<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[X] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
InSite Vision Incorporated
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
InSite Vision Incorporated
- --------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
LOGO
April 17, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders
of InSite Vision Incorporated (the "Company") to be held on Monday, June 2, 1997
at 12:00 p.m. local time at the Company's corporate headquarters, 965 Atlantic
Avenue, Alameda, California 94501. The formal Notice of Annual Meeting of
Stockholders and Proxy Statement accompanying this letter describe the business
to be acted upon.
Please sign, date and return your proxy card no later than May 14, 1997, in
the enclosed envelope, whether or not you plan to attend the meeting. If you
attend the meeting, you may still vote in person if you so desire.
Sincerely,
/s/ S. Kumar Chandrasekaran
------------------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board and Chief
Executive Officer
YOUR VOTE IS IMPORTANT
SO THAT YOUR COMMON STOCK WILL BE REPRESENTED AT THE ANNUAL MEETING IN THE
EVENT YOU ARE NOT PERSONALLY PRESENT, PLEASE DATE, SIGN AND RETURN PROMPTLY THE
ENCLOSED PROXY IN THE ENVELOPE PROVIDED. EXECUTION OF THE PROXY WILL NOT AFFECT
YOUR RIGHT TO VOTE IN PERSON IF YOU ARE PRESENT AT THE MEETING.
<PAGE> 3
INSITE VISION INCORPORATED
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 2, 1997
------------------------
TO THE STOCKHOLDERS OF INSITE VISION INCORPORATED:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders ("Annual
Meeting") of InSite Vision Incorporated, a Delaware corporation (the "Company"),
will be held on Monday, June 2, 1997, at 12:00 p.m. local time, at the Company's
corporate headquarters, 965 Atlantic Avenue, Alameda, California 94501, for the
following purposes:
1. To elect five directors to serve until the 1998 annual meeting or
until their respective successors are elected and qualified.
2. To approve a series of amendments to the Company's 1994 Stock
Option Plan (the "1994 Plan"), including (i) an increase in the total
number of shares of the Company's Common Stock authorized for issuance
under the 1994 Plan by an additional 500,000 shares, (ii) implement an
automatic share increase feature pursuant to which the number of shares of
Common Stock available for issuance under the 1994 Plan will automatically
increase on the first day of January each year, beginning January 1, 1998,
by 2% of the total number of shares of Common Stock outstanding on the last
day of December in the immediately preceding year, (iii) impose a specific
share limitation of 850,000 shares on the maximum number of shares of the
Company's Common Stock for which any one participant may be granted stock
options under the 1994 Plan and (iv) increase by an additional 33,334
shares of the Company's Common Stock the portion of the share reserve which
may be issued pursuant to the Automatic Option Grant Program in effect
under the 1994 Plan for the non-employee directors.
3. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1997.
4. To transact such other business as may properly come before the
Annual Meeting and any adjournment of the Annual Meeting.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on April 4, 1997, as
the record date for determining the stockholders entitled to receive notice of
and to vote at the Annual Meeting and any adjournment thereof. A complete list
of stockholders entitled to vote will be available from the Secretary of the
Company for 10 days before the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting.
However, to assure your representation at the meeting, please carefully read the
accompanying Proxy Statement which describes the matters to be voted upon at the
Annual Meeting and mark, date, sign and return the enclosed proxy card in the
reply envelope provided. Should you receive more than one proxy because your
shares are registered in different names and addresses, each proxy should be
returned to ensure that all your shares will be voted. If you attend the Annual
Meeting and vote by ballot, your proxy vote will be revoked automatically and
only your vote at the Annual Meeting will be counted. The prompt return of your
proxy card will assist us in preparing for the Annual Meeting.
By Order of the Board of Directors,
/s/ S. Kumar Chandrasekaran
-------------------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board and Chief
Executive Officer
Alameda, California
April 17, 1997
<PAGE> 4
INSITE VISION INCORPORATED
965 ATLANTIC AVENUE
ALAMEDA, CALIFORNIA 94501
------------------------
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 2, 1997
GENERAL INFORMATION FOR STOCKHOLDERS
------------------------
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of InSite Vision Incorporated, a Delaware corporation
(the "Company"), with principal executive offices at 965 Atlantic Avenue,
Alameda, California 94501, of proxies in the accompanying form to be used at the
Annual Meeting of Stockholders ("Annual Meeting") to be held on June 2, 1997,
and any adjournment thereof.
This Proxy Statement and the accompanying form of proxy are being mailed to
all stockholders entitled to vote at the Annual Meeting on or about April 17,
1997.
