other compensation from the Company, other than annual professional fees of less than $100,000 in providing services for the executive salary review and other consulting services as described above. The Committees advisor attended the majority of the meetings of the Committee during 2006.
The total compensation program for the executive officers of the Company consists of the following:
As set out in greater detail below, each element of the Companys total compensation program is intended to serve the Companys overall objectives, as described above. The Committee does not have a set formula for determining the mix of each pay element, instead ensures that compensation across all elements is fair and consistent with the Companys philosophy in total.
The base salaries of the Named Executive Officers are reviewed by the Committee and the Board on an annual basis, as well as at the time of a promotion or other material change in responsibilities. Any increases in base salary are based on an evaluation of the particular individuals performance and level of pay compared to the benchmarks, as well as the individuals criticality to the Companys future plans.
Merit increases normally take effect in the first fiscal quarter of the year and are typically retroactive to January 1st of such year. The base salaries for each of the Named Executive Officers were increased by approximately 3.6% in 2006.
In recommending the base salaries for each of the Named Executive Officers for 2006 to the Board, the Committee took into account (i) Radfords compensation analysis of compensation statistics at comparable benchmarks, including both quantitative and qualitative information, (ii) the individuals particular experience in the biotechnology or pharmaceutical industries, (iii) the scope of the executives responsibilities and the criticality of the executive to achieving the Companys business goals, and (iv) the performance of that executive against predetermined corporate goals and objectives.
The executive officers receive annual bonuses in connection with our Company-wide performance bonus program. For each executive officer, other than the Chief Executive Officer (whose bonus is discussed below), the annual bonus target is set at 35% of the executives base salary. For those executives, 65% of the target bonus is linked to successful achievement of specified corporate goals that the Board determines annually for the current fiscal year, although the Board retains discretion to apply qualitative judgments in assessing performance. The remaining 35% of the target bonus is linked to performance versus the executives individual objectives as determined by the Chief Executive Officer. Under the plan approved by the Board, the named officers can earn an award ranging from 0% to 150% of the target bonus opportunity based on Company and individual performance. Under the terms of Mr. Welchs offer letter agreement, his annual target bonus is 75% of his base salary. Mr. Welch may earn up to 200% of his target bonus, meaning that he may earn up to 150% of his base salary tied to performance.
On March 6, 2007, the Committee met to consider the bonus compensation of the Companys Named Executive Officers for fiscal year 2006. The Committee considered the performance of the Named Executive Officers and the Company generally in relation to the Companys 2006 corporate performance goals and made its recommendations to the Board on March 7, 2007.
The Board determined that the Company successfully achieved its 2006 corporate performance goals. Among the Companys critical achievements in 2006 were (i) the completion of enrollment in the Companys INSPIRE trial (a Phase III, double-blind, placebo-controlled study evaluating Actimmune® (gamma-interferon) in idiopathic pulmonary fibrosis), (ii) the initiation of the Companys CAPACITY trials (two parallel Phase III double-blind, placebo-controlled trials evaluating pirfenidone in idiopathic pulmonary fibrosis), (iii) the filing of a European Clinical Trial Authorization on the Companys lead candidate in hepatitis C virus (HCV), ITMN-191, and the initiation of a Phase I trial for that compound, (iv) the completion of a collaboration agreement with Roche Pharmaceuticals for the further development of ITMN-191 and other protease inhibitors, and (v) advances in the Companys pre-clinical research programs.
As a result of the Companys 2006 performance, the Committee recommended to the Board that the corporate component of 2006 annual incentive compensation (which accounts for 70% of the target annual incentive compensation of members of executive management other than the Chief Executive Officer, and for 80% of the target annual incentive compensation of the Chief Executive Officer) be established at 100%.
Based on the Committees recommendations and determinations, the Board approved cash bonus for executive officers considering each individuals performance as assessed by the Chief Executive Officer against the pre-defined objectives. Awards under the plan are included in the Summary Compensation Table below.
In recommending executive bonuses, the Committee compared the Companys cash compensation levels to data from the Radford 2006 Biotechnology Compensation Report relating to public biotechnology companies with 150 to
500 employees, as well as the approved peer group (the Radford Benchmarks). In addition, the Committee used the services of Radford to conduct its periodic review of the effectiveness and competitiveness of the Companys executive compensation. For 2006, the Committee generally targeted total cash compensation at the 60th percentile, based on company and individual performance, and with reference to the market benchmarks defined above, but makes adjustments from this target as appropriate.
