Isis Pharmaceuticals DEF 14A 2008
April 21, 2008
ISIS PHARMACEUTICALS, INC.
1896 Rutherford Road
Carlsbad, CA 92008
2008 ANNUAL MEETING OF STOCKHOLDERS
AND PROXY STATEMENT
I am pleased to invite you to Isis Pharmaceuticals 2008 Annual Meeting of Stockholders. We will host the meeting at our offices in Carlsbad, California on Thursday, June 5, 2008 at 3:00 p.m. Pacific Time. In addition to covering the formal items on the agenda, we will review the major developments of the past year and our plans for 2008, and answer your questions.
This booklet includes the agenda for this years Annual Meeting and the Proxy Statement. The Proxy Statement explains the matters we will discuss in the meeting and provides additional information about Isis.
Your vote is very important. Whether or not you plan to attend the meeting, please be sure to vote your shares as soon as possible to ensure your representation at the meeting. This year we are distributing our Notice of Annual Meeting and Proxy Materials using the Notice and Access procedures established by the United States Securities and Exchange Commission. As a result, you will receive in the mail a notice regarding the availability of proxy materials. This notice is important because it contains a control number and instructions that will allow you to access our proxy materials and vote electronically by the Internet or request printed proxy materials so you may vote by telephone or mail.
If you are a stockholder of record (that is, if your stock is registered with us in your own name), you may also vote by telephone, or electronically through the Internet, by following the instructions included with your proxy card. If your shares are registered in the name of a broker or other nominee, your nominee may be participating in a program provided through Broadridge Financial Solutions, Inc. that also allows you to vote by phone or through the Internet. If so, the voting form your nominee sends you will provide telephone and Internet instructions.
If you plan to attend the meeting and prefer to vote in person, you may still do so even if you have already returned your proxy. If you are unable to attend, please note that a webcast of the presentation will be available at www.isispharm.com.(1) In this document, the words Isis, we, our and us refer only to Isis Pharmaceuticals, Inc. and not any other person or entity.
PLEASE NOTE, HOWEVER, THAT IF A BROKER, BANK OR OTHER NOMINEE HOLDS YOUR SHARES OF RECORD AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN A PROXY ISSUED IN YOUR NAME FROM THE BROKER, BANK OR OTHER NOMINEE.
We look forward to seeing you at the meeting.
(1) Any information that is included on or linked to our website is not part of this proxy statement or any registration statement or report that incorporates this proxy statement by reference.
ISIS PHARMACEUTICALS, INC.
1896 Rutherford Road
Carlsbad, CA 92008
NOTICE OF 2008 ANNUAL MEETING OF STOCKHOLDERS
At our 2008 Annual Meeting, we will ask you to:
· elect three Directors each to serve for a three-year term;
· approve an Amendment to the 2002 Non-Employee Directors Stock Option Plan to increase the annual non-discretionary stock option grant for our non-employee Directors from 12,500 shares to 15,000 shares and the initial stock option grant from 20,000 shares to 30,000 shares;
· approve an increase in shares reserved for issuance under the 1989 Stock Option Plan from 13,200,000 shares to 16,700,000 shares;
· ratify the Audit Committees selection of Ernst & Young LLP as independent auditors for our 2008 fiscal year; and
· transact any other business that may be properly presented at the Annual Meeting.
The foregoing items of business are more fully described in the enclosed Proxy Statement.
If you were an Isis stockholder of record at the close of business on April 7, 2008 you may vote at the Annual Meeting.
April 21, 2008
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE VOTE BY PHONE OR INTERNET BY FOLLOWING THE INSTRUCTIONS INCLUDED IN THIS PROXY STATEMENT AND YOUR NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS OR PROXY CARD. ALTERNATIVELY, YOU MAY REQUEST A WRITTEN PROXY STATEMENT, AND COMPLETE, DATE, SIGN AND RETURN YOUR PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. IF YOU RECEIVE YOUR PROXY MATERIALS BY MAIL, WE WILL INCLUDE A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES) FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE BROKER, BANK OR OTHER NOMINEE A PROXY ISSUED IN YOUR NAME.
ISIS PHARMACEUTICALS, INC.
1896 Rutherford Road
Carlsbad, CA 92008
INFORMATION ABOUT THE 2008 ANNUAL MEETING AND VOTING
The enclosed proxy materials have been provided to you by the Board of Directors of Isis Pharmaceuticals, Inc., a Delaware corporation, for use at the 2008 Annual Meeting of Stockholders to be held on Thursday, June 5, 2008, at 3:00 p.m. Pacific Time, or at any adjournment or postponement of the meeting, for the purposes stated in this document. The Annual Meeting will be held at the Companys offices at 1896 Rutherford Road, Carlsbad, California. This Proxy Statement summarizes the information you will need to vote in an informed manner.
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be held on June 5, 2008.
This year we are distributing our Notice of Annual Meeting and Proxy Materials using the Notice and Access procedures established by the United States Securities and Exchange Commission. As a result, you will receive in the mail a notice regarding the availability of proxy materials. This notice is important because it contains a control number and instructions that will allow you to access our proxy materials and vote electronically by the Internet or request printed proxy materials so you may vote by telephone or mail.
This Proxy Statement and the accompanying Annual Report are available at www.proxyvote.com where you vote your shares.
Among other things, the Proxy Statement contains information regarding:
· the date, time and location of the meeting;
· a list of the matters being submitted to the stockholders; and
· information concerning voting in person.
Electronic Delivery of Isis Pharmaceuticals, Inc. Stockholder Communications
We are pleased to offer to our stockholders the benefits and convenience of electronic delivery of Annual Meeting materials, including:
· email delivery of the Proxy Statement, Annual Report and related materials;
· stockholder voting on-line;
· reduction of the amount of bulky documents stockholders receive; and
· reduction of our printing and mailing costs associated with more traditional delivery methods.
We encourage you to conserve natural resources and to reduce printing and mailing costs by signing up for electronic delivery of Isis stockholder communications after you place your current vote at www.proxyvote.com.
Voting Rights, Outstanding Shares and Quorum
We will make this Proxy Statement and the accompanying proxy card available on or about April 21, 2008 to all stockholders who are entitled to vote. Only stockholders who owned our common stock at the close of business on April 7, 2008 are entitled to vote at the Annual Meeting. On this record date, we had 93,015,171 shares of our common stock outstanding.
A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present at the meeting if at least a majority of the outstanding shares are represented in person or by proxy. 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.
Each share of our common stock that you own entitles you to one vote. Your notice of availability of proxy materials and proxy card indicates the number of shares of our common stock that you own. The inspector of election will count votes for the meeting, and will separately count For and Against votes, abstentions and broker non-votes. With respect to the election of Directors, stockholders do not affirmatively vote Against Directors. Instead, if you do not want to elect a particular Director, you may simply withhold your For vote. Abstentions will be counted towards the vote total for each proposal, and will have the same effect as Against votes. Broker non-votes have no effect and will not be counted towards the vote total for any proposal.
If your broker holds your shares as your nominee, that is, in street name, you will need to obtain a proxy form from 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 on which a broker may vote shares held in street name in the absence of your voting instructions. Both the proposal to elect Directors and to ratify Ernst & Young LLP as independent auditors are discretionary items. On non-discretionary items for which you do not give your broker instructions, the shares will be treated as broker non-votes.
You may vote in one of the following ways:
· vote through the Internet by following the instructions included with your notice of availability of proxy materials or proxy card;
· if you have received proxy materials electronically or by mail, you may vote by phone by following the instructions included with your proxy card;
· complete, sign, date and return your proxy card in the postage paid envelope provided; or
· attend the 2008 Annual Meeting and vote in person.
If you receive more than one notice of availability of proxy materials or proxy cards, your shares are registered in more than one name or are registered in different amounts. Please complete, sign and date and return each separate proxy card or vote by phone or through the internet by following the instructions included with each notice or proxy card so that your shares are properly voted.
We will announce preliminary voting results at the Annual Meeting and publish final voting results in our quarterly report on Form 10-Q for the second quarter of 2008.
The Board of Directors of Isis is soliciting your proxy to vote at the Annual Meeting. Isis will bear the entire cost of soliciting proxies, including preparing, assembling, making available on the Internet and printing and mailing this Proxy Statement, the proxy card and any additional information furnished to stockholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding in their names shares of our common stock beneficially owned by others, to forward to such beneficial owners. We may reimburse persons representing beneficial owners of common stock for their costs of forwarding solicitation materials to such beneficial owners. Original solicitation of proxies may be supplemented by telephone, electronic mail or personal solicitation by Directors, officers or other employees of Isis. We will not pay our Directors and employees any additional compensation for soliciting proxies.
General Information for all Shares Voted by Phone or Through the Internet
Votes submitted by phone or through the Internet must be received by 11:59 p.m., Eastern Time, on June 4, 2008. Submitting your proxy by phone or through the Internet will not affect your right to vote in person should you decide to attend the Annual Meeting.
We provide Internet proxy voting to allow you to vote your shares on-line, with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your Internet access, such as usage charges from Internet access providers or telephone companies.
For Shares Registered in Your Name
If you are a stockholder of record, you may go to www.proxyvote.com to vote your shares through the Internet. The votes represented by your proxy will be generated on the computer screen and you will be prompted to submit or revise your votes as desired.
To vote your shares by phone, you must first request that we send proxy materials to you by following the instructions included in your notice regarding availability of proxy materials. Once you have received your proxy materials, you may vote using a touch-tone telephone by calling 1-800-690-6903 and following the recorded instructions. Please have your proxy card available at the time you vote.
For Shares Registered in the Name of a Broker or Bank
Most beneficial owners whose stock is held in street name receive instructions for voting their shares from their bank, broker or other agent, rather than from our proxy card.
A number of brokers and banks are participating in a program provided by Broadridge Financial Solutions, Inc. which allows proxies to vote shares by means of the telephone and Internet. If your shares are held in an account with a broker or bank participating in the Broadridge program, you may vote your shares by phone or through the Internet by having the voting form in hand and calling the number or going to the website indicated on the form and following the instructions.
Revocability of Proxies
Once you have submitted your proxy by mail, Internet or telephone, you may revoke it at any time before we exercise it at the Annual Meeting. You may revoke your proxy by any one of the following four ways:
· you may mail another proxy marked with a later date;
· you may revoke it through the Internet;
· you may notify our Secretary in writing that you wish to revoke your proxy before the Annual Meeting takes place; or
· you may vote in person at the Annual Meeting. Attendance at the meeting will not, by itself, revoke a proxy.
If you have a proposal or Director nomination that you would like included in our Proxy Statement and form of proxy for, or to be presented at the 2009 Annual Meeting of Stockholders, you must send the proposal to Isis by no later than December 22, 2008. Stockholders wishing to submit proposals or Director nominations that are not to be included in such Proxy Statement and proxy must do so no earlier than the close of business on February 5, 2009 and no later than the close of business on March 7, 2009. Stockholders are also advised to review our Bylaws, which contain additional requirements with respect to advance notice of stockholder proposals and Director nominations.
ELECTION OF DIRECTORS
Information about our Board of Directors
The Board is divided into three classes, each consisting of one third of our total number of Directors. Presently, the Board has eight members with two classes consisting of three Directors and one class consisting of two Directors. Each class serves a three-year term and we hold elections each year at the Annual Meeting to elect the Directors whose terms are expiring.
In addition, the Board may elect a new Director to fill any vacant spot, including a vacancy caused by an increase in the size of the Board. However, the Board believes it is important for our stockholders to ratify any member of the Board who has been appointed by the Board. As a result, whenever the Board appoints a new member, the Board will submit such new members directorship for approval at the next regularly scheduled Annual Meeting of stockholders. If elected by the stockholders, the Board member will serve the remaining term of the class of Directors to which he or she was elected.