RECORD DATE AND VOTING
Stockholders of record on April 4, 1997 are entitled to notice of and to
vote at the Annual Meeting. As of such date, 12,936,651 shares of the Company's
Common Stock, par value $0.01 per share (the "Common Stock"), were issued and
outstanding, held by approximately 213 stockholders of record or, as estimated
by the Board, approximately 4,000 beneficial stockholders. No shares of the
Company's preferred stock are outstanding. Each stockholder is entitled to one
vote for each share of Common Stock held by such stockholder as of the record
date. If a choice as to the matters coming before the Annual Meeting has been
specified by a stockholder on the Proxy, such stockholder's shares will be voted
accordingly. If no choice is specified, the shares will be voted IN FAVOR OF the
approval of the proposals described in the Notice of Annual Meeting of
Stockholders and in this Proxy Statement. Abstentions and broker non-votes
(i.e., the submission of a Proxy by a broker or nominee specifically indicating
the lack of discretionary authority to vote on the matter) are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business. Abstentions will be counted towards the tabulation of votes cast on
proposals presented to the stockholders and will have the same effect as
negative votes, whereas broker non-votes will not be counted for purposes of
determining whether a proposal has been approved or not.
Any stockholder or stockholder's representative who, because of a
disability, may need special assistance or accommodation to allow him or her to
participate at the Annual Meeting may request reasonable assistance or
accommodation from the Company by contacting Investor Relations in writing at
965 Atlantic Avenue, Alameda, California 94501 or by telephone at (510)
865-8800. To provide the Company sufficient time to arrange for reasonable
assistance, please submit such requests by May 15, 1997.
IMPORTANT
PLEASE MARK, DATE AND SIGN THE ENCLOSED PROXY CARD, AND RETURN IT AT YOUR
EARLIEST CONVENIENCE IN THE ENCLOSED, POSTAGE-PREPAID, RETURN ENVELOPE SO THAT
IF YOU ARE UNABLE TO ATTEND THE ANNUAL MEETING, YOUR SHARES MAY BE VOTED.
REVOCABILITY OF PROXIES
Any person giving a proxy has the power to revoke it at any time prior to
or at the Annual Meeting. It may be revoked by filing with the Secretary of the
Company at the Company's principal executive offices, InSite Vision
Incorporated, 965 Atlantic Avenue, Alameda, California 94501, a notice of
revocation or another signed proxy with a later date. You may also revoke your
proxy by attending the Annual Meeting and voting in person.
<PAGE> 5
SOLICITATION
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the Proxy
and any additional solicitation materials furnished to stockholders. Copies of
solicitation materials will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs in
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by telephone
or other means by directors, officers, employees or agents of the Company. No
compensation will be paid to these individuals for any such services. The
Company does not presently intend to solicit proxies other than by mail.
THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31,
1996 (THE "ANNUAL REPORT") AND ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996 ("FORM 10-K") HAVE BEEN MAILED CONCURRENTLY WITH THE MAILING
OF THE NOTICE OF ANNUAL MEETING AND PROXY STATEMENT TO ALL STOCKHOLDERS ENTITLED
TO NOTICE OF AND TO VOTE AT THE ANNUAL MEETING. NEITHER THE ANNUAL REPORT NOR
THE FORM 10-K IS INCORPORATED INTO THIS PROXY STATEMENT AND NEITHER IS
CONSIDERED PROXY SOLICITING MATERIAL.
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MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
PROPOSAL ONE -- ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Board of Directors shall be
comprised of not less than five nor more than nine directors. Effective with the
Annual Meeting, the authorized number of directors will be reduced from six to
five. Accordingly, five directors will stand for re-election at the Annual
Meeting to serve until the Company's next annual meeting, until their successors
shall have been duly elected and qualified, or until their earlier death,
resignation or removal. Mr. Jon S. Saxe, who is currently serving as the sixth
member of the Board of Directors, will resign from the Board effective upon the
date of the Annual Meeting, and his vacancy on the Board will not be filled at
the Annual Meeting. However, Mr. Saxe will continue to serve the Company as
"Director Emeritus." The Board of Directors will vote all proxies received by
them in favor of the five nominees listed below unless otherwise instructed in
writing on such proxy. If, however, any of the nominees named in the
accompanying proxy card are unable or unwilling to serve (which is not expected)
at the time of the Annual Meeting, the proxies (except those marked to the
contrary) will be voted for such other person(s) as the persons named in the
accompanying proxy may recommend. The five candidates receiving the highest
number of affirmative votes of the shares represented and voting at the Annual
Meeting will be elected directors of the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
ELECTION OF EACH OF THE FOLLOWING NOMINEES TO SERVE AS DIRECTORS OF THE COMPANY
UNTIL THE 1998 ANNUAL MEETING, UNTIL THEIR RESPECTIVE SUCCESSORS HAVE BEEN
ELECTED AND QUALIFIED OR UNTIL THEIR EARLIER DEATH, RESIGNATION OR REMOVAL.