Mr. Welchs bonus is based 80% on the achievement of corporate objectives and 20% on the achievement of individual objectives established by the Board. The assessment of achievement of Mr. Welchs corporate objectives is linked to successful achievement of the Companys performance goals, although the Board retains discretion to apply a different performance rating for this aspect of his bonus compared to that of the other executive officers. Based on this assessment, including the Boards determination that the Company successfully achieved its 2006 corporate performance goals, and its qualitative assessment of Mr. Welchs performance on his individual objectives and other observations, the Committee recommended and the Board awarded Mr. Welch a cash bonus for 2006 of $481,338 which is 110% of his target bonus opportunity.
The Committee uses the grant of stock options and shares of restricted stock under the Companys equity incentive plans to align the interests of stockholders and management. Options and shares of restricted stock granted to Named Executive Officers are intended to provide a continuing financial incentive to maximize long-term value to stockholders and to help keep the executives total compensation opportunity competitive. In addition, because stock options generally become exercisable over a period of several years and grants of shares of restricted stock are subject to a declining risk of forfeiture by the Company over a period of several years, such grants encourage executives to remain in the long-term employ of the Company.
The Company typically grants options and/or shares of restricted stock to executive officers (i) when the executive officer first joins the Company, (ii) in connection with a significant change in responsibilities, (iii) as needed for ongoing retention and, (iv) occasionally, to achieve equity within a the Radford benchmarks. In determining the size of an option grant or grant of shares of restricted stock to a Named Executive Officer, the Board takes into account the following criteria: the officers position and level of responsibility within the Company, the existing stock and unvested option holdings previously granted by the Company to the officer in connection with his or her employment with the Company, the potential reward to the officer if the underlying price of the Companys stock appreciates in the public market, and the practices of the Companys competitors as set out in independent compensation surveys provided to the Committee by Radford.
Historically, the Companys stock options have been priced as follows: (i) for newly-hired executives, the price of the option was determined to be the NASDAQ closing price of the Companys common stock as of the close of business on the day before the executive commenced employment with the Company; (ii) for ongoing grants to current executives (whether resulting from a change in responsibilities, for retention or internal equity, or as part of an annual grant program), the price of the option was determined to be the NASDAQ closing price of the Companys common stock as of the close of business on the day prior to final Board or Committee approval of the grant.
The Company has amended its stock option grant policy to provide that options will price on a regularly pre-scheduled basis once a month as follows: (i) for newly-hired executives, the price of the option is determined to be the NASDAQ closing price of the Companys common stock as of the close of business on the day that the executive commences employment with the Company; and (ii) for ongoing grants to current executives (whether resulting from a change in responsibilities, for retention or internal equity, or as part of an annual grant program), the price of the option is determined to be the NASDAQ closing price of the Companys common stock as of the close of business on a pre-fixed day in the future when final Board approval of the grant is achieved. Also, we do not make stock option grants when our employees are otherwise prohibited from trading in our securities in accordance with the Companys Code of Conduct and insider trading policies, also known as a blackout period. Consistent with this policy, we do not make stock option grants while in possession of material non-public information, with the exception of new hire and promotional grants for non-executives, which are priced systematically on a reoccurring day during the following month.
On January 16, 2006, the Company made grants of restricted stock to all then-current full-time regular employees of the Company, including all members of executive management, other than the Chief Executive Officer. Those grants of restricted shares were subject to performance-based vesting over a two-year period, i.e., 25% of the total grant vests on the occurrence of each of four milestones relating to the advancement of the Companys research and development programs. The Committee determined that performance based restricted stock was the best vehicle to reward executives and all employees for the critical strategic initiatives that would create value for our shareholders.
The Company offers standard health and welfare benefits (e.g., medical, dental and vision insurance, short and long-term disability insurance, and life insurance) to all of its employees, including its Named Executive Officers, on the same terms. The Company offers flexible benefit plans (i.e. flexible spending and dependent care reimbursement) to all of its employees, including Named Executive Officers, on the same terms. The Company offers certain financial planning and retirement benefits (e.g., Section 529 College Savings Plan and a 401(k) Retirement Plan, to all employees, including Named Executive Officers, on the same terms. The Company does not offer any perquisites to employees at any level of the Company.
The Committee administers the Companys 1999 Equity Incentive Plan, the Amended and Restated 2000 Equity Incentive Plan, the Amended and Restated 2000 Non-Employee Directors Stock Option Plan and the 2000 Employee Stock Purchase Plan.