The Board represents the interests of our stockholders by overseeing the Chief Executive Officer and other members of senior management in the operation of the Company. The Boards goal is to optimize long-term value by providing the Company guidance and strategic oversight on our stockholders behalf.
Information about the 2008 Elections
The Board has nominated three Directors for election at the 2008 Annual Meeting. Each of the nominees currently serves as one of our Directors. Dr. Berthelsen, Ms. Parshall and Mr. Wender have served as a Director since May 2002, September 2000, and January 1994, respectively, and have been re-elected by our stockholders each successive term. If re-elected, the nominees, Dr. Berthelsen, Ms. Parshall and Mr. Wender, will serve until the 2011 Annual Meeting or, in each case, until his or her successor is elected and has qualified, or until his or her death, resignation or removal.
Our stockholders elect Directors by a plurality of the votes of the shares represented in person or by proxy at the meeting and entitled to vote in the election of Directors. Shares represented by executed proxies will be voted for the election of the three nominees listed below, unless authority to vote in favor of the nominees is withheld. Each person nominated for election has agreed to serve if elected, and we have no reason to believe that any of the nominees will be unable to serve. However, if any nominee cannot serve, your proxy may be voted for another nominee proposed by the Board, or the Board may reduce the number of authorized Directors.
We provide below a short biography of each of the nominees and of each Director whose term of office will continue after the Annual Meeting.
Biographies of Nominees for Election for a Three-year Term Expiring at the 2011 Annual Meeting
Spencer R. Berthelsen, M.D., age 56, has served as a Director of Isis since May 2002. Since 1980, he has practiced Internal Medicine with the Kelsey Seybold Clinic, a 330 physician medical group based in the Texas Medical Center in Houston. Dr. Berthelsen has served in various senior leadership positions at Kelsey Seybold, including Chairman of the Department of Internal Medicine and Medical Director. He has been Chairman of their Board of Directors since October 2001 and Managing Director since August 2005. He is a Clinical Professor of Medicine at Baylor College of Medicine. Dr. Berthelsen has served on the Board of the Texas Academy of Internal Medicine in the past and the Caremark National Pharmacy and Therapeutics Committee from 1999 through 2005.
B. Lynne Parshall, age 53, has served as a Director of Isis since September 2000. She was promoted to Chief Operating Officer in December 2007 and previously served as an Executive Vice President since December 1995. She has served as our Chief Financial Officer since June 1994, and our Secretary since November 1991. From February 1993 to December 1995, she was a Senior Vice President of Isis, and from November 1991 to February 1993, she was a Vice President of Isis. Prior to joining Isis, Ms. Parshall practiced law at Cooley Godward LLP (now Cooley Godward Kronish LLP), outside counsel to Isis, where she was a partner from 1986 to 1991. Ms. Parshall is on the Board of Trustees of the Bishops School and is also a member of the American, California and San Diego bar associations. Ms. Parshall serves on the board of directors of CardioDynamics International Corporation, a publicly held biotechnology company.
Joseph H. Wender, age 63, has served as a Director of Isis since January 1994. Mr. Wender began with Goldman, Sachs & Co. in 1971 and became a General Partner of that firm in 1982, where he headed the Financial Institutions Group for over a decade. Mr. Wender joined GSC Group in 2005 through 2007 where he was a Senior Managing Director, member of the Management Committee, and Chairman of the Finance Committee. Since January 2008, he has been a Senior Consultant to Goldman Sachs & Co. He is a former member of the GSC Advisory Board. He sits on the Board of Affinity Financial, an Internet financial institution and Vintrust, a wine management company. He is also an Independent Trustee of the Schwab Family of Funds.
The Nominating, Governance and Review Committee made its report to the Board on February 22, 2008. Following that report, the Board determined it would be in the best interests of Isis and its stockholders to nominate Dr. Berthelsen, Ms. Parshall and Mr. Wender as Directors to be elected at the Annual Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE ABOVE NOMINEES
Biographies of Directors Whose Terms Expire at the 2009 Annual Meeting
Richard D. DiMarchi, Ph.D., age 55, has served as a Director of Isis since December 2004. Dr. DiMarchi has been a Professor and the Jack and Linda Gill Distinguished Chair in Biomolecular Science at Indiana University, Bloomington, Indiana since August 2003. He previously served as Chairman of the Chemistry Department, and is a co-founder of Marcadia Biotech and Ambrx, Inc., privately held biotechnology companies. Prior to joining Indiana University, Dr. DiMarchi worked for 22 years at Eli Lilly and Company in several senior management positions, including Group Vice President, Biotechnology and Product Development, from 1996 to 2003, and Vice President, Endocrine Research and Clinical Investigation, from 1992 to 1996.
Frederick T. Muto, age 54, has served as a Director of Isis since March 2001. Mr. Muto joined the law firm of Cooley Godward Kronish LLP, outside counsel to Isis, in 1980 and became a partner in 1986. He is a founding partner of Cooley Godward Kronish LLPs San Diego office and serves as the partner in charge of that office. Mr. Muto also serves on that firms executive and management committees.
Biographies of Directors Whose Terms Expire at the 2010 Annual Meeting
Stanley T. Crooke, M.D., Ph.D., age 63, is a founder of Isis and has been Chief Executive Officer and a Director since January 1989. He was elected Chairman of the Board in February 1991. Prior to founding Isis, from 1980 until January 1989, Dr. Crooke was employed by SmithKline Beckman Corporation, a pharmaceutical company, where his titles included President of Research and Development of SmithKline and French Laboratories.
Joseph Klein, III, age 47, has served as a Director of Isis since December 2005. Mr. Klein is currently Managing Director of Gauss Capital Advisors, LLC, a financial consulting and investment advisory firm focused on biopharmaceuticals, which he founded in March 1998. In addition to his investment advisory and financial consulting activities, Mr. Klein currently serves as a Venture Partner of Red Abbey Venture Partners, LP, a life sciences private equity fund. From September 2001 to September 2002, Mr. Klein was a Venture Partner of MPM Capital, a healthcare venture capital firm. From June 1999 to September 2000 when it merged with WebMD Corporation, Mr. Klein served as Vice President, Strategy for Medical Manager Corporation, a leading developer of physician office management information systems. Mr. Klein serves on the board of directors of four additional publicly held biotechnology companies: BioMarin Pharmaceutical Inc. since June 2005; OSI Pharmaceuticals, Inc. since July 2006; Savient Pharmaceuticals, Inc. since May 2006; and PDL BioPharma, Inc. since July 2007.
John C. Reed, M.D., Ph.D., age 49, has served as a Director of Isis since February 2002. Dr. Reed has been the President and Chief Executive Officer of the Burnham Institute for Medical Research, an independent, nonprofit, public benefit organization dedicated to basic biomedical research, since January 2002. Dr. Reed has been with Burnham Institute for the past fifteen years, serving as the Deputy Director of the Cancer Center beginning in 1994, as Scientific Director of the Institute beginning in 1995, and as Cancer Center Director in 2002. He also currently serves as an adjunct professor in the medical schools at University of California San Diego (UCSD), University of Florida, University of Central Florida, and San Diego State Universitys Biology department. In addition, Dr. Reed is an associate member of UCSDs Cancer Center. Dr. Reed serves on the board of directors of a publicly held biotechnology company, Pharmion Corporation.
Independence of the Board of Directors
As required under the Nasdaq Global 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 Nominating, Governance and Review Committee of the Board of Directors. The Nominating, Governance and Review Committee consults with our legal 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 the Nasdaq listing standards, 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 or her family members, and Isis, its senior management and its independent auditors, the Board affirmatively has determined that all of our Directors are independent Directors within the meaning of the applicable Nasdaq listing standards, except for Dr. Crooke and Ms. Parshall, our Chief Executive Officer and Chief Operating Officer, respectively. In making this determination, the Board found that none of these Directors or nominees for Director had a material or other disqualifying relationship with Isis. With respect to Mr. Muto who is a partner of Cooley Godward Kronish LLP, our outside legal counsel, and Dr. DiMarchi who had a consulting agreement with Isis that was terminated in 2007, each is independent for purposes other than serving on the Audit Committee, of which neither is a member.
Information Regarding the Board of Directors and its Committees
As part of each Board meeting, our independent Directors meet in executive session without the presence of our employee Directors. The Chairpersons of the Audit Committee, the Compensation Committee, and the Nominating, Governance and Review Committee will each preside over at least one executive session. Persons interested in communicating with the independent Directors about their concerns or issues may address correspondence to a particular Director or to the independent Directors generally, in care of Isis Pharmaceuticals, Inc., 1896 Rutherford Road, Carlsbad, CA 92008. If no particular Director is named, letters will be forwarded, depending on the subject matter, to the Chair of the Audit, Compensation, or Nominating, Governance and Review Committee.
The Board has three committees: an Audit Committee, a Compensation Committee, and a Nominating, Governance and Review Committee. Below is a description of each committee of our Board. Each of the committees has authority to engage legal counsel or other experts or consultants, as it deems appropriate to carry out its responsibilities. The Board has determined that each member of each committee:
· meets the applicable rules and regulations regarding independence, including but not limited to, Rule 4200(a)15 of the Nasdaq listing standards;
· is not an officer or employee of the Company; and
· is free of any relationship that would interfere with his or her individual exercise of independent judgment with regard to Isis.
Meetings and Attendance; Committee Members
The Board of Directors met seven times in 2007, five regularly scheduled meetings and two special meetings, and acted by unanimous written consent five times. During 2007, all Directors attended at least 85% of the meetings of the Board and the committees on which they served, except for Drs. DiMarchi and Reed. Drs. DiMarchi and Reed attended 80% of all the regularly scheduled meetings and 71% of all Board meetings, including the special meetings, due to short notice and scheduling conflicts. We encourage each member of the Board to attend the Annual Meeting of Stockholders. Last year, Dr. Berthelsen, Dr. Crooke, Mr. Klein, Ms. Parshall and Dr. Reed attended our 2007 Annual Meeting of Stockholders.
2007 Board Committee Members
The following table provides membership and meeting information for fiscal 2007 for each of the Board committees:
* Committee Chairperson
(1) Mr. Muto served as counsel to the Nominating, Governance & Review Committee.
(2) Acted by written consent one time as well.
(3) Acted by written consent 14 times as well.
2008 Board Committee Members
The following table provides membership information for fiscal 2008 for each of the Board committees:
* Committee Chairperson
(1) Mr. Muto serves as counsel to the Nominating, Governance and Review Committee
The Audit Committee of the Board of Directors oversees our corporate accounting and financial reporting process. For this purpose, the Audit Committee performs several functions.
The Audit Committee:
· reviews the annual and quarterly financial statements and oversees the annual and quarterly financial reporting processes;
· selects and hires our independent auditors;
· oversees the independence of our independent auditors;
· evaluates our independent auditors performance; and
· has the authority to hire its own outside consultants and advisors if necessary.
In addition to the responsibilities listed above, the Audit Committee has the following functions:
· reviewing our annual budget with management and, if acceptable, recommending the budget to the Board for approval;
· receiving and considering our independent auditors comments as to internal controls, adequacy of staff and management performance and procedures in connection with internal controls;
· reviewing and, if appropriate, approving related party transactions;
· establishing and enforcing procedures for the receipt, retention and treatment of complaints regarding accounting or auditing improprieties; and
· pre-approving all audit and non-audit services provided by our independent auditors that are not prohibited by law.
Our Audit Committee charter requires that each member must be independent. We consider the members to be independent as long as they:
· do not accept any consulting, advisory or other compensatory fee from us, except in connection with their service as a Director;
· are not an affiliate of Isis or one of its subsidiaries; and
· meet all of the other Nasdaq independence requirements.
In addition, all Audit Committee members must be financially literate and at least one member must be a financial expert, as defined by Securities and Exchange Commission (SEC) regulations. Our Board has determined that the Audit Committees financial expert is Mr. Wender based on, among other things, his over 30 years of experience as an investment banker with Goldman, Sachs & Co. We provide the Audit Committee with the funding it needs to perform its duties.