Set forth below is information regarding the nominees, including
information furnished by them as to their principal occupation at present and
for the last five years, certain other directorships held by them, the year in
which each became a director of the Company, and their ages as of March 31,
1997:
<TABLE>
<CAPTION>
NOMINEES POSITION(S) WITH THE COMPANY AGE DIRECTOR SINCE
- --------------------------------------------- ---------------------------- --- --------------
<S> <C> <C> <C>
S. Kumar Chandrasekaran, Ph.D................ Chairman of the Board, Chief 54 1989
Executive Officer and Chief
Financial Officer
Mitchell H. Friedlaender, M.D................ Director 51 1996
Grant M. Inman............................... Director 55 1996
John E. Lucas................................ Director 65 1996
Anders P. Wiklund............................ Director 56 1996
</TABLE>
BUSINESS EXPERIENCE OF BOARD NOMINEES
S. KUMAR CHANDRASEKARAN, PH.D., has been a Director of the Company since
1989. Dr. Chandrasekaran joined the Company in September 1987 as Vice President,
Development. From 1988 to 1989, Dr. Chandrasekaran served as Vice President,
Research and Development. From 1989 to 1993, Dr. Chandrasekaran served as
President and Chief Operating Officer. Since August 1993, he has served as
Chairman of the Board of Directors and Chief Executive Officer and since
December 1995 he has served as Chief Financial Officer. Prior to joining the
Company, Dr. Chandrasekaran was Vice President of Technical Affairs for Sola
Barnes-Hind (formerly Syntex Ophthalmics) from 1982 to 1987. From 1971 to 1982,
he served as a Principal Scientist and director at Alza Corporation. Dr.
Chandrasekaran holds a Ph.D. in Chemical Engineering from the University of
California at Berkeley.
MITCHELL H. FRIEDLAENDER, M.D. has been a Director of the Company since May
1996. He has served as an ophthalmologist at Scripps Clinic and Research
Foundation ("Scripps") since 1986 and currently serves as director of Cornea and
Refractive Surgery in the Division of Ophthalmology. Prior to joining Scripps,
Dr. Friedlaender served as a full-time faculty member at the University of
California, San Francisco for 10 years. He is the founder of the Aspen Corneal
Society and the Pacific Ophthalmic Forum, co-editor in chief of International
Ophthalmology Clinics, a member of four scientific editorial boards, a member of
the Sjogren's Syndrome Foundation Medical Advisory Board, and former president
of the Ocular Microbiology and Immunology Group. He also serves as consultant
for several pharmaceutical companies and performs clinical
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<PAGE> 7
studies on new ophthalmic drugs. Dr. Friedlaender holds an M.B.A. and an M.D.
from the University of Michigan.
GRANT M. INMAN has been a Director of the Company since May 1996. He has
served as the Managing General Partner of Inman & Bowman since 1985. He
currently serves as director of Paychex, Inc., Lam Research, Inc. and ViewStar
Corp. Mr. Inman holds an M.B.A. from the University of California, Berkeley.
JOHN E. LUCAS has been a Director of the Company since May 1996. He served
as President and Chief Executive Officer of American Scientific Resources Ltd.
from 1994 to March 1996, and as President and Chief Executive Officer of
Oxigene, Inc. from 1992 to 1994. He also was the co-founder and served as
Chairman and Chief Executive Officer of XOMA Corporation. Mr. Lucas holds an
M.B.A. from Harvard Business School.
ANDERS P. WIKLUND has been a Director of the Company since October 1996. He
has served as Vice President, Corporate of Pharmacia Upjohn since 1996, as
Executive Vice President of Pharmacia U.S. Inc. from 1994 to 1996 and as
President and Director of Pharmacia Development Corp. from 1993 to 1994. Mr.
Wiklund served as Chief Executive Officer, President and Director of KABI
Pharmacia Inc. from 1980 to 1993. Mr. Wiklund holds a Masters of Pharmacy from
the Pharmaceutical Institute, Stockholm, Sweden.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1996, the Board of Directors held
eight meetings. The Board of Directors has an Audit Committee, a Stock Plan and
Compensation Committee, and a Nominating Committee.
The Audit Committee currently consists of two directors, John E. Lucas and
Jon S. Saxe.(1) The Audit Committee held one meeting during the 1996 fiscal
year. The Audit Committee monitors the effectiveness of the internal and
external audit controls, oversees the Company's financial and accounting
organization and financial reporting, and selects a firm of certified public
accountants whose duty it is to audit the books and accounts of the Company for
the fiscal year for which they are appointed.
The Stock Plan and Compensation Committee (the "Compensation Committee")
currently consists of two directors, Grant M. Inman and Jon S. Saxe.(1) The
Compensation Committee held six meetings during the 1996 fiscal year. The
Compensation Committee determines and reviews the compensation to be paid to the
Company's officers and directors and administers the Company's 1994 Stock Option
Plan (the "1994 Plan") and the 1994 Employee Stock Purchase Plan (the "ESPP").
The Nominating Committee consists of two directors, S. Kumar
Chandrasekaran, Ph.D. and Grant M. Inman.(1) The Nominating Committee held no
meetings during the 1996 fiscal year. The Nominating Committee, on behalf of the
Board of Directors, makes nominations for election to the Company's Board of
Directors. The Nominating Committee will consider nominations recommended by
stockholders. Such nominations by stockholders must be made by notice in writing
delivered or mailed by first class United States mail, postage prepaid, to the
Secretary or Assistant Secretary of the Company, and received by the Secretary
or Assistant Secretary not less than 120 days prior to any meeting of
stockholders called for the election of directors, provided, however, that if
less than 100 days' notice of the meeting is given to stockholders, such
nomination shall have been mailed or delivered to the Secretary or Assistant
Secretary of the Company not later than the close of business on the seventh day
following the day on which the notice of the meeting was mailed. Such notice
shall set forth as to each proposed nominee who is not an incumbent director (i)
the name, age, business address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or employment of each
such nominee, (iii) the number of shares of stock of the Company which are
beneficially owned by each such nominee and by the nominating stockholder, and
(iv) any other information concerning the nominee that must be disclosed of
nominees in proxy solicitations regulated by Regulation 14A of the Securities
Exchange Act of 1934, as amended.