The Board and the Committee have authorized a three-person committee of Company employees consisting of the Companys Chief Executive Officer, Chief Financial Officer and General Counsel to grant stock options for less than 25,000 (for 2006 and 20,000 in 2007) shares of common stock to non-executive committee level employees and consultants when such employees and consultants initially join the Company, provided that all such grants fall within specific ranges (determined by the salary grade of the employee) previously approved by the Committee and the Board. The Company establishes new hire and performance grant guidelines that are approved by the Compensation Committee, as part of the annual review of compensation programs performed by Radford.
In order to provide employees at all levels with greater incentive to contribute to our success, the Company makes available to all employees, including its executive officers, with the opportunity to purchase discounted common stock of the Company under our 2000 Employee Stock Purchase Plan, qualified under Section 423 of the IRC. A copy of the 2000 Employee Stock Purchase Plan, as amended, has been filed with the SEC and can be found on the SECs website at http://www.sec.gov/edgar.shtml.
The Company has entered into a written agreement with Mr. Welch which, among other things, provides that in the event of a Change of Control (as defined in the agreement) of the Company that results in (i) Mr. Welchs termination without cause (as defined in the agreement) or (ii) Mr. Welchs resignation for good reason (as defined in the agreement), Mr. Welch will, subject to certain conditions, be entitled to receive certain benefits, including two years base salary, two years of target bonus, two years benefits continuation and immediate vesting of all outstanding equity grants. In addition, upon the occurrence of a Change of Control on or after September 25, 2004 and in the absence of Mr. Welchs termination or resignation, all of his options will vest. To the extent that Mr. Welch incurs an excise tax as a result of taxes imposed on him under Section 4999 of the IRC, the Company will gross-up such payments to make Mr. Welch whole on an after-tax basis.
The Company has entered into written agreements with each executive officer in addition to Mr. Welch to provide that in the event of a change of control (as defined in the agreements) of the Company that results in (i) such executive officers termination without cause or (ii) his or her resignation for good reason (as defined in the agreements), such executive officer will, subject to certain conditions, be entitled receive certain benefits, including
two years base salary and two years benefits continuation, immediate vesting of all outstanding equity grants, and certain transition management services.
The Committee believes these agreements are necessary to retain the Companys executive officers. Because mergers and acquisitions are common in the biotechnology industry, the Committee believes that these agreements, which provide executive officers with some measure of financial security in the event of a change of control of the Company, are essential to encouraging the executives to remain with the Company to achieve its business goals. Absent such protections, the Committee believes that executives would be more inclined to pursue opportunities with other organizations that do provide this protection or seek opportunities in industries they perceive would be less vulnerable to such changes of control. The Committee intends to review the need for these agreements periodically (at least annually) to determine whether they continue to be required.
The Company has not adopted a policy that its executive officers hold any particular amount of Company stock in their personal portfolio, nor has the Company adopted any sort of minimum holding period or hold-until-retirement stock retention requirements. This policy is reviewed as part of the annual review of executive compensation.
Impact of Regulatory Requirements on Compensation
The Committee has not adopted a policy with respect to the application of Section 162(m) of the IRC, which generally imposes an annual corporate deduction limitation of $1.0 million on the compensation of certain executive officers. However, pursuant to Section 162(m), compensation from options granted under the Amended and Restated 2000 Equity Incentive Plan with exercise prices of no less than 100% of fair market value on the date of grant and in a grant amount not exceeding one million shares of common stock for the executive officer during any calendar year may be excluded from the Section 162(m) limitation.
Section 162(m) generally disallows a tax deduction to public companies for compensation over $1.0 million paid to the corporations chief executive officer and the four other most highly compensated executive officers. Qualified performance-based compensation, including stock options granted under the Amended and Restated 2000 Equity Incentive Plan in accordance with the restrictions described above, will not be subject to the deduction limitation if certain requirements are met. The Company generally intends to grant stock options to its executive officers in a manner that satisfies the requirements for qualified performance-based compensation to avoid any disallowance of deductions under Section 162(m).
The Compensation Committee (the Committee) currently consists of Mr. Jonathan Leff, Dr. Lars Ekman and Mr. William Ringo, Jr., each of whom are independent directors, as independence is defined in NASD Marketplace Rule 4200(a)(15) of the Nasdaq listing standards. The following is a report of the Committee describing the compensation policies applicable to the Companys executive officers during the fiscal year ended December 31, 2006.
2 The material in this report is not soliciting material, is not deemed filed with the SEC and is not to be incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in such filing, except to the extent that the Company specifically incorporates it by reference in such filing.
The Compensation Committee has reviewed and discussed the Companys Compensation Discussion and Analysis with management. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Companys definitive proxy statement on Schedule 14A for its 2007 Annual Meeting, which is incorporated by reference in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006, each as filed with the Securities and Exchange Commission.