In 2007, the Audit Committee met four times and acted by unanimous written consent once. Our Audit Committee charter can be found on our corporate website at www.isispharm.com.(2) Each member meets the membership criteria set forth in the Audit Committee charter and as stated above.
The Compensation Committee of the Board of Directors reviews, modifies (as needed) and approves the overall compensation strategy and policies of Isis. The Compensation Committee reviews and approves corporate performance goals and objectives relevant to the compensation of our executive officers and other members of senior management; reviews and approves the compensation for our Directors and reviews and approves the compensation and other terms of employment of our executive officers, including our Chief Executive Officer; and administers our stock option and purchase plans. We also have a Non-Management Stock Option Committee that, as delegated by the Compensation Committee, may award stock options to employees who are below director level in accordance with guidelines adopted by the Compensation Committee. The Non-Management Stock Option Committee has one member, Dr. Crooke.
The Compensation Committee met five times in 2007 and acted by unanimous written consent fourteen times. Our Compensation Committee charter can be found on our corporate website at www.isispharm.com.(2)
Beginning in 2007, the Compensation Committee reviews with management Isis Compensation Discussion and Analysis to consider whether to recommend that it be included in our proxy statements and other filings.
The charter of the Compensation Committee grants the Compensation Committee full access to all books, records, facilities and personnel of the Company, as well as authority to obtain, at the expense of Isis, advice and assistance from internal and external legal, accounting or other advisors and consultants and other external resources that the Compensation Committee considers necessary or appropriate in the performance of its duties. In particular, the Compensation Committee has the sole authority to retain compensation consultants to assist in its evaluation of executive and Director compensation, including the authority to approve the consultants reasonable fees and other retention terms.
Compensation Committee Interlocks and Insider Participation
As noted above, during the fiscal year ended December 31, 2007, our Compensation Committee was composed of Drs. Berthelsen, DiMarchi and Reed. None of the members of the Compensation Committee has ever been an employee or officer of Isis. None of our executive officers serves as a member of the Board of Directors or Compensation Committee of any other entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee.
(2) Any information that is included on or linked to our website is not part of this proxy statement or any registration statement or report that incorporates this proxy statement by reference.
Nominating, Governance and Review Committee
Role and Responsibilities
The Nominating, Governance and Review Committee of the Board of Directors is responsible for:
· interviewing, evaluating, nominating and recommending individuals for membership on Isis Board of Directors. As part of this process, the Nominating, Governance and Review Committee will consider nominees recommended by Isis stockholders;
· on an annual basis, reviewing the performance of the Board and its committees, including evaluating the Boards ability to function as a group and the integrity, independence and competency of the individual Board members;
· annually reviewing and assessing the adequacy of Isis corporate governance guidelines and recommending any proposed changes to the Board for approval; and
· performing such other functions as may be necessary or convenient for the efficient discharge of the foregoing.
The Nominating, Governance and Review Committee met twice during 2007. You can find our Nominating, Governance and Review Committee charter on our corporate website at www.isispharm.com(3).
Director Nominations - Quality Standards
The Nominating, Governance and Review Committee believes that candidates for Director should have certain minimum qualifications. As a result, the Board adopted membership standards and believes that the Board members should meet the minimum membership requirements listed below.
The minimum membership requirements are as follows:
· members must be able to read and understand basic financial statements;
· members must demonstrate high personal integrity and ethics;
· members cannot serve as a director on the board of more than seven other publicly traded companies;
· members cannot serve more than ten consecutive terms on the Board; and
· members cannot run for re-election or serve on the Board once they have reached the age of 80 years old.
In addition to these minimum standards, the Nominating, Governance and Review Committee will consider such factors as:
· possessing relevant expertise to offer advice and guidance to management;
· having sufficient time to devote to the affairs of Isis;
· demonstrating excellence in his or her field;
· having sound business judgment; and
· having commitment to rigorously represent the long-term interests of our stockholders.
(3) Any information that is included on or linked to our website is not part of this proxy statement or any registration statement or report that incorporates this proxy statement by reference.
Director Nominations - Process
The Nominating, Governance and Review Committee will consider Director candidates recommended by stockholders. The Committee does not intend to alter the manner in which it evaluates candidates, including the minimum criteria set forth above, based on whether or not the candidate was recommended by a stockholder.
New candidates for Director are reviewed in the context of the current composition of the Board, the operating requirements of Isis and the long-term interests of our stockholders. In conducting this assessment, the Committee considers diversity, maturity, skills, the minimum membership requirements discussed above, and such other factors as it deems appropriate given the current needs of the Board and Isis, to maintain a balance of knowledge, experience and capability. In the case of incumbent Directors whose terms of office are set to expire, the Nominating, Governance and Review Committee reviews such Directors overall service to Isis during their term, including the number of meetings attended, level of participation, quality of performance, and any other relationships and transactions that might impair such Directors independence. The Committee then uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a paid professional search firm. The Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of the Board.
The Committee meets to discuss and consider the candidates qualifications and determines whether each candidate is independent, which determination is based upon applicable Nasdaq listing standards, applicable SEC rules and regulations and the advice of counsel, if necessary. Finally, the Committee then selects a nominee for recommendation to the Board by majority vote. To date, the Nominating, Governance and Review Committee has not paid a fee to any third party to assist in the process of identifying or evaluating Director candidates.
Stockholder Recommendations for Directors
Stockholders who wish to recommend individuals for consideration by the Nominating, Governance and Review Committee to become nominees for election to the Board may do so by delivering a written recommendation to the Secretary of Isis at the following address: 1896 Rutherford Road, Carlsbad, CA 92008, by December 22, 2008. 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 our 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.
To date, the Board has not received or rejected a timely Director nominee for election at the upcoming meeting from a stockholder or stockholders holding more than 5% of the Companys voting stock.
Stockholder Communications with the Board of Directors
We make every effort to ensure that the views of stockholders are heard by the Board or individual Directors, as applicable, and that appropriate responses are provided to stockholders in a timely manner. Stockholders who wish to communicate with the Board, or individual Directors, may do so by sending written communications addressed to the Secretary of Isis at 1896 Rutherford Road, Carlsbad, CA 92008. Communications will be compiled by the Secretary and submitted to the Board or the individual Directors on a periodic basis. These communications will be reviewed by one or more employees of Isis designated by the Board, who will determine whether they should be presented to the Board. The purpose of this screening is to allow the Board to avoid having to consider irrelevant or inappropriate communications, such as advertisements, solicitations and hostile communications. All communications directed to the Audit Committee in accordance with our Code of Ethics policy that relate to questionable accounting or auditing matters involving Isis will be promptly and directly forwarded to the Audit Committee. Other than the processes described above, our Board has not adopted a formal written process for stockholder communications with the Board. We believe our Boards responsiveness to stockholder communications has been excellent.
Code of Ethics and Business Conduct
Isis has adopted a Code of Ethics that applies to all officers, Directors and employees. We filed the Code of Ethics as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and posted the Code of Ethics on our website. If we make any substantive amendments to the Code of Ethics or grant any waiver from a provision of the Code of Ethics to any executive officer or Director, we will promptly disclose the nature of the amendment or waiver on our website at www.isispharm.com(4).
Corporate Governance Guidelines
In 2003, the Board of Directors documented the governance practices followed by the Company by adopting Corporate Governance Guidelines to assure that the Board will have the necessary authority and practices in place to review and evaluate the Companys business operations as needed and to make decisions that are independent of the Companys management. The guidelines are also intended to align the interests of Directors and management with those of the Companys stockholders. The Corporate Governance Guidelines set forth the practices the Board intends to follow with respect to board composition and selection, board meetings and involvement of senior management, Chief Executive Officer performance evaluation and succession planning, and board committees and compensation. The Corporate Governance Guidelines were adopted by the Board to, among other things, reflect changes to the Nasdaq listing standards and SEC rules adopted to implement provisions of the Sarbanes-Oxley Act of 2002. The Corporate Governance Guidelines, as well as the charters for each committee of the Board, may be viewed at www.isispharm.com(4).
(4) Any information that is included on or linked to our website is not part of this proxy statement or any registration statement or report that incorporates this proxy statement by reference.
APPROVAL OF THE AMENDMENT TO THE 2002
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Stockholders are requested in this Proposal 2 to approve an amendment to the 2002 Non-Employee Directors Stock Option Plan (the Directors Plan). Subject to stockholder approval, our Board of Directors approved the amendment on September 13, 2007. The amendment to the Directors Plan:
· increases the annual non-discretionary stock option grant for our non-employee Directors from 12,500 shares to 15,000 shares; and,
· increases the initial non-discretionary stock option grant for non-employee Directors from 20,000 shares to 30,000 shares.
The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the 2008 Annual Meeting will be required to approve the amendment to the Directors Plan.
The following description of the Directors Plan is qualified in all respects by the specific terms of the Directors Plan, a copy of which was filed with this Proxy Statement.
The purpose of the Directors Plan is to assist in retaining the services of persons now serving as our non-employee Directors, to attract and retain the services of persons capable of serving on our Board of Directors and to provide incentives for such persons to exert maximum efforts to promote our success.
Our Board of Directors administers the Directors Plan. Our Board of Directors may not delegate administration of the Directors Plan to a committee. The Board of Directors has the power to construe and interpret the Directors Plan and options granted under it, and to establish, amend and revoke rules and regulations for its administration.
Stock Subject To The Directors Plan
An aggregate of 850,000 shares of common stock were reserved for issuance under the Directors Plan. As of March 31, 2008, 303,000 shares of common stock were available for future grant under the Directors Plan, there were options to purchase 438,000 shares of common stock issued and outstanding under the Directors Plan and Directors had exercised options to purchase 109,000 shares. On March 31, 2008 the last reported sales price of our common stock on the Nasdaq Global Market was $14.11 per share.
If options granted under the Directors Plan expire or otherwise terminate without being exercised, the shares of common stock not acquired pursuant to such options again become available for issuance under the Directors Plan.
Eligibility, Option Grants
The Directors Plan provides that options may be granted only to a non-employee Director. A non-employee Director is defined in the Directors Plan as a Director of Isis or one of our affiliates who is not otherwise an employee of Isis or any affiliate. Six of our eight current Directors, all except Dr. Crooke and Ms. Parshall, are eligible to participate in the Directors Plan.
Options granted under the Directors Plan are nonstatutory stock options, meaning that they are not intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the Code). Option grants under the Directors Plan are non-discretionary. Subject to the approval of this Proposal 2, the Directors Plan provides for (i) an initial grant of an option to purchase 30,000 shares of common stock to each person when he or she first becomes a non-employee Director of Isis, and (ii) an annual grant, on July 1, or the next business day should such date be a Saturday, Sunday or holiday, of an option to purchase 15,000 shares of common stock to each non-employee Director, commencing July 1, 2008. Prior to the proposed amendment, the annual grant was an option to purchase 12,500 shares and the initial grant was an option to purchase 20,000 shares.
Terms of Options
Each option under the Directors Plan is subject to the following terms and conditions.
Option Exercise. Options granted under the Directors Plan vest in four equal annual installments beginning on the first anniversary of the grant of the option. Vesting is conditioned upon continued service as a Director or as an employee or consultant of Isis or one of our affiliates.
The Board has the power to accelerate the time during which an option may vest or be exercised. Options granted under the Directors Plan do not permit exercise prior to vesting.
A Director may exercise an option under the Directors Plan by written notice to Isis, specifying the number of full shares of common stock to be purchased accompanied by payment of the purchase price.
Exercise Price; Payment. The exercise price of options granted under the Directors Plan is equal to 100% of the fair market value of the common stock on the date granted; however, an option may be granted with a lower exercise price if the option is granted pursuant to an assumption or substitution for another option in a manner which satisfies the provision of Section 424(a) of the Code. Optionholders must pay the exercise price of options granted under the Directors Plan in cash. To the extent provided by the terms of an option, an optionholder may satisfy any federal, state or local tax withholding obligation relating to the exercise of such option by:
· a cash payment upon exercise;
· authorizing Isis to withhold a portion of the stock otherwise issuable to the optionholder;
· delivering already-owned shares of our common stock; or
· a combination of these means.