- ---------------
(1) New members of each committee may be appointed following the election of
directors at the 1997 Annual Meeting of Stockholders.
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During fiscal year 1996 no currently serving director attended fewer than
75% of the aggregate number of meetings of the Board of Directors and meetings
of the Committees of the Board of Directors on which he served for the time
period during which he held a position as director.
COMPENSATION OF DIRECTORS
Each non-employee Board member who is not otherwise affiliated with a
substantial investor in the Company is eligible to receive $1,000 for each Board
meeting and $250 for each committee meeting attended in person, together with
reimbursement of expenses for attending such meetings.
Under the Automatic Option Grant Program in effect under the 1994 Plan,
each individual who first joins the Board as a non-employee Board member will
receive, at the time of his or her initial election or appointment to the Board,
an option grant to purchase 10,000 shares of Common Stock. Accordingly, at the
1996 Annual Stockholders Meeting, Mitchell H. Friedlaender, M.D., Grant M. Inman
and John E. Lucas each received, in connection with their initial election to
the Board, an option grant under the 1994 Plan to purchase 10,000 shares. Each
such option has an exercise price per share of $6.375, the fair market value per
share of Common Stock on the grant date, and has a maximum term of 10 years
measured from such grant date, subject to earlier termination upon the
optionee's cessation of Board service. Similarly, on October 23, 1996, the date
of his appointment to the Board, Anders P. Wiklund received an option grant
under the 1994 Plan to purchase 10,000 shares. This option has an exercise price
per share of $4.25, the fair market value per share of Common Stock on the grant
date, and has a maximum term of 10 years measured from such grant date, subject
to earlier termination upon the optionee's cessation of Board service. Each
10,000-share grant under the Automatic Option Grant Program will become
exercisable for all of the option shares upon the optionee's completion of one
year of Board service, measured from the grant date. However, the option will
immediately become exercisable for all the option shares upon certain changes in
control of the Company.
Each continuing non-employee Board member will, upon his or her re-election
to the Board at each Annual Stockholders Meeting, receive an option grant under
the Automatic Option Grant Program to purchase 5,000 shares of Common Stock.
Each option will have an exercise price per share equal to the fair market value
per share of Common Stock on the grant date and will have a maximum term of 10
years measured from such grant date, subject to earlier termination upon the
optionee's cessation of Board service. The option will become exercisable for
all of the option shares upon the optionee's completion of one year of Board
service, measured from the grant date. However, the option will immediately
become exercisable for all the option shares upon certain changes in control of
the Company.
No non-employee Board member will be entitled to receive both an initial
10,000-share option grant and an annual 5,000-share option grant in the same
year. However, because Messrs. Inman, Lucas and Wiklund and Dr. Friedlaender
received their initial 10,000-share grant in 1996, each of them will be eligible
to receive an annual 5,000-share grant if they are re-elected to the Board at
the 1997 Annual Meeting.
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<PAGE> 9
PROPOSAL TWO -- AMENDMENTS TO 1994 STOCK OPTION PLAN
APPROVAL OF AMENDMENTS TO THE
INSITE VISION INCORPORATED 1994 STOCK OPTION PLAN
Stockholders are being asked to approve amendments to the 1994 Plan which
the Company's Board of Directors (the "Board") authorized on March 17, 1997. The
amendments will effect the following changes to the 1994 Plan:
(i) increase the maximum number of shares of Common Stock available
for issuance over the term of the 1994 Plan by an additional 500,000 shares
to 2,488,853 shares;
(ii) implement an automatic share increase feature pursuant to which
the number of shares of Common Stock available for issuance under the 1994
Plan will automatically increase on the first day of January each year,
beginning January 1, 1998, by 2% of the total number of shares of Common
Stock outstanding on the last day of December in the immediately preceding
year;
(iii) increase the maximum number of shares available for issuance
under the Automatic Option Grant Program in effect under the 1994 Plan by
an additional 33,334 shares to 150,000 shares;
(iv) impose a specific limitation of 850,000 shares on the maximum
number of shares for which any one participant may be granted stock options
under the 1994 Plan;
(v) render the non-employee Board members eligible to receive option
grants under the Discretionary Option Grant Program in effect under the
1994 Plan;
(vi) remove certain restrictions on the eligibility of non-employee
Board members to serve as Plan Administrator; and
(vii) effect a series of additional changes to the provisions of the
1994 Plan (including the stockholder approval requirements, the
transferability of non-statutory stock options and the elimination of the
six (6)-month holding period requirement as a condition to the exercise of
stock appreciation rights) in order to take advantage of the recent
amendments to Rule 16b-3 of the Securities and Exchange Commission
promulgated under the Securities Exchange Act of 1934, as amended, which
exempts certain officer and director transactions under the 1993 Plan from
the short-swing liability provisions of the Federal securities laws.