Jonathan S. Leff Chairman
Lars G. Ekman
William R. Ringo, Jr.
None of the Companys executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Companys Board or Compensation Committee.
Directors, other than the Chairman, who are neither employees of nor consultants to the Company (each, a non-employee director) previously received an annual retention fee of $30,000, paid on a quarterly basis. In addition, each board member, other than the Chairman, previously received a fee of $1,000 per board meeting and $1,000 per committee meeting attended and the chairman of each committee previously received an additional $500 per committee meeting attended. The Chairman previously received an annual retention fee of $60,000 and $2,000 per committee meeting. In March of 2007, the Board changed the compensation of directors such that the annual cash retainer paid to each director be increased from $30,000 to $50,000, that the chairman of the Board be paid an additional annual retainer of $50,000, that the chairman of the Audit Committee be paid an additional $15,000 per year, that the chairmen of each of the Compensation, Corporate Governance and Nominating, Science, and Compliance Committees each be paid an additional $10,000 per year, and that each board member be paid an additional $5,000 per year for each committee he or she serves on, and that the Company eliminate all other meeting fees. Such changes are scheduled to take effect in the third quarter of 2007.
During 2006, the Company paid an aggregate of $378,597 for such retention and attendance fees. In accordance with Company policy, directors are also reimbursed for reasonable expenses in connection with attendance at Board and committee meetings. During 2006, the Company paid an aggregate of $53,743.15 for such expenses.
Option Grants. Options for common stock are automatically granted under the Amended and Restated 2000 Non-Employee Directors Stock Option Plan (the Directors Plan) as follows:
These option grants are non-discretionary and are automatically granted under the Directors Plan without further action by the Company, the Board or its stockholders. In March of 2007, the Corporate Governance and Nominating Committee approved a proposed amendment to the Directors Plan, which will reduce the directors annual stock option grant from 20,000 shares to 12,000 shares each.
Vesting. For grants to a non-employee director in his or her capacity as a director, as long as the non-employee director continues to serve with the Company or any of its affiliates (whether in the capacity of a director, consultant or employee): (i) each Initial Grant will vest in monthly installments commencing one month after the date of its grant, at the rate of 1/36th of the total number of shares subject to the option, and (ii) each annual grant for 20,000 shares will vest in monthly installments commencing one month after the date of its grant, at the rate of 1/12th of the total number of shares subject to the option.
For grants to the independent Chairman of the Board in his or her capacity as Chairman, as long as such person continues to serve with the Company as Chairman, each option granted for 10,000 shares will vest in monthly installments commencing one month after the date of its grant, at the rate of 1/12th of the total number of shares subject to the option.
If an annual option grant to a non-employee director or the Chairman of the Board is pro-rated because that person was appointed as a non-employee director or the Chairman of the Board, as the case may be, after the annual grant date, then the vesting schedule for that option grant will be adjusted so that the pro-rated number of shares will vest in equal monthly installments between the grant date of the option and the Companys next annual meeting of stockholders.
Exercise Price. Options have an exercise price equal to 100% of the fair market value of the Companys common stock on the grant date.
Term. The maximum option term is ten years. However, options generally will terminate three months after the optionholders service with the Company terminates, or, in the case of an option granted to the Chairman of the Board in his or her capacity as Chairman, three months after the optionholders service as Chairman terminates. If termination is due to the optionholders disability, however, the post-termination exercise period is extended to 12 months. If termination is due to the optionholders death or if the optionholder dies within three months after his or her service terminates, the post-termination exercise period is extended to 18 months following death.
Transfer. The optionholder may transfer the option by gift only to immediate family or to certain trusts used for estate-planning purposes. The optionholder also may designate a beneficiary to exercise the option following the optionholders death. Otherwise, the option exercise rights will pass by the optionholders will or by the laws of descent and distribution.
Other Provisions. The option agreement may contain such other terms, provisions and conditions not inconsistent with the Directors Plan as determined by the Board.
Adjustment Provisions. Transactions not involving the receipt of consideration, including a merger, consolidation, reorganization, stock dividend and stock split, may change the class and number of shares subject to the Directors Plan and to outstanding options. In that event, the Board will appropriately adjust the Directors Plan as to the class and the maximum number of shares subject to the Directors Plan, the automatic annual increase to the share reserve and the automatic option grants. The Board will also adjust outstanding options as to the class, number of shares and price per share subject to the options.