Transferability; Term. Under the Directors Plan, an optionholder may not transfer an option, except as determined by the Board and as set forth in the option agreement. Currently, the Board has determined, and Director option agreements provide, that in addition to the ability to transfer an option by will or the laws of descent and distribution, a Director may transfer part or all of an option to any of the following:
· an optionholders spouse, children (by birth or adoption), stepchildren, grandchildren, or parents;
· a trust or other entity established solely for the optionholders benefit or the benefit of the optionholders spouse, children (by birth or adoption), stepchildren, grandchildren, or parents for estate planning purposes; or
· an organization which is exempt from taxation under Section 501(c)(3) of the Code or to which tax-deductible charitable contributions may be made under Section 170 of the Code.
Furthermore, an optionholder may, by delivering written notice to Isis, in a form satisfactory to Isis, designate a third party who, in the event of the optionholders death, will thereafter be entitled to exercise the option.
No option granted under the Directors Plan is exercisable by any person after the expiration of 10 years from the date the option is granted.
Other Provisions. The option agreement may contain such other terms, provisions and conditions not inconsistent with the Directors Plan as may be determined by the Board.
If any change is made in, or other event occurs with respect to, the common stock subject to the Directors Plan, or subject to any option under the Directors Plan, without the receipt of consideration by Isis (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by Isis (each, a Capitalization Adjustment), the Directors Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Directors Plan and issuable pursuant to option grants under the Directors Plan, and any outstanding options will be appropriately adjusted in the class(es) and number of securities and exercise price per share of the securities subject to such outstanding options. The Board of Directors will make such adjustments, and its determination will be final, binding and conclusive. The conversion of any of our convertible securities will not be treated as a transaction without receipt of consideration by Isis.
In the event of (i) the sale or other disposition of all or substantially all of our assets, (ii) the sale or other disposition of at least 90% of our outstanding securities, or (iii) certain specified types of merger, consolidation or similar transactions (each, a Corporate Transaction as defined more specifically in the Directors Plan), any surviving or acquiring corporation may assume options outstanding under the Directors Plan or may substitute similar options. If any surviving or acquiring corporation does not assume the options or substitute similar options, then with respect to options held by optionholders whose service with Isis or an affiliate of Isis has not terminated as of the effective date of the Corporate Transaction, the vesting of such options (and, if applicable, the time during which such options may be exercised) will be accelerated in full and the options will terminate if not exercised (if applicable) at or prior to such effective date. With respect to options outstanding under the Directors Plan that have been neither assumed nor substituted and that are held by optionholders whose continuous service has terminated prior to the effective time of the Corporate Transaction, the vesting of the options, and, if applicable, the time at which such options may be exercised will not be accelerated unless otherwise provided in a written agreement between Isis or any affiliate and the holder of the option, and such options shall terminate if not exercised prior to the effective time of the Corporate Transaction.
In the event of a dissolution or liquidation of Isis, then all outstanding options under the Directors Plan will terminate immediately prior to the completion of the dissolution or liquidation.
In the event of (i) a qualifying merger or consolidation or similar transaction, as described in the Directors Plan, whereby following such transaction the stockholders of Isis immediately prior to such transaction do not own outstanding voting securities representing more than 50% of the combined voting power of the entity (or parent of the entity) surviving such transaction, (ii) a qualifying sale, lease, license or other disposition of all or substantially all of our assets, (iii) certain entities reporting under Section 13(d) or 14(d) of the Securities Exchange Act of 1934 acquire more than 50% of our voting power under certain qualifying circumstances, or (iv) a majority of our Board of Directors is replaced by individuals who are not nominated by members of our current Board of Directors or members nominated by our current Board of Directors or their nominees (each such event, a Change of Control for purposes of the Directors Plan), the vesting of any outstanding options under the Directors Plan held by persons whose continuous service with Isis or an affiliate of Isis has not terminated prior to the effective date of the Change of Control will accelerate in full, and the options will terminate on the earlier of 12 months following the date of the Change of Control or the expiration date set forth in the option grant.
The acceleration of an option in the event of a Corporate Transaction or a Change in Control event may be viewed as an anti-takeover provision, which may have the effect of discouraging a proposal to acquire or otherwise obtain control of Isis.
Option Repricing Prohibited
The Board cannot, without first obtaining the approval of a majority of the shares present or represented and entitled to vote at a duly convened meeting of stockholders, (1) reduce the exercise price of any Options under the Directors Plan that are currently outstanding; or (2) cancel any outstanding Options under the Directors Plan and grant in substitution therefore new Options under the Directors Plan at a lower exercise price, including entering into any 6 month and 1 day cancellation and re-grant program, regardless of whether or not the cancelled Options revert to and again become available for issuance under the Directors Plan.
Duration, Amendment and Termination
The Board at any time, and from time to time, may amend the Directors Plan. However, except as relating to Capitalization Adjustments (described above), no amendment will be effective unless approved by Isis stockholders to the extent stockholder approval is necessary to satisfy the requirements of SEC Rule 16b-3 or any Nasdaq or securities exchange listing requirements for such amendment seeks to amend the prohibition on option repricing. The Board, in its sole discretion, may submit any other amendment to the Directors Plan for stockholder approval. Rights under any outstanding option granted before amendment of the Directors Plan will not be impaired by any amendment of the Directors Plan unless Isis requests the consent of the optionholder and the optionholder consents in writing.
Unless sooner terminated, the Directors Plan will terminate on May 30, 2012.
Federal Income Tax Information
Nonstatutory stock options granted under the Directors Plan generally have the following federal income tax consequences.
There are no tax consequences to the optionholder or Isis by reason of the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock option, the optionholder normally will recognize taxable ordinary income equal to the excess of the stocks fair market value on the date of exercise over the option exercise price. In the unlikely event the optionholder becomes an employee, we are required to withhold from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Subject to the requirement of reasonableness and the satisfaction of a tax reporting obligation, we will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the optionholder.
Upon disposition of the stock, the optionholder 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 exercise of the option (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 optionholders who are subject to Section 16(b) of the Exchange Act.
New Plan Benefits Table
The following table presents certain information with respect to options we expect to grant under the Directors Plan for the fiscal year ending December 31, 2008 to our non-employee Directors, assuming stockholder approval of this Proposal 2. This table assumes that each non-employee Director continues as one of our Directors throughout the year and that we do not elect any additional non-employee Directors. This information is for illustration only and may not be indicative of grants that are made in the future under the Directors Plan.
NEW PLAN BENEFITS
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 2
AMENDMENT OF THE 1989 STOCK OPTION PLAN TO INCREASE SHARES
In June 1989, our Board of Directors adopted, and our stockholders subsequently approved, our 1989 Stock Option Plan (the 1989 Plan).
Below is a high-level summary of the terms of the 1989 Plan. Please be sure to read the more detailed description of the 1989 Plan contained in this Proposal 3. The 1989 Plan, among other things:
· Has a term ending on January 31, 2014;
· Prohibits the repricing of any option outstanding under the 1989 Plan unless approved by our stockholders;
· Is limited to the grant of options and does not authorize stock bonuses or restricted stock awards;
· Limits the term of each newly granted option to 7 years;
· Requires that each newly granted option not become fully vested until a date at least two years after the date of grant, except in the case of certain corporate events;
· Requires all options outstanding under the 1989 Plan to have an exercise price of not less than 100% of the fair market value of our common stock on the date of grant;
· Is administered by our Compensation Committee, which is composed entirely of independent Directors; and
· Requires that the exercise price for options outstanding under the 1989 Plan can only be paid in cash.
Our management, Board and Compensation Committee believe that stock options are a key aspect of our ability to attract and retain qualified personnel in the face of intense competition for experienced scientists and other personnel among many pharmaceutical and health care companies. The Board, upon the recommendation of the Compensation Committee, has approved an increase in the aggregate number of shares of common stock authorized for issuance under the 1989 Plan by 3,500,000 shares to an aggregate of 16,700,000 shares, in order to ensure that for a period of at least two years, based on business plans, we are able to continue to grant stock options to employees and consultants at appropriate levels as determined by the Compensation Committee. If the stockholders do not approve Proposal 3, and as a consequence, we are unable to continue to grant options at competitive levels, we believe that it will negatively affect our ability to meet our needs for highly qualified personnel and our ability to manage future growth. Without these additional shares, management expects that the current shares available for grant under the 1989 Plan will not be sufficient to maintain our option grant practices for new employees or for promotions or merit awards for current employees after January 2009.
Subject to stockholder approval of this Proposal 3, a total of 16,700,000 shares are reserved for issuance under the 1989 Plan. As of March 31, 2008, a total of 6,649,011 options were granted and outstanding, 3,263,727 of which were vested and exercisable; and options to purchase an aggregate of 6,508,306 shares had been exercised under the 1989 Plan. If our stockholders do not approve this Proposal 3, as of March 31, 2008 there would only be 42,683 shares available for future grant under the 1989 Plan.
Required Vote and Board of Directors Recommendation
The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the 2008 Annual Meeting will be required to approve the amendment to the 1989 Plan.
Should we not obtain stockholder approval, then we will not implement the increase in the aggregate number of shares of common stock authorized for issuance under the 1989 Plan, and no additional stock options will be granted on the basis of such increase. However, the 1989 Plan will remain in effect, and we may continue to make stock option grants and other awards pursuant to the current provisions of the 1989 Plan until we deplete the share reserve.
The Board of Directors believes that the proposed amendment of the 1989 Plan is in the best interests of Isis and our stockholders for the reasons stated above. THEREFORE, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO THE 1989 PLAN TO INCREASE THE SHARES RESERVED FOR ISSUANCE UNDER THE 1989 PLAN FROM 13,200,000 SHARES TO 16,700,000 SHARES.
The following description of the 1989 Plan, as amended, is qualified in all respects by the specific terms of the 1989 Plan, a copy of which was filed with this Proxy Statement.
The 1989 Plan was adopted to provide a means by which we may give our employees (including officers), Directors and consultants an opportunity to benefit from increases in value of our common stock through the granting of incentive and supplemental (or nonstatutory) stock options (collectively, the Options). Incentive stock options granted under the 1989 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 Code). Supplemental stock options granted under the 1989 Plan are intended not to qualify as incentive stock options under the Code. See Federal Income Tax Information below for a discussion of the tax treatment of incentive and supplemental stock options.
Under the 1989 Plan, we cannot grant stock bonuses and restricted stock awards. We have not granted these types of awards in the past.
The 1989 Plan authorizes the Compensation Committee to administer the 1989 Plan. Each person serving on the Compensation Committee is a non-employee Director within the meaning of Rule 16b-3 of the Exchange Act, an outside Director within the meaning of Section 162(m) of the Code and an independent Director within the meaning of applicable Nasdaq listing standards. As used herein with respect to the 1989 Plan, the Committee refers to the Compensation Committee and the Non-Management Stock Option Committee.
The Committee has the power to construe and interpret the 1989 Plan and, subject to the provisions of the 1989 Plan, to select the persons to whom Options are to be made, to designate the number of shares to be covered by each Option, to determine whether an Option is an incentive stock option or a supplemental stock option, to establish vesting schedules, to specify the exercise price and, subject to certain restrictions, to specify any other terms. We believe limiting administration to the Compensation Committee is important because the Compensation Committee must be composed entirely of independent Directors.
The Compensation Committee has delegated to the Non-Management Stock Option Committee the power to grant options, on predefined terms, to our employees who are not our executive officers.
Incentive stock options may be granted under the 1989 Plan only to our key employees, including officers. In addition, key employees, including officers, Directors and consultants are eligible to receive supplemental or nonstatutory options. As of March 31, 2008, we had approximately 317 employees and eight Directors who where eligible to receive options under the 1989 Plan.