The purpose of items (i) through (iii) is to provide the Company with a
sufficient reserve of Common Stock under the 1994 Plan and under the Automatic
Option Grant Program in effect under the 1994 Plan to attract and retain the
services of key individuals essential to the Company's long-term growth and
success. The purpose of item (iv) is to assure that all options granted under
the 1994 Plan will continue to qualify as performance-based compensation under
the Internal Revenue Code Section 162(m) so that any compensation deemed paid by
the Company upon the exercise of those options will not be subject to the
limitation on the income tax deductibility of that compensation otherwise
imposed under Section 162(m). The purpose of items (v) through (vii) is to
provide the Company with more opportunities to make equity incentives available
to the non-employee Board members as an inducement for their continued service
and to facilitate plan administration by eliminating a number of limitations and
restrictions previously incorporated into the 1994 Plan to comply with the
applicable requirements of SEC Rule 16b-3 prior to its recent amendment.
The 1994 Plan was originally adopted by the Board as the 1993 Stock Plan,
which became effective on October 25, 1993. The name of the 1993 Stock Plan was
changed to the 1994 Stock Option Plan, effective January 1, 1994. The 1993 Stock
Plan was the successor to the 1989 Stock Option Plan ("1989 Option Plan").
The purpose of the 1994 Plan is to provide eligible employees, non-employee
Board members and consultants the opportunity to acquire a proprietary interest,
or otherwise increase their proprietary interest, in the Company as an incentive
for them to remain in the service of the Company or its subsidiaries.
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<PAGE> 10
The principal terms and provisions of the 1994 Plan as modified by the
recent amendments approved by the Board, together with the applicable tax and
accounting implications, are summarized below. The summary is not, however,
intended to be a complete description of all the terms of the Plan. A copy of
the Plan will be furnished without charge to any stockholder upon written
request to the Corporate Secretary at the Company's principal executive office
in Alameda, California.
EQUITY INCENTIVE PROGRAMS
The 1994 Plan consists of two separate equity incentive programs: (i) a
Discretionary Option Grant Program, under which officers and other employees,
non-employee Board members and independent consultants may, at the discretion of
the Plan Administrator, be granted stock options to purchase shares of stock at
an exercise price per share equal to the fair market value of the option shares
on the grant date, and (ii) an Automatic Grant Program, under which option
grants will be made at specified intervals to non-employee Board members.
Options granted under the Discretionary Option Grant Program may be either
incentive stock options designed to meet the requirements of Section 422 of the
Internal Revenue Code or non-statutory options not intended to satisfy such
requirements. All grants under the Automatic Option Grant Program will be non-
statutory options.
SHARE RESERVE
As of March 31, 1997, a total of 2,488,853 shares of Common Stock were
reserved for issuance over the remainder of the 10 year term of the 1994 Plan,
including the 500,000-share increase which forms part of this Proposal. Should
stockholders approve this Proposal, then the number of shares of Common Stock
available for issuance under the 1994 Plan will automatically increase on the
first day of January each year, beginning January 1, 1998, by an amount equal to
2% of the number of shares of Common Stock outstanding on the last day of
December in the immediately preceding year. The shares issuable under the 1994
Plan may be drawn from either authorized but previously unissued shares of stock
or from reacquired shares of stock, including shares purchased by the Company on
the open market.
Should an option expire or terminate for any reason prior to exercise in
full (including options canceled in accordance with the cancellation-regrant
provisions of the 1994 Plan), the shares subject to the portion of the option
not so exercised will be available for subsequent issuance under the 1994 Plan.
However, any shares surrendered to pay the exercise price of an outstanding
option or shares withheld to pay any taxes associated with the exercise of the
option will not be available for subsequent issuance under the 1994 Plan.
The portion of the share reserve set aside for issuance to non-employee
Board members under the Automatic Option Grant Program may not exceed 150,000
shares over the remaining term of the 1994 Plan, assuming the stockholders
approve the 33,344-share increase to that program which forms part of this
Proposal.
The maximum number of shares for which any one individual participating in
the 1994 Plan may be granted stock options and separately exercisable stock
appreciation rights may not exceed 850,000 shares in the aggregate over the term
of the 1994 Plan. However, for purposes of this limitation, any option grants or
stock appreciation rights made on or before December 31, 1993 will not be taken
into account. Prior to the March 17, 1997 amendment to the 1994 Plan, such
limitation did not cover a specific number of shares, but was instead a formula
limitation tied to 35% of the total number of shares of Common Stock which may
be authorized from time to time for issuance under the 1994 Plan. It is not
certain whether such a formula limitation is permissible under the final
Treasury Regulations issued under Internal Revenue Code Section 162(m), and the
Board accordingly amended the 1994 Plan to impose a specific limitation of
850,000 shares.