In the event of a change in control, the surviving entity may either assume or replace outstanding options under the Directors Plan. If this does not occur, then options granted under the Directors Plan to persons providing services to the Company (whether as a director, employee or consultant) will become fully vested and exercisable
and any unexercised options will terminate immediately prior to the change of control event. Even if assumption or replacement does occur, the options held by non-employee directors will become fully vested and exercisable as of the date initially preceding the change of control event. A change in control includes the following:
During the last fiscal year, the Company granted options covering an aggregate of 193,340 shares under the Directors Plan in the individual amounts of: 45,003 to Dr. Ekman, 40,002 to Dr. Kabakoff, 30,000 to Mr. Ringo, 28,335 to each of Mr. Leff and Dr. Healy, 26,668 to Mr. Hodgson and 20,000 to each of Messrs. Halter and Smith. Options granted during the last fiscal year had exercise prices equal to 100% of the fair market value on the date of grant, based on the closing sales price reported in the Nasdaq National Market for the date of grant. As of March 31, 2007, no options had been exercised by non-employee directors in 2006 or to date in 2007.
The following table sets forth summary information concerning the compensation awarded to, paid to or earned by each of our non-employee members of the Board for the year ended December 31, 2006.
Compensation of Named Executive Officers
Summary Compensation Table
The following table sets forth summary information concerning the compensation awarded to, paid to or earned by each of our Named Executive Officers for all services rendered for the fiscal years ended December 31, 2006, 2005 and 2004.
The Company has granted stock options to executive officers, employees and consultants under the Companys 1999 Equity Incentive Plan (the 1999 Plan) and the Amended and Restated 2000 Equity Incentive Plan (the Incentive Plan). As of March 31, 2007, options to purchase 51,550 shares of common stock were outstanding under the 1999 Plan, and no shares of common stock remained available for future grants as the 1999 Plan was superseded by the Incentive Plan. As of March 31, 2007, 544,123 shares of restricted common stock and options to purchase 4,195,918 shares of common stock were outstanding under the Incentive Plan and 1,570,909 shares remained available for future grants.
Grants of Plan-Based Award
The following table sets forth summary information regarding all grants of plan-based awards made to our Named Executive Officers for the year ended December 31, 2006.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth summary information regarding the outstanding equity awards made to our Named Executive Officers at December 31, 2006.
The following table sets forth summary information regarding the option exercises and vesting of stock awards made to each of our Named Executive Officers for the year ended December 31, 2006.
Welch Offer Letter Agreement. The Company entered into an offer letter agreement with Mr. Welch in September 2003 (the Welch Letter Agreement). Under the terms of the Welch Letter Agreement, Mr. Welch is entitled to an annual base salary, which is reviewed annually by the Compensation Committee. For 2005, his base salary was $572,000. In addition, Mr. Welch is eligible for an annual bonus based on the attainment of corporate goals established between the Board and Mr. Welch. Under the Welch Letter Agreement, Mr. Welchs annual target bonus is 75% of his base salary, with a potential of between 0% and 150% of his base salary as the Board may approve (the Target Bonus). Under the terms of the Welch Letter Agreement, Mr. Welch was also granted an option to purchase 625,000 shares of the Companys common stock pursuant to the Incentive Plan (the Options). The Options have a ten-year term and vest in equal monthly installments over four years. The first 12 installments vested on September 25, 2004 and all of the Options shall be fully vested on September 24, 2007. Mr. Welch was also entitled to certain relocation expenses and four-year cost of living housing differential payment (COLA). The COLA is paid to Mr. Welch in equal monthly installments pursuant to which Mr. Welch has received $117,577 in his first two years of employment and will receive:
In addition, at the end of each calendar year, the Company will gross-up for income tax purposes the portion of the COLA payment that was used to pay for Mr. Welchs non-deductible expenses.
Under the terms of the Welch Letter Agreement, if Mr. Welch is terminated for Cause (as defined in the Welch Letter Agreement) due to indictment for criminal activities, and he is later adjudicated innocent of the charges on which he was indicted or the indictment is subsequently quashed, Mr. Welch will be entitled at the time of such adjudication or quashing to: (i) two times the sum of his base salary and Target Bonus at the time of such termination for Cause, and (ii) an amount equal to the product of (x) the number of Options that would have become vested if his termination had been considered a termination without Cause and (y) the difference between the exercise price of such Options and the highest closing price of the Companys common stock during the year following his date of termination, in each case with interest from the date of termination at the prevailing prime rate.