We cannot grant an incentive stock option under the 1989 Plan to any person who, at the time of the grant, owns (or is deemed to own) stock representing more than 10% of the total combined voting power of all classes of our stock, unless the option 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 such incentive options are exercisable for the first time by an optionee during any calendar year may not exceed $100,000. Further, the 1989 Plan contains a per-employee, per-calendar year grant limitation equal to 294,873 shares.
Stock Subject to the 1989 Plan
Subject to stockholder approval of this Proposal 3, 16,700,000 shares are reserved for issuance under the 1989 Plan. If Options granted under the 1989 Plan expire or otherwise terminate without being exercised, the common stock not purchased pursuant to such Options again becomes available for issuance under the 1989 Plan.
Option Budget and Potential Dilution
Each year the Compensation Committee approves a budget that sets the number of stock options we can grant to our employees for that year. We do not grant options that exceed the budget without the Compensation Committees approval. The options we grant in any year primarily represent options for new hires and annual merit grants for our existing employees. Over the past three years, the average option budget set by the Compensation Committee has been under 2% of our outstanding common stock on an issued and outstanding basis. The option budget is a net budget, which means that if options expire or otherwise terminate without being exercised, the common stock not purchased pursuant to such options is added to the budget. Since cancelled or terminated options already counted against the budget for the year in which such options were granted, it makes sense to add them to the current budget to avoid double counting. We believe the option budget is an important tool to balance our equity compensation objectives with stockholder interests. Since the option budget has historically been below 2% of our outstanding common stock on an issued and outstanding basis, we believe we have administered our stock option plans in a way that minimizes the potential dilution to our stockholders.
Terms of Options
The following is a description of the permissible terms of Options under the 1989 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 Options under the 1989 Plan may not be less than the fair market value of the common stock subject to the Option on the date of the option grant, and in some cases may not be less than 110% of such fair market value (see Eligibility above). At March 31, 2008, the closing price of our common stock as reported on the Nasdaq Global Market was $14.11 per share.
An optionholder must pay the exercise price of Options granted under the 1989 Plan either: in cash at the time of exercise or pursuant to a same-day sale program developed pursuant to Regulation T of the Federal Reserve Board.
Transferability. Under the 1989 Plan, an optionee may not transfer an incentive stock option other than by will or by the laws of descent and distribution. Optionees may transfer supplemental stock options for limited estate planning purposes or by will or the laws of descent and distribution.
Option Exercise. Options granted under the 1989 Plan may become exercisable in cumulative increments, or vest, as determined by the Compensation Committee. Shares covered by currently outstanding options under the 1989 Plan typically vest at the rate of 25% per year after year one and 2.08% per month thereafter for three years, as long as the optionees employment or service as a consultant or Director continues. Shares covered by options granted in the future under the 1989 Plan may be subject to different vesting terms. However, no Option granted to an employee will, unless otherwise provided by the 1989 Plan in very limited circumstances (see Effect of Certain Corporate Events below), become fully vested in a period of less than two years after the grant of such Option. Subject to the two-year limitation, the Compensation Committee has the power to accelerate the time during which an option may be exercised.
Term. The maximum term of options under the 1989 Plan is seven years, except that in certain cases the maximum term is five years (see Eligibility). With certain exceptions, options under the 1989 Plan terminate three months after the optionee ceases to render services to us.
Prohibition of Option Repricing
The 1989 Plan expressly provides that, without the approval of a majority of votes cast in person or by proxy at a meeting of stockholders, we cannot cancel outstanding options in exchange for granting new options at a lower exercise price or amend outstanding options to reduce the exercise price.
If there is any change in our common stock (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the 1989 Plan and the Options outstanding thereunder will be appropriately adjusted as to the class and the maximum number of shares, the maximum number of shares which may be granted to an employee during a calendar year and price per share of stock subject to the 1989 Plan and such Options.
Effect of Certain Corporate Events
The 1989 Plan provides that, in the event of our dissolution or liquidation, or of a specified type of merger or other corporate reorganization, to the extent permitted by law, any surviving corporation will be required to either assume any Options outstanding under the 1989 Plan or substitute similar Options for those outstanding under the 1989 Plan, or such outstanding Options will continue in full force and effect. In the event that any surviving corporation declines to assume or continue the Options outstanding under the 1989 Plan, or to substitute similar Options, then, with respect to Options held by persons then performing services as employees or as consultants or Directors for us, the time during which such Options may be exercised will be accelerated and the Options terminated if not exercised during such time.
Duration, Amendment and Termination
The Compensation Committee may suspend or terminate the 1989 Plan without stockholder approval or ratification at any time or from time to time. Unless sooner terminated, the 1989 Plan will terminate on January 31, 2014.
The Compensation Committee may also amend the 1989 Plan at any time or from time to time. However, no amendment will be effective unless approved by our stockholders within 12 months before or after its adoption by the Compensation Committee if such amendment (i) increases the maximum aggregate number of shares of our common stock that may be issued pursuant to Options granted under the 1989 Plan, or (ii) requires stockholder approval in order to comply with SEC Rule 16b-3, Section 422(b) of the Code or any Nasdaq or securities exchange requirements.
The 1989 Plan does not include any automatic share reserve increase provision (i.e. an evergreen provision).
Federal Income Tax Information
Incentive Stock Options. Incentive stock options under the 1989 Plan are intended to be eligible for the favorable federal income tax treatment accorded incentive stock options under the Code.
There generally are no federal income tax consequences to the participant or Isis 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 if the participant held the stock for more than one year.
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, we will generally be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation) to a corresponding business expense deduction in the tax year in which the disqualifying disposition occurs.
Slightly different rules may apply to optionees who acquire stock subject to certain repurchase options or whose stock is subject to forfeiture under Section 16(b) of the Exchange Act.
Supplemental Stock Options. Supplemental stock options granted under the 1989 Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionee or Isis by reason of the grant of a supplemental stock option. Upon exercise of a supplemental stock option, the optionee normally will recognize taxable ordinary income equal to the excess of the stocks fair market value on the date of exercise over the option exercise price. Generally, with respect to employees, we are 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 Code, and the satisfaction of a tax-reporting obligation, we will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the optionee. Upon disposition of the stock, the optionee 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 exercise of the option. Such gain or loss will be long-term, mid-term or short-term depending on how long the stock was held. Slightly different rules apply to optionees 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 Code denies a deduction to any publicly held corporation for compensation paid to certain employees in a taxable year to the extent that compensation exceeds $1 million for such employee. It is possible that compensation attributable to stock options, when combined with all other types of compensation received by a covered employee from Isis, 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 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.
New Plan Benefits
The following table presents certain information with respect to merit-based options granted during the fiscal year ended December 31, 2007 to (i) each executive officer named in the Summary Compensation Table under Executive CompensationCompensation of Executive Officers, (ii) all executive officers as a group, (iii) all non-employee Directors as a group and (iv) all non-executive officer employees as a group. This information regarding grants for the fiscal year ended December 31, 2007 is for illustration only and may not be indicative of grants that are made in the future under the 1989 Plan.
NEW PLAN BENEFITS
1989 STOCK OPTION PLAN
(1) Dr. Jonas grant of 130,000 shares represents his new hire option grant. New hire grants are typically much larger than annual merit grants. On an annual basis, we would anticipate Dr. Jonas option grants to be similar to those of our COO.
(2) Dr. Wedel was not an executive officer at December 31, 2007. However, we are reporting his compensation for the year pursuant to the SEC regulations.
Equity Compensation Plan Information
The following table sets forth information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2007 and March 31, 2008.
(a) Consists of three Isis plans: 1989 Stock Option Plan, 2002 Non-Employee Directors Stock Option Plan and our 2000 Employee Stock Purchase Plan (the ESPP).
(b) Consists of our 2000 Broad-Based Equity Incentive Plan, more fully described below.
(c) Of these shares, 138,124 remained available for purchase under the ESPP as of December 31, 2007. The ESPP incorporates an evergreen formula pursuant to which on January 1 of each year through and including 2009, we automatically increase the aggregate number of shares reserved for issuance under the ESPP by 200,000 shares.
(d) Of these shares, 259,609 remain available for purchase under the ESPP as of March 31, 2008.
1989 Stock Option Plan
The terms of our 1989 Plan are described under Proposal 3. At December 31, 2007, a total of 6,201,808 options were outstanding, options to purchase 2,717,282 shares were exercisable, and 666,653 shares were available for future grant under the 1989 Plan. At March 31, 2008, a total of 6,649,011 options were outstanding, options to purchase 3,263,727 shares were exercisable, and 42,683 shares were available for future grant under the 1989 Plan.
2000 Broad Based Equity Incentive Plan
In January 2000, we adopted the 2000 Broad-Based Equity Incentive Plan (the 2000 Plan), which provides for the issuance of non-qualified stock options for the purchase of up to 5,990,000 shares of common stock to our employees, Directors, and consultants. Typically options expire 10 years from the date of grant. Options granted under this plan generally vest over a four-year period, with 25% exercisable at the end of one year from the date of the grant and the balance vesting ratably thereafter. Options granted under this plan pursuant to our April 2003 stock option exchange program will expire on December 31, 2008. At December 31, 2007, a total of 1,543,878 options were outstanding, options to purchase 1,488,933 shares were exercisable, and 2,195,309 shares were available for future grant under the 2000 Plan. At March 31, 2008, a total of 2,871,488 options were outstanding, options to purchase 1,432,624 shares were exercisable, and 804,588 shares were available for future grant under the 2000 Plan.
Change of Control Under the 1989 Plan and 2000 Plan
With respect to both the 1989 Plan and 2000 Plan, in the event of:
· a sale, lease or other disposition of all or substantially all of our assets;
· a merger or consolidation in which we are not the surviving corporation; or
· reverse merger in which we are 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,
then any surviving corporation or acquiring corporation will assume any stock awards outstanding under the 2000 Plan and the 1989 Plan or will substitute similar stock awards, including an award to acquire the same consideration paid to the stockholders in the transaction for those outstanding under the 2000 Plan and the 1989 Plan. In the event any surviving corporation or acquiring corporation refuses to assume such stock awards or to substitute similar stock awards for those outstanding under the 2000 Plan and the 1989 Plan, then with respect to stock awards held by participants whose continuous service has not terminated, such stock awards automatically vest in full and the stock awards will terminate if not exercised at or prior to such event. With respect to any other stock awards outstanding under the 2000 Plan and the 1989 Plan, such stock awards will terminate if not exercised prior to such event. As of December 31, 2007 and March 31, 2008, options to purchase approximately 8,945 shares, and 1,967 shares, respectively, granted under the 2000 Plan would have been accelerated in full if a transaction described above occurred at such date, even if the surviving corporation assumes such award. Stock awards issued under the 2000 Plan after May 16, 2007, do not accelerate in full if a transaction described above occurs.
In addition, the vesting of Dr. Crookes, Dr. Jonas and Ms. Parshalls stock options will accelerate in the event of a change in control, as further described under Retention and Change of Control Agreements below.
2002 Non-Employee Directors Stock Option Plan
The terms of our Directors Plan are described under Proposal 2. At both December 31, 2007 and March 31, 2008, a total of 438,000 options were granted and outstanding, 256,750 of which were vested and exercisable; options to purchase an aggregate of 109,000 shares had been exercised, and 303,000 shares were available for future grant under the Directors Plan.
Employee Stock Purchase Plan
In 2000, our Board of Directors adopted, and the stockholders subsequently approved, the ESPP and we reserved 200,000 shares of common stock for issuance thereunder. In each of the subsequent years, an additional 200,000 shares of common stock were reserved under the ESPP, resulting in a total of 1,600,000 shares authorized in the ESPP as of December 31, 2007. The ESPP permits full-time employees to purchase common stock through payroll deductions (which cannot exceed 10% of each employees compensation) at the lower of 85% of fair market value at the beginning of the purchase period or the end of each six-month purchase period. During 2007, our employees purchased 161,930 shares under the ESPP at prices ranging from $5.14 to $8.23 per share. At December 31, 2007, 138,124 shares were available for purchase under the ESPP. At March 31, 2008, 259,609 shares were available for purchase under the ESPP.