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<PAGE> 11
PLAN ADMINISTRATION
The 1994 Plan (other than the Automatic Option Grant Program) is
administered by the Stock Plan and Compensation Committee ("Committee" or the
"Plan Administrator") of the Board. The Committee is comprised of two or more
non-employee Board members appointed by the Board. The Committee, acting as Plan
Administrator, has complete discretion (subject to the express provisions of the
1994 Plan) to authorize stock option grants and stock appreciation rights under
the 1994 Plan. However, all grants under the Automatic Option Grant Program will
be made in strict compliance with the express provisions of that program, and no
administrative discretion will be exercised by the Plan Administrator with
respect to the grants made under such program.
ELIGIBILITY
Officers and other key employees who render services that contribute to the
management, growth and financial success of the Company, non-employee members of
the Board and independent consultants in the service of the Company or any
parent or subsidiary corporation (whether now existing or subsequently
established) are eligible to participate in the Discretionary Option Grant
Program. Non-employee Board members are also eligible to participate in the
Automatic Option Grant Program.
As of March 31, 1997, five non-employee Board members, three executive
officers and approximately 44 other employees were eligible to participate in
the 1994 Plan. The five non-employee Board members were also eligible to
participate in the Automatic Option Grant Program.
VALUATION
The fair market value per share of Common Stock on any relevant date under
the 1994 Plan is the closing selling price per share on the date in question as
reported on the Nasdaq National Market. If there is no reported closing price
for such date, then the closing price for the last previous date for which such
quotation exists will be determinative of such fair market value. On March 31,
1997, the fair market value per share of Common Stock determined on such basis
was $4.31.
DISCRETIONARY OPTION GRANT PROGRAM
The principal features of the Discretionary Option Grant Program may be
summarized as follows:
The exercise price per share will be set by the Plan Administrator, but in
no event will the exercise price be less than 100% of the fair market value per
share of stock on the grant date. No option will have a maximum term in excess
of 10 years measured from the grant date. Options issued under the Discretionary
Option Grant Program may become exercisable in cumulative increments over a
period of months or years as determined by the Plan Administrator.
The exercise price may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date. Each option may also be exercised
through a same-day sale program pursuant to which a designated brokerage firm is
to effect an immediate sale of the shares purchased under the option and pay to
the Company, out of the sales proceeds available on the settlement date,
sufficient funds to cover the exercise price for the purchased shares plus all
applicable withholding taxes.
Loans
The Plan Administrator may also assist any optionee (including an officer)
in the exercise of outstanding options under the Discretionary Option Grant
Program by authorizing a loan from the Company or permitting the optionee to pay
the exercise price in installments over a period of years. The terms and
conditions of any such loan or installment payment will be established by the
Plan Administrator in its sole discretion, but in no event may the maximum
credit extended to the optionee exceed the aggregate exercise price payable for
the purchased shares (less the par value of those shares) plus any Federal,
state or local income taxes or employment taxes incurred by the optionee in
connection with the option exercise.
8
<PAGE> 12
Limited Stock Appreciation Rights
Each officer of the Company subject to the short-swing profit restrictions
of the Federal securities laws will be granted a limited stock appreciation
right as part of any stock option grant made to such officer under the
Discretionary Option Grant Program. Any option with such a limited stock
appreciation right may be surrendered to the Company upon the successful
completion of a hostile tender offer for securities possessing more than 50% of
the combined voting power of the Company's outstanding securities. In return for
the surrendered option, the officer will be entitled to a cash distribution from
the Company in an amount per surrendered option share equal to the excess of (a)
the highest reportable price per share of stock paid in such hostile tender
offer over (b) the exercise price payable for such share.
Cessation of Service
Outstanding options under the Discretionary Option Grant Program will
terminate, with respect to any shares for which such options are exercisable at
the time of the optionee's cessation of service with the Company, within three
months following such cessation of service (or 12 months in the case of
cessation of service due to permanent disability), unless the Plan Administrator
determines that such exercise period should be further extended for one or more
additional months or years. Under no circumstances, however, may any such option
remain exercisable after the specified expiration date of the option term.
Should the optionee die while holding one or more exercisable options, then
those options will remain exercisable for a 12-month period measured from the
earlier of (i) the date of the optionee's death or (ii) the date of the
optionee's cessation of service and may be exercised within that period by the
personal representative of the optionee's estate or by the persons to whom such
options are transferred by the optionee's will or by the laws of inheritance.
During the applicable exercise period following the optionee's cessation of
service, the option may not be exercised for more than the number of option
shares for which the option is exercisable at the time of such cessation of
service. However, the Plan Administrator will have the discretionary authority
to accelerate, in whole or in part, the exercisability of any outstanding
options held by the optionee and may exercise this discretion at any time while
the option remains outstanding.
For purposes of the 1994 Plan, the optionee will be deemed to be in the
service of the Company for so long as such individual renders periodic services
to the Company or any parent or subsidiary, whether as an employee, a
non-employee member of the Board or an independent consultant or advisor.
Stockholder Rights/Limited Transferability
The optionee does not have any stockholder rights with respect to the
option shares until the option is exercised and the exercise price is paid for
the purchased shares. Options are generally not assignable or transferable other
than by will or the laws of inheritance and, during the optionee's lifetime, the
option may be exercised only by such optionee. However, the Plan Administrator
may allow non-statutory options to be transferred or assigned during the
optionee's lifetime to one or more members of the optionee's immediate family or
to a trust established exclusively for one or more such family members, to the
extent such transfer or assignment is in furtherance of the optionee's estate
plan.