In the event Mr. Welch resigns from the Company without Good Reason (as defined in the Welch Letter Agreement), Mr. Welch will be entitled to any accrued but unpaid salary or Target Bonus (Accrued Obligations). If Mr. Welch resigns from the Company with Good Reason or if he is terminated without Cause, he will be entitled to the following payments and benefits:
Upon the occurrence of a Change in Control on or after September 25, 2004 and in the absence of Mr. Welchs termination or resignation, all of his Options will vest.
To the extent that Mr. Welch incurs an excise tax as a result of taxes imposed on him under Section 4999 of the IRC, the Company will gross-up such payments to make Mr. Welch whole on an after-tax basis.
Offer Letter Agreements. The Company has entered into or amended the offer letter agreements with each of Drs. Armstrong, Blatt and Porter, to provide that if their employment terminates other than for cause (as defined in
the offer letter agreements), they will be entitled to the following continuation of salary and benefits, and vesting of Company stock following their termination date:
Change of Control Agreements. The Company has entered into or amended the offer letter agreements with each of Drs. Armstrong, Blatt and Porter, to provide that in the event of a change on control (as defined in the offer letter agreements) of the Company that results in (i) such executive officers termination without cause or (ii) his or her resignation for good reason (as defined in the offer letter or offer letter amendment), such executive officer will, subject to certain conditions, be entitled receive the following benefits:
Executive Loan and Bonus Plan for Dr. Armstrong. In April 2002, the Company entered into an employment offer letter with Marianne Armstrong, Ph.D., the Companys Chief Medical Affairs and Regulatory Officer. Pursuant to this letter, Dr. Armstrong received a $345,000 loan from the Company. This loan was entered into on May 1, 2002 for the purpose of providing housing assistance to Dr. Armstrong. This loan is evidenced by a full recourse promissory note secured by a second position Deed of Trust on Dr. Armstrongs main residence and carries a term of five years. The annual interest rate on such loan is 4.65%. As of December 31, 2006, the aggregate outstanding principal and accrued interest under the loan was $72,184.86. Since the beginning of the fiscal year ended December 31, 2006, the largest aggregate indebtedness of Dr. Armstrong under this loan was $72,984.47 including principal and accrued interest. Pursuant to a bonus plan agreement, Dr. Armstrong has received and will continue to receive for each of her first five full calendar years of employment beginning as of January 1, 2003 minimum, annual post-tax bonuses equal to $81,120, $83,040, $79,680, $76,560 and $74,400, respectively.
Executive Loan and Bonus Plan for Dr. Blatt. In April 2002, the Company entered into an employment offer letter with Lawrence M. Blatt, Ph.D., the Companys Chief Scientific Officer. Pursuant to this letter, Dr. Blatt received a $250,000 loan from the Company. This loan was entered into on May 22, 2002 for the purpose of providing housing assistance to Dr. Blatt. This loan is evidenced by a full recourse unsecured promissory note and carries a term of five years. The annual interest rate on such loan is 4.65%. As of December 31, 2006, the aggregate outstanding principal and accrued interest under the loan was $56,362.91. Since the beginning of the fiscal year ended December 31, 2006, the largest aggregate indebtedness of Dr. Blatt under this loan was $57,242.47 including principal and accrued interest. Pursuant to a bonus plan agreement entered into in May 2002, Dr. Blatt has received and will continue to receive for each of his first five full calendar years of employment beginning as of January 1, 2003, a minimum annual bonus equal to $57,464, plus an amount equal to one-half of the income taxes resulting from such bonus.
The following table quantifies the amount that would be payable to the NEOs and members of the Board of Directors assuming the termination of employment without cause or with good reason occurred within 12/24 months of a change in control. The amounts shown assume that the termination was effective as of December 31, 2006, and includes amounts earned through that time and are estimates of the amounts which would be paid out to the executives upon their termination. The actual amounts to be paid out can only be determined at the time of the executives separation from the Company after the occurrence of a change in control.
Under the Companys Statement of Policy with Respect to Related Party Transactions, information about transactions involving related persons is assessed by the Audit Committee of the Board of Directors. Related persons include the Companys directors and executive officers, as well as immediate family members of directors and executive officers. If the Audit Committee determine that a related person has a material interest in any Company transaction, then the Companys Audit Committee would review, approve or ratify it, and the transaction would be required to be disclosed in accordance with the applicable SEC rules.
From January 1, 2006 to the present, there have been no (and there are no currently proposed) transactions in which the amount involved exceeded $120,000 to which the Company was (or is to be) a party and in which any executive officer, director, 5% beneficial owner of the Companys common stock or member of the immediate family of any of the foregoing persons had (or will have) a direct or indirect material interest, except as set forth below and under Compensation of Executive Officers Employment, Severance and Change of Control Agreements above.