The Audit Committee of the Board of Directors has selected Ernst & Young LLP as our independent registered public accounting firm for our 2008 fiscal year, and has requested management to ask for stockholder ratification at the Annual Meeting. Ernst & Young LLP has audited our financial statements since we were founded in 1989. Representatives of Ernst & Young LLP will be at the 2008 Annual Meeting to answer any questions and make a statement should they be asked to do so.
Although our Bylaws do not require stockholders to approve our independent registered public accounting firm, the Audit Committee of the Board would like our stockholders opinion as a matter of good corporate practice. If the stockholders vote against Ernst & Young LLP, the Audit Committee of the Board will reconsider whether to keep the firm. However, even if the stockholders ratify the selection, the Audit Committee of the Board may choose to appoint a different independent accounting firm at any time during the year if it believes that a change would be in the best interests of our stockholders and Isis.
The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the 2008 Annual Meeting will be required to ratify the selection of Ernst & Young LLP.
As of December 31, 2007, none of our finance or accounting employees had been employed by Ernst & Young LLP during the past six years.
Independent Auditors Fees
The Audit Committee has adopted a policy and procedures for the pre-approval of audit and permissible non-audit services rendered by our independent registered public accounting firm, Ernst & Young LLP. The policy generally pre-approves specific services in the defined categories of audit services, audit-related services, and tax services up to pre-determined amounts. Pre-approval may also be given as part of the Audit Committees approval of the scope of the engagement of the independent auditor or on an individual explicit case-by-case basis before the independent registered public accounting firm is engaged to provide each service. As an additional measure to ensure auditor independence, beginning in 2004, the Audit Committee engaged Deloitte Tax LLP as the Companys primary tax advisor. All fees described below were pre-approved by the Audit Committee.
For the fiscal years ended December 31, 2007 and 2006, the fees billed by Ernst & Young LLP related primarily to the integrated audit of our financial statements and reviews of our interim financial statements for such fiscal years were $489,000 and $382,000, respectively. In addition, Ernst & Young LLP billed us $241,000 and $67,000 in 2007 and 2006 related to our convertible debt offering in January 2007 and accounting consultations related to our partnership activities. Furthermore in 2007 and 2006, Ernst & Young LLP billed us $65,000 in each year for the audits of two of our subsidiaries, Regulus Therapeutics LLC and Symphony GenIsis, Inc, respectively.
Audit Related Fees:
During the fiscal years ended December 31, 2007 and 2006, the aggregate fees billed by Ernst & Young LLP for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements that are not included under Audit Fees above were $5,000 and $22,000, respectively. The fees billed were primarily for services related to Ernst & Young LLPs consultations related to accounting for our business transactions.
During the fiscal years ended December 31, 2007 and 2006, the aggregate fees billed by Ernst & Young LLP related to the preparation of information requested in connection with a Franchise Tax Board audit were $21,000 and $31,000, respectively. In 2006 and 2007, we utilized Deloitte Tax LLP for the majority of our tax services.
Financial Information Systems Design and Implementation Fees:
During the fiscal years ended December 31, 2007 and 2006, there were no fees billed by Ernst & Young LLP for information technology consulting.
All Other Fees:
During the fiscal years ended December 31, 2007 and 2006, all other fees billed by Ernst & Young LLP were $3,000 and $2,000, respectively. These fees were for a subscription to an online accounting and tax information service.
The Audit Committee has determined that the rendering of all non-audit services by Ernst & Young LLP is compatible with maintaining the auditors independence.
During the fiscal year ended December 31, 2007, none of the total hours expended on our financial audit by Ernst & Young LLP were provided by persons other than Ernst & Young LLPs full-time permanent employees.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table outlines the ownership of our common stock as of March 31, 2008 by:
· each Director and nominee for Director;
· each executive officer named in the Summary Compensation Table under Executive CompensationCompensation of Executive Officers;
· all Directors and executive officers as a group; and
· every entity that we know beneficially owns more than five percent of our common stock.
*Less than one percent.
(1) This table is based upon information supplied by officers, Directors, principal stockholders and Form 3s, Schedules 13D and 13G filed with the SEC. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.
(2) Applicable percentages are based on 92,994,635 shares of common stock outstanding on March 31, 2008, adjusted as required by rules promulgated by the SEC.
(3) Represents shares of our common stock beneficially owned by registered investment companies and separate accounts advised by Federated Equity Management Company of Pennsylvania and Federated Global Investment Management Corp. (the Investment Advisers) as of December 31, 2007. The Investment Advisers are wholly owned subsidiaries of FII Holdings, Inc., which is a wholly owned subsidiary of Federated Investors, Inc. The beneficial ownership also includes 1,176,470 shares of common stock issuable upon exercise of warrants and 4,705,882 shares of common stock issued to Federated Kaufmann Fund, a portfolio of Federated Equity Funds, pursuant to the August 2005 Private Placement. This also includes $20,000,000 of our convertible promissory notes which, if converted, would represent 1,367,522 shares of common stock.
(4) Fidelity Management & Research Company (Fidelity), a wholly- owned subsidiary of FMR LLC and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 13,042,549 shares as a result of acting as investment adviser to various investment companies. The ownership of one investment company, Fidelity Growth Company Fund, amounted to 8,695,033 shares or 9.4% of the Common Stock outstanding on March 31, 2008.
(5) On January 7, 2008 Isis entered into a Stock Purchase Agreement with Genzyme Corporation pursuant to which Isis issued and sold to Genzyme 5,000,000 shares of common stock for an aggregate purchase price of $150,000,000, representing a per share purchase price of $30.
(6) Includes 70 shares owned by Dr. Berthelsens daughter for which he disclaims beneficial ownership. Includes 55,625 shares of common stock issuable upon exercise of options held by Dr. Berthelsen that are exercisable on or before May 30, 2008.
(7) Includes 691,200 shares of common stock issuable upon exercise of options held by Dr. Crooke that are exercisable on or before May 30, 2008. Also includes 41,394 shares of common stock issuable upon exercise of options held by Rosanne Crooke, Dr. Crookes wife, that are exercisable on or before May 30, 2008, and 3,150 shares owned by her. Dr. Crooke disclaims beneficial ownership of the shares of common stock owned and issuable upon exercise of options held by his wife.
(8) Includes 23,125 shares of common stock issuable upon exercise of options held by Dr. DiMarchi that are exercisable on or before May 30, 2008.
(9) Includes 13,125 shares of common stock issuable upon exercise of options held by Mr. Klein that are exercisable on or before May 30, 2008 and 100 shares of common stock indirectly beneficially owned by Mr. Kleins son.
(10) Includes 1,500 shares of common stock indirectly beneficially owned through the Cooley Godward LLP Salary Deferral and Profit Sharing Plan and 57,625 shares of common stock issuable upon exercise of options held by Mr. Muto that are exercisable on or before May 30, 2008.
(11) Includes 298,726 shares of common stock issuable upon exercise of options held by Ms. Parshall that are exercisable on or before May 30, 2008, and an aggregate of 60,090 shares of common stock issuable upon exercise of options which Ms. Parshall transferred to her two daughters that are exercisable on or before May 30, 2008.
(12) Includes 65,625 shares of common stock issuable upon exercise of options held by Dr. Reed that are exercisable on or before May 30, 2008.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act, as amended, requires our Directors, executive officers, and persons who own more than ten percent of a registered class of our 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 Isis. Officers, Directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2007, all Section 16(a) filing requirements applicable to our officers, Directors and greater than ten percent beneficial owners were complied with except, due to administrative oversight, the new grant of stock options to Dr. Crookes wife on May 1, 2007 for her promotion was not reported until July 3, 2007.
Compensation Discussion and Analysis
Compensation Overview and the Role of the Compensation Committee
We have designed our executive compensation to attract and retain executives who can help us meet our business objectives and to motivate them to enhance long-term stockholder value. The Compensation Committee of the Board of Directors manages and oversees our executive compensation program. At the end of each year, and as otherwise required, the Compensation Committee approves the total compensation for each of our executive officers. In addition, the full Board of Directors reviews and approves the Compensation Committees recommendations regarding the compensation of executive officers.
The Compensation Committees responsibilities include:
· overall compensation strategy;
· reviewing and approving corporate performance goals and objectives relevant to the compensation of Isis executive officers;
· evaluating and recommending to the Board the compensation plans and programs advisable for Isis, as well as modifying or terminating existing plans and programs;
· establishing policies with respect to equity compensation arrangements;
· reviewing and approving compensation arrangements for Isis executive officers, including its Chief Executive Officer;
· reviewing and approving compensation arrangements for Isis Directors;
· administering Isis benefit plans, including stock option and employee stock purchase plans;
· performing other functions as may be necessary or convenient in the efficient discharge of the foregoing; and
· reporting to the Board of Directors from time to time, or whenever it shall be called upon to do so.
Compensation Philosophy & Objectives
We created a compensation system that is simple and supports the characteristics and behaviors that we feel will make us successful: individual excellence, effective collaboration and teamwork, willingness to take prudent risks, and honesty and openness. Our system is designed to be fair and reward individuals based on their contributions. As a result, we do not institute artificial limits on rewards. In order to attract and retain individuals that perform in the top 25% we consistently try to target actual total annual cash compensation at the 75th percentile of the biotech market for our size company. Although we do not necessarily recruit at the 75th percentile, we do expect that top performers will earn at or above that level. This basic tenet of our compensation practices allows us to recruit and retain top talent, and reflects Isis position among biotech companies. We recognize achievements in many ways including salary increases, promotions, cash bonus opportunities and stock options. We designed our compensation philosophy to encourage ownership in Isis and its ideals by all employees.
We believe our compensation system focuses our organization on achieving critical objectives. We ensure that these objectives are aggressive and we define excellent performance as a year in which we have met most of the objectives. At Isis, we expect people to achieve very complicated tasks and understand that we are doing science which is difficult to predict. We reward for that success. Our compensation system also reinforces desired behaviors. We expect outstanding performance from every individual and we expect every person at Isis to accept responsibility for making Isis a great place to work. We expect everyone to behave respectfully and supportively to each other and to never forget our commitment to the patients we serve and our obligations to stockholders.
Elements of Executive Compensation
Employees in our organization do not share either accountability or responsibility equally for strategic and/or tactical decisions. It is well ingrained in our culture that not everyone should share the same level of risk/reward for the consequences of these decisions. As a result, we have structured the various components of our compensation systems to reflect accountability both for the successes or failures (both long-term and short-term) of the company and of individuals. Our senior management team is paid for results and their use of judgment; therefore, the more senior the person, the greater percentage of at risk compensation. The more junior employees are compensated for accomplishing their work well and therefore have a lower at risk portion to their total compensation.
The executive officers annual compensation consists of three elements: base salary, a cash incentive bonus and stock option grants. The cash incentive bonus is the only element of these three that does not apply to all employees, but is available to employees at the director level and above. In addition, our executive officers receive the retirement and other benefits offered to all employees, as described in more detail below.
· Base Salary (including Annual Merit Increase);
· Cash Bonus;
· Stock Options (including Annual Merit Stock Option Awards); and
· Retirement & Other Benefits.
We consider many factors in determining the amounts we grant to our executives for each of these three elements. These considerations may include:
· The Compensation Committees performance assessment of the CEO and executive officers;
· Competitive compensation practices;
· Individual performance and contributions to company objectives;
· Increased efficiencies and process improvements;
· Effective collaboration and teamwork;
· Individual expertise, skills and knowledge;
· The need to retain and motivate; and
· The degree of risk taking assumed.