Tax Withholding
The Plan Administrator may in its discretion provide one or more option
holders under the Discretionary Option Grant Program with the election to have
the Company withhold, from the shares of Common Stock otherwise issuable upon
the exercise of their options, a portion of those shares with an aggregate fair
market value equal to the designated percentage (up to 100% as specified by the
option holder) of the Federal, state and local income and employment tax
liability incurred by such option holder in connection with the exercise of such
option. Any election so made will be subject to the approval of the Plan
Administrator. One or more option holders may also be granted the alternative
right, subject to Plan Administrator approval, to deliver previously-issued
shares of Common Stock in satisfaction of such tax liability.
9
<PAGE> 13
Cancellation-Regrant of Options
The Plan Administrator has the authority to effect, on one or more separate
occasions, the cancellation of outstanding options under the Discretionary
Option Grant Program which have exercise prices in excess of the then current
market price of stock and to issue replacement options with an exercise price
not less than the market price of stock at the time of the new grant.
AUTOMATIC GRANT PROGRAM
Out of the total share reserve under the 1994 Plan, 150,000 shares have
been set aside for issuance to non-employee Board members through automatic
option grants made under the Automatic Option Grant Program, assuming the
stockholders approve the 33,334-share increase to that sub-reserve which forms
part of this Proposal. Each non-employee Board member who is first elected or
re-elected to the Board will automatically be granted an option to purchase
10,000 shares of Common Stock. However, a non-employee Board member who replaces
a Board member will not receive an initial 10,000-share grant if both the new
and former Board members are affiliated with the same investment fund or similar
entity. At each Annual Meeting of the Company's stockholders, each individual
who is to continue to serve as a non-employee Board member will automatically be
granted an option to purchase 5,000 shares of Common Stock on the date of such
meeting, provided the individual did not receive a 10,000-share grant in the
same calendar year. Stockholder approval of this Proposal will also constitute
pre-approval of each option subsequently granted pursuant to the provisions of
the Automatic Option Grant Program summarized below and the subsequent exercise
of that option in accordance with such provisions.
The exercise price per share for each automatic grant will be the fair
market value per share of Common Stock on the date of grant and will be payable
in cash or shares of Common Stock. The option may also be exercised through a
cashless exercise procedure pursuant to which a designated brokerage firm
effects an immediate sale of the shares purchased under the option and pays to
the Company, out of the sales proceeds available on the settlement date,
sufficient funds to cover the exercise price for the purchased shares plus all
applicable withholding taxes.
Automatic option grants will become exercisable one year after the grant
date, provided the optionee remains a member of the Board through such date.
However, full and immediate exercisability will occur upon a Corporate
Transaction and Change in Control (as such terms are defined in the section
below entitled "Acceleration of Options").
Automatic Option Cancellation
Each automatic option grant will be automatically cancelled upon a hostile
take-over of the Company effected through a tender offer for securities
possessing more than 50% of the combined voting power of the Company's
outstanding securities. In return the optionee will be entitled to a cash
distribution from the Company in an amount equal to the excess per share of (i)
the highest reportable per share price paid in the hostile tender offer over
(ii) the exercise price payable for each such share subject to the surrendered
option, whether or not the option is otherwise at the time exercisable for all
the option shares. Stockholder approval of this Proposal shall constitute
pre-approval of each option subsequently granted with such an automatic
cancellation provision and the subsequent cancellation of that option in
accordance with such provision. No additional approval of the Plan Administrator
or the Board will be required at the time of the actual option cancellation and
cash distribution.
Cessation of Board Service
Upon cessation of Board service, the options held by the non-employee Board
member will remain exercisable for three months (or six months if cessation of
Board service is due to permanent disability). Should the optionee die while
holding one or more options, then those options may subsequently be exercised by
the personal representative of the optionee's estate or by the persons to whom
such options are transferred by the optionee's will or by the laws of
inheritance within six months of the director's death. During such post-
10
<PAGE> 14
service exercise period, the option may not be exercised for more than the
number of option shares for which the option is exercisable at the time of the
optionee's cessation of Board service.
GENERAL PROVISIONS
ACCELERATION OF OPTIONS
Outstanding options under the 1994 Plan will become immediately exercisable
in the event of certain changes in the ownership or control of the Company.
Corporate Transaction
In the event of any of the following stockholder-approved transactions in
which the Company is a party (a "Corporate Transaction"):
(a) a merger or consolidation in which securities possessing more than
50% of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction, or
(b) the sale, transfer or other disposition of all or substantially
all of the Company's assets in complete liquidation or dissolution of the
Company,
each outstanding option under the 1994 Plan will automatically become
exercisable for all of the option shares, unless the option is either to be
assumed by the successor corporation (or its parent corporation) in such
Corporate Transaction or is otherwise to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation. Upon the
consummation of the Corporate Transaction, all outstanding options under the
1994 Plan will terminate and cease to be exercisable, except to the extent
assumed by the successor corporation.