On January 20, 2006, the Company transferred to Dr. Lawrence Blatt, the Companys Chief Scientific Officer, its rights in the following intellectual property:
Prior to transferring its rights in this intellectual property (the Glyco Type I Interferon Intellectual Property) to Dr. Blatt, the Company had determined that it would not continue developing the Glyco Type I Interferon Intellectual Property. The transfer of the Glyco Type I Interferon Intellectual Property to Dr. Blatt was in consideration for the Company receiving from Dr. Blatt a waiver and release of claims to rights to inventions made by Dr. Blatt prior to becoming an employee of the Company related to U.S. Patent Application No. 10/545,867, filed February 26, 2004 (the Pump Patent). The Pump Patent relates to a method of administering interferon alfacon-1 using a pump device and was transferred to Valeant Pharmaceuticals in connection with the Companys divesture of its Infergen product. The Company cannot estimate what value, if any, that the Glyco Type I Interferon Intellectual Property has as it is still in early pre-clinical development. The Company estimates that it had invested approximately $150,000 in the Glyco Type I Interferon Intellectual Property, including out of pocket expenses and an allocation of FTE and overhead costs. The Company also waived any claims it may have to any intellectual property and/or works for hire Dr. Blatt creates out of the Glyco Type I Interferon Intellectual Property.
In compliance with the Companys Code of Business Conduct and Ethics, Dr. Blatt requested that he be allowed, on his own time and without use of Company resources, to found and mange a new independent business entity that would be devoted to advancing technology based on the Glyco Type I Interferon Intellectual Property. The Board of Directors approved Dr. Blatts request.
Warburg Pincus Agreement. On October 29, 2004 we entered into an Amended and Restated Standstill Agreement with Warburg Pincus Equity Partners, L.P. and certain of its affiliates (Warburg Pincus) that permits Warburg Pincus to acquire up to 25% of our outstanding common stock in the open market. Under this agreement, Warburg Pincus may acquire up to 25% of our outstanding common stock and have granted Warburg Pincus certain registration rights with respect to its holdings. In exchange for allowing Warburg Pincus to increase its ownership stake, Warburg Pincus has granted the independent members of our Board the right to vote the shares of InterMune common stock owned by Warburg Pincus in excess of 19.9%. In addition, Warburg Pincus has agreed to certain limitations on the manner in which it may dispose of its ownership interest in InterMune. In connection with this transaction, on October 29, 2004 we also amended the Rights Agreement between the Company and Mellon Investor Services LLC dated as of July 17, 2001 to allow Warburg Pincus to acquire up to 25% of our outstanding common stock in open market purchases. We also entered into a new Registration Rights Agreement with Warburg Pincus dated as of October 29, 2004. Jonathan S. Leff, a member of our Board, is a managing director of Warburg Pincus LLC and a partner of Warburg Pincus & Co., which are affiliates of Warburg Pincus Equity Partners, L.P.
Indemnification Agreements. The Company has entered into indemnification agreements with each of its vice presidents, executive officers and directors which provide, among other things, that the Company will indemnify such vice president, executive officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings to which he or she is or may be made a party by reason of his or her position as a director, officer or other agent of the Company, and otherwise to the fullest extent permitted under Delaware law and the Companys Bylaws.
The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy statements and annual reports with respect to two or more stockholders sharing the same address by delivering a single proxy statement addressed to those stockholders. This process, which is commonly referred to as householding, potentially means extra convenience for stockholders and cost savings for companies.
This year, a number of brokers with account holders who are InterMune stockholders will be householding our proxy materials. A single proxy statement may be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that it will be householding communications to your address, householding will continue until you are notified otherwise or until you notify your broker or the Company that you no longer wish to participate in householding.
If, at any time, you no longer wish to participate in householding and would prefer to receive a separate proxy statement and annual report in the future you may (1) notify your broker, (2) direct your written request to: Investor Relations, InterMune, Inc., 3280 Bayshore Boulevard, Brisbane, California 94005 or (3) contact our Senior Director, Investor Relations, Jim Goff, at (415) 466-2228. Stockholders who currently receive multiple copies of the proxy statement at their address and would like to request householding of their communications should contact their broker. In addition, the Company will promptly deliver, upon written or oral request to the address or telephone number above, a separate copy of the annual report and proxy statement to a stockholder at a shared address to which a single copy of the documents was delivered.