A large degree of discretion is allowed in setting the appropriate increases based on these and other possible factors. We do not have specific weightings assigned to these performance factors and the importance of each factor can vary among the executive officers.
The primary component of our compensation is base salary. We categorize our jobs in a system called broad-banding. That is to say that there are relatively few job levels within the company, but the scope of responsibility and accountability which an employee may assume is broad. We do not have salary ranges, and therefore we do not set salary maximums. It is therefore possible that someone may be in a lower job level, but his/her salary may reach levels which exceed those of someone in a higher job level. We have chosen not to have multiple levels and salary limits because years of experience has shown us that these approaches often create unnecessary bureaucracy and a loss of talented individuals.
We determine base compensation levels throughout the company primarily by market forces. First, we look externally at what comparable companies in the geographical or recruiting area are paying for comparable jobs. We use AONs Radford Biotechnology Survey to obtain this information targeting the 75th percentile and companies of a similar size (150-499 employees). Examples of companies within this group are: Arena Pharmaceuticals, Cytokinetics, Exelixis, Inc., Incyte Corporation, Medarex, Inc., MGI Pharma, Inc., Neurocrine Biosciences, Inc., OSI Pharmaceuticals, Inc., Vical Incorporated, and Zymogenetics, Inc. We then look at the salary required to attract a particular candidate. The third step is to determine whether the scope of job responsibilities and internal equity warrant a given base salary.
Base salary is guaranteed to all employees as wages for hours worked. It represents consideration for the performance of job responsibilities. This portion of total cash compensation is not at risk and may increase based on how well an individual performs his/her job responsibilities.
Each year our employees are eligible to receive an appropriate merit salary increase. The Compensation Committee sets a Company-wide merit increase budget percentage based on external factors such as the average merit increase being used by comparable companies, as well as the performance of the Company. The Company-wide merit increase budget percentage serves as the basis for each individual salary increase. For the merit increase for all our employees, including our executive officers, we may increase or decrease the Company-wide merit increase budget percentage depending upon the respective individuals contribution to Isis.
To set each individuals annual merit increase, the Compensation Committee evaluates each individual officers performance. With respect to all executive officers, other than the CEO, the Compensation Committee gives great deference to our senior managements written evaluation of each individual executive officer. The Compensation Committee shows deference since our senior management team is in the best position to evaluate our executive officers day-to-day and overall performance. The Compensation Committee then meets in executive session and evaluates the CEOs performance, primarily based upon the CEOs achievement of set objectives for the year. At the end of this process, the Compensation Committee determines the CEOs merit increase and approves or recommends changes to the merit increases for the remaining executive officers. The CEO has no role in determining his own compensation.
The executive officers new salaries for the upcoming year are calculated as follows:
Current Base Salary (x) Merit Increase = New Salary
For example, Dr. Crookes 2008 salary was calculated as follows:
The average merit increase for all of our other executive officers was 5.6%. The 2007 merit budget approved by the Compensation Committee for the entire Company was 5.5% of salaries. This was a 1% increase over the 2006 merit budget. The Compensation Committee approved this budget increase based on Isis outstanding accomplishments in 2007, as noted in the section entitled Evaluation of 2007; Business Highlights below, and competitive information on the planned merit increases provided by other local Biotech companies. Our Director of Human Resources obtained planned merit increases by surveying local companies through the Biotech Employee Development Coalition.
As part of the merit review and approval process, the Compensation Committee analyzes the impact of the proposed merit increases on the CEOs salary by comparing it to AONs Radford Biotech Compensation Survey. In 2008, Dr. Crookes proposed new base salary placed him above the 90th percentile ($609,532) of Radford; based on this information further analysis was performed. The Compensation Committee reviewed the CEO compensation of twelve companies with similar market capitalizations as Isis(5), using the latest salary data that was publically available at the time. This information illustrated that Dr. Crookes base pay was below the CEO average for these twelve companies and, as such, the Compensation Committee believed Dr. Crookes 6% increase was appropriate based on his accomplishments for the year as well as the market data. The merit increases for all other executives, and their impact, were compared to Radford data only. The results as a whole showed that we pay our executives, on average, above the 90th percentile. The Compensation Committee determined that this was reasonable based on the longevity of many of the executive officers as well as their performance in 2007. For example, the average tenure of our executive officers, excluding our CEO, is 11.6 years. The average tenure of our executive officers, including our CEO, is 12.8 years.
(5) These companies included Medarex, Inc., OSI Pharmaceuticals, Inc., Myriad Genetics, Inc., United Therapeutics, PDL BioPharma, Inc., Affymetrix, Inc., LifeCell Corporation, Alnylam Pharmaceuticals, Inc., Applera Corporation, Regeneron Pharmaceuticals, Inc., Cubist Pharmaceuticals Inc. and ZymoGenetics, Inc.
Cash Bonus At Risk
The next component of an executive officers salary, as well as the salary of our employees at the director and above level, is a cash bonus through our management by objective bonus program. While we design individual salary to compensate an employee for his or her continued service and performance, we designed our cash bonus portion of total compensation to compensate employees for reaching specific objectives and for the judgment they use in making decisions. This portion of compensation is totally at risk. As such, bonus represents an opportunity for reward based upon the individuals level of accountability and depends on the relative success of both Isis and the individual. Our approach for awarding management by objective bonuses differs from salary increases because, unlike salary increases, market forces do not impact bonus amounts.
The actual amount of each officers respective cash bonus is calculated based on the following formula:
Base Salary (x) Target MBO % (x) Company Success Factor (x) Individual Success Factor
Using this formula (the multipliers) ensures that we award bonuses based on the Companys performance, as well as based on the individuals performance. For example, in 1999, the Company Success Factor was 0% due to the failures the Company faced at the time. This resulted in no cash bonuses for executive officers and director level and above employees. Conversely, if Isis has a good year, we reward our employees proportionately using the Company Success Factor.
We tie Target MBO percentages to the level of the position in Isis. For example, the Target MBO percentage for vice presidents ranges between 25% and 35%. Unless an individual is promoted to a higher level at Isis, his or her Target MBO percentage does not change.
The Compensation Committee sets the Company Success Factor based on Isis achievement of set objectives for the year. At the end of each year, the Compensation Committee meets to evaluate the overall performance of the Company. They measure Company performance based upon the achievement of goals that were set at the beginning of the year and agreed upon by our Board and upper management. The Compensation Committee may also consider unexpected accomplishments, as well as failures, that occurred through the year.
Finally, the Compensation Committee assigns each individual officer an Individual Success Factor, based on the same elements it used to evaluate the Individual Success Factor for salary increases.
Once the Compensation Committee has determined all of the elements of the formula above, they apply the formula to each individual officer. For example, Dr. Crookes cash bonus based on his, as well as the Companys performance in 2007, was calculated as follows and equaled $782,501:
The average Target MBO percentage and Individual Success Factor for our other executive officers was 32% and 142%, respectively.
The Compensation Committee set the Company success factor for the 2007 MBO at 200% due to our phenomenal achievements. 2007 was Isis most successful year since inception and the increase in our stock price reflected this assessment; rising from $10.93 per share at the beginning of 2007 to $17.36 per share on the date the Compensation Committee determined the Company success factor. The section entitled Evaluation of 2007; Business Highlights below provides a full review of our accomplishments.
An executive officers salary plus bonus represents the officers total cash compensation. Our philosophy has been to have the CEOs total cash compensation be between 20-30 times the lowest level compensation. Dr. Crookes total cash compensation is an average of 2 times greater than that of our other executive officers and 29.1 times that of the average cash compensation for our lowest level employees. This falls within industry standards, ISS guidelines, and our philosophy. For example, ISS has suggested a ratio of CEO to Executive level compensation of between 2 and 5.
We use our stock option program to give all employees, including Isis executive officers, an economic interest in the long-term appreciation of our common stock. We grant existing employees new options on an annual basis to provide a continuing financial incentive and equity in Isis growth.
Each year the Compensation Committee approves a budget that sets the number of stock options we can grant our employees for that year. We do not grant options that exceed the budget without the Compensation Committees approval. The options we grant in any year represent options for new hires, promotions and annual merit grants for our existing employees. Over the past five years, the average option budget set by the Compensation Committee has been approximately 1.89% of our outstanding common stock on an issued and outstanding basis. We believe the option budget is an important tool to balance our equity compensation objectives with stockholder interests. For 2007, the Compensation Committee set the option budget at 1.66 million shares, which represented 1.9% of our outstanding common stock on an issued and outstanding basis for that year. This overall maximum, plus each employees position and performance in the previous year, ultimately determines the size of the individual annual option grant.
For each stock option, the Compensation Committee sets a vesting schedule that is typically over a 4-year period at the rate of 25% for the first year and then at the rate of 2.08% per month for 36 months thereafter during the optionees employment. We have historically had low employee turnover, particularly in our management team and the members of our management have historically held their options for a long period of time before exercise. The low turnover is indicative of our employees commitment to Isis and its technology. As such, we believe our officers see the long term value of our stock and therefore we do not require our employees to own a minimum number of shares of our stock, or hold shares of our stock they acquire for minimum periods of time.
To help avoid situations where our employees may benefit from transactions that harm our stockholders, our policies specifically prohibit all employees, including our executive officers, from taking a short position in our stock and otherwise hedging their position in our stock against a future drop in our stock price. In addition, we specifically prohibit all of our employees from trading derivative instruments based on our common stock (e.g. put or call options for our stock).
Finally, we have a Rule10b5-1 trading program. When there is no material non-public information available, our Rule 10b5-1 trading program allows our executive officers, and other select employees, to establish plans that permit prearranged future sales of his or her securities. Except for purchases of our stock under our ESPP (but not subsequent sales of the stock) we do not allow our executive officers to buy or sell our stock outside of the Rule 10b5-1 trading program.
Isis is committed to using stockholder money responsibly, to building stockholder value and ensuring our processes are entirely transparent. As a result, Isis policies do not provide for perquisites for any employees, including our executive officers.
Retirement & Other Benefits
Isis maintains a highly competitive position with regard to the benefits offered to all regular employees, including our executive officers. These benefits include medical, dental and vision insurance, basic life insurance, short-term disability/sick pay, vacation, holidays, a 401(k) plan with employer match, an ESPP and Accidental Death & Dismemberment (AD&D) insurance.
Recognizing that health care costs constitute a greater fraction of disposable income for lower paid employees, we have a progressive contribution premium for our health care benefits; the more money an Isis employee makes, the more he or she contributes to the costs of his/her familys health care.
Retention and Change of Control Agreements
Isis retention agreements for our CEO, COO and Executive Vice President and the related severance compensation provisions are designed to meet the following objectives:
Change in Control: As part of our normal course of business, we engage in discussions with other biotechnology and pharmaceutical companies about possible collaborations, licensing and/or other ways in which the companies may work together to further our respective long-term objectives. In addition, many larger established pharmaceutical companies consider companies at similar stages of development to ours as potential acquisition targets. In certain scenarios, the potential for merger or being acquired may be in the best interests of our stockholders. We provide a component of severance compensation for our CEO, COO and Executive Vice President to promote their ability to act in the best interests of our stockholders even though they could be terminated as a result of the transaction.
Termination without Cause: If we terminate the employment of our COO without cause we will pay her the benefits described under Post-Employment Compensation Retention and Change of Control Agreements of this Proxy Statement. This agreement provides us with more flexibility to make a change in senior management if such a change is in our and our stockholders best interests. We provided Dr. Jonas, our Executive Vice President, a severance benefit if we terminated his employment without cause during the first year of his employment as part of our overall recruitment strategy to incentivize him to join Isis.