The Board knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are properly brought before the meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
April 19, 2006
A copy of the Companys Annual Report to the Sec on Form 10-K for the fiscal year ended December 31, 2006 is available without charge upon written request to: Investor Relations, InterMune, Inc., 3280 Bayshore Boulevard, Brisbane, CA 94005. A copy of the report can also be viewed by visiting the Companys website, http://www.intermune.com.
CHARTER OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
(Amended March 5, 2003, March 11, 2004 and September 7, 2004)
The purpose of the Compensation Committee (the Committee) of the Board of Directors (the Board) of InterMune, Inc., a Delaware corporation (the Company), shall be to approve the type and level of compensation for officers and employees of the Company, to administer the stock option plans adopted by the Company (the Stock Option Plans) and to perform such other functions as may be deemed necessary or convenient in the efficient and lawful discharge of the foregoing.
The Committee shall be comprised of a minimum of two (2) members of the Board, all of whom shall be independent directors as such term is defined in Rule 4200(a) of the Marketplace Rules of the Nasdaq Stock Market, as may be amended periodically, and by any applicable SEC regulations. The members of the Committee and its Chairman will be appointed by and serve at the discretion of the Board.
The Secretary of the Company shall be the Secretary of the Committee. The Secretary shall keep minutes and records of all meetings of the Committee. In the event that either the Chairman or the Secretary is absent from any meeting, the members present shall designate any director present to act as Chairman and shall designate any director, officer or employee of the Company to act as Secretary.
The operation of the Committee shall be subject to the Bylaws of the Company, as in effect from time to time, and Section 141 of the Delaware General Corporation Law. The Committee shall have the full power and authority to carry out the following responsibilities:
1. To administer and grant stock under the various incentive compensation and benefit plans, including the Stock Option Plans.
2. To approve the compensation philosophy, programs, and policies for plans impacting the officers and employees of the Company including, but not limited to annual salary, bonus, stock options, and other direct or indirect benefits as follows:
a. reviewing and recommending to the Board for approval, corporate performance goals and objectives relevant to the compensation of the Companys Executive Officers (as that term is defined in Section 16 of the Exchange Act and Rule 16a-1 thereunder) and other senior management, as appropriate;
b. determining and approving the compensation and other key terms of the employment of the Companys vice presidents, other than routine hiring option grants and normal compensation within the Companys pre-approved guidelines;
c. determining and recommending to the full Board for approval the compensation and other key terms of the employment of the Companys Executive Officers taking into consideration the Executive Officers success in achieving his or her individual performance goals and objectives and the corporate performance goals and objectives deemed relevant; and
d. determining and recommending to the Board for approval, the compensation and other key terms of employment of the Companys Chief Executive Officer in light of the Companys corporate performance goals and objectives. In determining the Chief Executive Officers compensation, the Committee should consider the Companys performance and such other criteria as the Committee deems advisable.
3. To review on a periodic basis the operation of the Companys executive compensation programs to determine whether they are properly coordinated and to establish and periodically review policies for the administration of executive compensation programs.
4. To perform such other functions and have such other powers as may be necessary in the efficient discharge of the foregoing, including the engagement of independent employment and/or compensation experts.
5. To report to the Board from time to time, or whenever it shall be called upon to do so.
The Committee will hold at least two (2) regular meetings per year and additional meetings as the Chairman or Committee deems appropriate. The Committee may invite such officers, directors and employees of the Company as it may see fit from time-to-time to attend a meeting of the Committee and participate in the discussion of matters relating to the Committee.
Minutes of each meeting of the Committee shall be kept and distributed to each member of the Committee, members of the Board who are not members of the Committee and the Secretary of the Company. The Committee shall report to the Board from time to time, or whenever so requested by the Board.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
The undersigned hereby appoints Daniel G. Welch and Robin J. Steele, and each of them, with power to act without the other and with power of substitution, as proxies and attorneys-in-fact and hereby authorizes them to represent and vote, as provided on the other side, all the shares of InterMune, Inc. Common Stock which the undersigned is entitled to vote, and, in their discretion, to vote upon such other business as may properly come before the Annual Meeting of Stockholders of InterMune, Inc. (the Annual Meeting) to be held May 15, 2007, or at any adjournment or postponement thereof, with all powers which the undersigned would possess if present at the Meeting.
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The Board of Directors recommends a vote FOR Proposal 2, and FOR Proposal 3.
NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such.
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Vote by Internet or Telephone or Mail
24 Hours a Day, 7 Days a Week
Proxies submitted over the Internet or by telephone must be received by 11:59 pm Eastern Time
on Wednesday, May 14, 2007.
Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manner
as if you marked, signed and returned your proxy card.
If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.