Evaluation of 2007; Business Highlights
2007 was a very strong year for Isis. In 2007, the Company met or exceeded nearly every one of its corporate objectives for the year. As mentioned earlier, we define excellent performance as a year in which we have met most of the corporate objectives. For 2007, we set very aggressive corporate objectives, primarily related to Isis clinical development, corporate partnering, financial performance and its Ibis subsidiary. Isis met its corporate objectives in the following ways:
· Clinical Development. Isis initiated registration studies for mipomersen in Familial Hypercholesterolemia patients, and recruited and integrated Jeffrey M. Jonas, M.D. to lead its clinical development, preclinical development, regulatory affairs and quality assurance and compliance organizations.
· Corporate Partnering. Isis identified Genzyme Corporation as a preferred partner for mipomersen, which ultimately lead to a strategic alliance with Genzyme. In addition, Isis executed high-value collaborations with Ortho McNeil (OMI) and Bristol-Myers Squibb (BMS).
· Financial Performance. Isis refinanced its convertible debt on favorable terms and significantly improved its cash balance and financial operating performance over its projections.
· Ibis Subsidiary. Ibis gained a strategic partner, Abbott, which will enable Ibis to aggressively prepare to enter larger commercial markets, including hospital-acquired infection control and clinical diagnostics.
The Company exceeded all of its corporate objectives for the year, except its Ibis subsidiary failed to meet a very aggressive and difficult revenue objective, which was overshadowed by the success of Ibis Abbott transaction.
The Compensation Committee set the Company Success Factors for salary and bonus as described above, based on Isis successful achievement of the corporate objectives for the year as well as Isis additional achievements, which are highlighted below:
Drug Development Highlights
Isis cardiovascular franchise matured appreciably during the last year with mipomersen at the forefront. The clinical success of mipomersen has added significant value to the entire drug development pipeline.
· mipomersen (formerly ISIS 301012) continued to demonstrate an excellent safety and efficacy profile supported by strong Phase 2 clinical results in all patient populations tested. As a result, Isis initiated registration studies of mipomersen in Familial Hypercholesterolemia patients.
· Isis established a strategic alliance with BMS for the discovery and development of antisense drugs targeting PCSK9, an important regulator of the LDL-receptor.
· Isis initiated IND-enabling studies of ISIS 353512, an antisense drug that targets C-reactive protein, in partnership with the Korea Institute of Technology.
Isis metabolic disease franchise continued to expand with the addition of new diabetes drugs into development, and new research efforts toward attractive targets for the treatment of obesity.
· Isis continued Phase 2 studies of ISIS 113715 for the treatment of type 2 diabetes in patients on stable sulfonylurea treatment. In humans and preclinical studies, ISIS 113715 demonstrated reductions in blood glucose without causing low blood sugar, called hypoglycemia, weight gain or nausea.
· Isis initiated Phase 1 studies of ISIS 325568, an antisense drug partnered with OMI that targets the glucagon receptor, GCGR.
· Isis identified a development candidate ISIS 377131, an antisense drug also partnered with OMI that targets the glucocorticoid receptor, GCCR.
· Isis added ISIS 388626 to its development pipeline. ISIS 388626 targets SGLT2, a protein that is responsible for glucose re-absorption in the kidney.
Cancer continues to be a disease in which antisense drugs could make a profound difference in treatment options. Isis partners are developing antisense drugs discovered by Isis to treat cancer.
· OncoGenex reported encouraging Phase 2 data for OGX-011, an antisense drug that targets clusterin, in several studies in patients with advanced prostate or lung cancers. The most recent study showed that OGX-011 was well-tolerated in combination with certain chemotherapy agents and showed ongoing survival durations that were more favorable than with the chemotherapy agents alone, based on historical controls.
· OncoGenex initiated Phase 1 clinical studies of OGX-427, an antisense drug that targets Hsp27, a cell survival protein that is overly abundant in cancer cells.
· Lilly advanced its Phase 1 studies of LY2275796, which targets eIF-4E, a protein involved in tumor progression, and in the Journal of Clinical Investigation, Isis and Lilly published preclinical study results that support the therapeutic potential of LY2275796.
Isis is exploring new applications and disease indications for antisense drugs to treat neurodegenerative diseases and other diseases for which antisense drugs are uniquely suited.
· Isis was granted orphan drug status for ISIS 333611, an antisense drug in IND-enabling studies that targets SOD1 for the treatment of an inherited, aggressive form of ALS, which is also known as Lou Gehrigs disease. IND-enabling preclinical studies are being funded by the ALS Association and the Muscular Dystrophy Association.
· Isis initiated a program to discover and develop antisense drugs to treat Huntingtons Disease in collaboration with CHDI, which is providing Isis with nearly $10 million in funding for the program.
· Antisense Therapeutics Ltd. (ATL) licensed ATL1102 to Teva Pharmaceutical Industries. ATL1102 is an antisense drug discovered by Isis and licensed to ATL, and is currently in Phase 2 studies for the treatment of multiple sclerosis.
· iCo initiated Phase 1 studies of iCo-007, an antisense drug discovered by Isis for the treatment of various eye diseases. Isis received a $1.25 million milestone payment in equity for the initiation of this study.
Isis added three major new pharmaceutical partners for drugs in its cardiovascular and metabolic franchises.
· Isis licensed mipomersen to Genzyme as part of a strategic alliance that includes a $150 million equity investment, an upfront licensing fee of $175 million, over $1.5 billion in milestone payments, and a share of profits on mipomersen and follow-on drug(s) ranging from 30-50% of all commercial sales. As part of the alliance, Genzyme became a preferred development partner for Isis for programs in CNS and certain rare diseases.
· Isis licensed two type 2 diabetes drugs that target GCGR and GCCR to Johnson & Johnsons OMI for a $45 million upfront licensing fee and could receive more than $230 million in milestone payments, and Isis established a research collaboration with OMI to identify additional antisense drugs to treat metabolic diseases. Isis received the first development milestone payment of $5 million under this collaboration.
· Isis licensed its lipid-lowering PCSK9 program to BMS for a $15 million upfront licensing fee and up to $168 million in milestone payments.
Isis expanded clinical opportunities for its drugs by licensing several antisense drugs that are outside of the Companys key therapeutic focus areas to companies with disease-area expertise devoted to optimizing the future development of these drugs.
· Isis licensed ISIS 369645, an inhaled antisense drug, to Altair Therapeutics, Inc. for the treatment of respiratory diseases.
· Isis entered into a collaboration with Excaliard to discover and develop antisense drugs for the local treatment of fibrotic diseases, including scarring.
· Isis licensed alicaforsen, an antisense drug targeting ICAM-1 for ulcerative colitis, to Atlantic Healthcare.
Isis demonstrated the value of its technology innovation and dominant intellectual property through partnerships with industry leaders in a variety of related areas.
· Isis received $26.5 million under its collaboration with Alnylam, associated with Alnylams transaction with Roche.
· Isis licensed technology to Archemix for aptamer drug applications in exchange for milestones and royalties on aptamer drugs developed by Archemix that incorporate Isis proprietary chemistries or manufacturing methods; Isis received the first milestone payment from Archemix for the advancement of Archemix aptamer drug into Phase 2a studies.
Isis improved its financial position significantly in 2007, strengthening its balance sheet and reducing its net operating loss.
· Isis refinanced its convertible debt which extended the maturity of the debt, strengthened the Companys balance sheet, and reduced its cash interest payments by approximately $2.6 million annually due to the lower coupon rate.
· Isis purchased Symphony GenIsis relatively early in the term of that financing arrangement saving approximately $75 million in the predetermined purchase price, regaining full ownership of mipomersen, which Isis licensed to Genzyme, and the GCGR and GCCR drugs, which Isis licensed to OMI.
· As a result of Isis partnering strategy, Isis was able to reduce its pro forma net operating loss guidance by $40 million over the course of 2007.
Isis strengthened its leadership team with the addition of:
· Jeffrey M. Jonas, M.D. to lead Clinical Development, Preclinical Development, Regulatory Affairs, and Quality Assurance and Compliance. Dr. Jonas was formerly Chief Medical Officer and Executive Vice President at Forest Laboratories, Inc.
Isis and Alnylam founded Regulus Therapeutics LLC and hired senior management to lead the joint venture company in discovering and developing antisense drugs targeting microRNAs.
· Kleanthis G. Xanthopoulos, Ph.D. was appointed as President and Chief Executive Officer of Regulus. Dr. Xanthopoulos is the co-founder and former President and Chief Executive Officer of Anadys Pharmaceuticals, Inc.
Isis Ibis subsidiary gained a strategic partner, Abbott, who will enable Ibis to aggressively prepare to enter larger commercial markets, including hospital-acquired infection control and clinical diagnostics. Ibis also successfully completed its first full year of commercializing the Ibis T5000 Biosensor System.
· Abbott invested $20 million in Ibis and now owns 10.25% equity in Ibis at a post money valuation of $215 million, with the option to invest an additional $20 million in Ibis for a total equity holding of 18.6%.
· Abbott acquired the option to purchase the remaining shares of Ibis for a total purchase price of $215 to $230 million.
· If Abbott exercises its option to acquire Ibis, Isis will receive an earn-out tied to the achievement of certain cumulative sales.
· Ibis placed eight instruments, including placements with research hospitals.
· Ibis finished constructing its commercial assay kit manufacturing facility.
· Ibis received over $12 million in contracts and grants during 2007 to advance the detection and identification of infectious organisms for a broad range of applications, including biodefense.
Under Section 162(m) of the Code, we can only deduct up to $1 million of compensation we pay to certain executive officers each taxable year. However, we may deduct compensation above $1 million if it is performance based compensation within the meaning of the Internal Revenue Code. The Compensation Committee has determined that stock options granted under the 1989 Plan and the 2000 Plan with an exercise price at least equal to the fair market value of our common stock on the date of grant is performance-based compensation.
Compensation of Executive Officers
The following table shows for the fiscal year ended December 31, 2007, compensation awarded to or paid to, or earned by, the Companys Chief Executive Officer, Chief Financial Officer and its three other most highly compensated executive officers at December 31, 2007 (the Named Executive Officers).
In 2007, we did not grant any stock awards or non-equity incentive plan compensation and we do not currently offer pension or non-qualified deferred compensation plans.
Summary Compensation Table for Fiscal 2007
Grants of Plan-Based Awards
The following table shows for the fiscal year ended December 31, 2007, certain information regarding grants of plan-based awards to the Named Executive Officers:
Grants of Plan-Based Awards in Fiscal 2007
(1) Non-cash amounts calculated utilizing the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-based Payment. For more information, please see Note 4 of the consolidated financial statements in our Annual Report for the year ended December 31, 2007 regarding assumptions underlying valuation of equity awards.
Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table
The Compensation Committee granted merit non-statutory stock options to the executive officers on January 2, 2007, the same date on which they granted stock awards to our other employees. However, since the Nasdaq Global Market was unexpectedly closed on that day in memorial of President Fords death, in accordance with the terms of our equity incentive plans, the exercise price was based on the closing price of December 29, 2006, the last trading day prior to January 2, 2007.
All of these stock options were granted out of our 1989 Stock Option Plan. The options have a term of seven years and vest at the rate of 25% for the first year and then at the rate of 2.08% per month for 36 months thereafter during the optionees employment.
For new hires and promotions for employees who are not executive officers, the Board has pre-approved standing resolutions that set the number of shares to be granted. The stock option exercise price is equal to 100% of the closing price on the date of hire or promotion, as applicable.
Outstanding Equity Awards at Fiscal Year-End Executive Officers.
The following table shows for the fiscal year ended December 31, 2007, certain information regarding outstanding option awards at fiscal year-end for the Named Executive Officers.
Other than the options described in the table below, there were no equity incentive plan awards outstanding for the Named Executive Officers at December 31, 2007. In addition, there were no stock awards outstanding for the individuals named below at December 31, 2007.
Outstanding Option Awards At December 31, 2007
The following table shows for the fiscal year ended December 31, 2007, certain information regarding option exercises and stock vested during the last fiscal year with respect to the Named Executive Officers:
Option Exercises in Fiscal 2007(1)