Change in Control
In the event of a Change in Control (as defined below), each outstanding
option under the 1994 Plan will automatically become exercisable for all of the
option shares. A Change in Control will be deemed to have occurred if:
(i) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act)
of securities possessing 40% or more of the total combined voting power of
the Company's outstanding securities pursuant to a tender or exchange offer
made directly to the Company's stockholders which the Board does not
recommend such stockholders to accept; or
(ii) the composition of the Board changes over a period of two
consecutive years or less such that a majority of the Board members ceases
to be comprised of individuals who either (A) have been Board members
continuously since the beginning of such period or (B) have been elected or
nominated for election as Board members during such period by at least a
three-fourths ( 3/4ths) majority of the Board members described in clause
(A) who were still in office at the time such election or nomination was
approved by the Board.
Upon a Change in Control, all outstanding options will remain exercisable
until the expiration or sooner termination of the option term specified in the
instrument evidencing the option.
The acceleration of the exercisability of options in the event of a
Corporate Transaction or Change in Control may be seen as an anti-takeover
provision and may have the effect of discouraging a merger proposal, a takeover
attempt or other efforts to gain control of the Company.
11
<PAGE> 15
CHANGES IN CAPITALIZATION
In the event any change is made to the outstanding shares of stock by
reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to (i) the maximum number and/or class of securities issuable under the
1994 Plan, (ii) the maximum number and/or class of securities for which any one
individual may be granted stock options and separately exercisable stock
appreciation rights under the 1994 Plan after December 31, 1993, (iii) the
number and/or class of securities and price per share in effect under each
outstanding option (including all option grants incorporated from the 1989
Option Plan) and (iv) the maximum number of shares issuable under the Automatic
Option Grant Program to newly-elected or continuing non-employee Board members.
Each outstanding option which is assumed or is otherwise to continue in
effect after a merger or business combination will be appropriately adjusted to
apply and pertain to the number and class of securities which would have been
issuable, in connection with such merger or business combination, to an actual
holder of the same number of shares of Common Stock as are subject to such
option immediately prior to such merger or business combination. Appropriate
adjustments will also be made to the option price payable per share and to the
number and class of securities available for issuance under the 1994 Plan.
Option grants under the 1994 Plan will not affect the right of the Company
to adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
AMENDMENT AND TERMINATION
The Board may amend or modify the 1994 Plan in any or all respects
whatsoever. However, no such amendment may adversely affect the rights of
existing optionees holding outstanding options without their consent. In
addition, certain amendments may require stockholder approval pursuant to
applicable laws or regulations. The Board may terminate the 1994 Plan at any
time, and the 1994 Plan will in all events terminate on the earlier of (i) July
27, 2003, or (ii) the date all shares available for issuance are issued or
cancelled. Each stock option outstanding at the time of such termination will
remain in force in accordance with the provisions of the instruments evidencing
such grant.
STOCK AWARDS
The table below shows, as to each of the Company's officers listed in the
Summary Compensation Table set forth elsewhere in this Proxy Statement (the
"Named Executive Officers") and the various indicated individuals and groups,
the following information with respect to stock option transactions under the
1994 Plan from January 1, 1996 to April 4, 1997: (i) the number of shares of
stock subject to options granted during that period and (ii) the weighted
average option price payable per share.
OPTION TRANSACTIONS
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS GRANTED EXERCISE PRICE
NAME (NUMBER OF SHARES) OF OPTIONS GRANTED
- ---------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
S. Kumar Chandrasekaran, Ph.D. ........................... -- --
Lyle M. Bowman, Ph.D. .................................... -- --
Karen K. Church........................................... 50,000 $5.875
All current non-employee directors as a group who received
option grants (5 persons)............................... 45,000 $5.90
All employees, including current officers who are not
Named Executive Officers, as a group who received option
grants (approximately 26 persons)....................... 149,550 $5.507
</TABLE>
12
<PAGE> 16
FEDERAL INCOME TAX CONSEQUENCES
OPTION GRANTS
Options granted under the 1994 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
federal income tax treatment for the two types of options differs as described
below:
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of disposition. For federal tax purposes, dispositions are divided into
two categories: (i) qualifying and (ii) disqualifying. The optionee will make a
qualifying disposition of the purchased shares if the sale or other disposition
of such shares is made after the optionee has held the shares for more than two
years after the grant date of the option and more than one year after the
exercise date. If the optionee fails to satisfy either of these two minimum
holding periods prior to the sale or other disposition of the purchased shares,
then a disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for those shares. If there is a disqualifying
disposition of the shares, then the excess of (i) the fair market value of those
shares on the option exercise date over (ii) the exercise price paid for the
shares will be taxable as ordinary income. Any additional gain recognized upon
the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the optionee.
STOCK APPRECIATION RIGHTS
An optionee who is granted a stock appreciation right will recognize
ordinary income in the year of exercise equal to the amount of the appreciation
distribution. The Company will be entitled to an income tax deduction equal to
the appreciation distribution for the taxable year in which the ordinary income
is recognized by the optionee.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options will qualify as performance-based
compensation for purposes of Code Section 162(m) and will not have to be taken
into account for purposes of the $1 million limitation per covered individual on
the deductibility of the compensation paid to certain executive officers of the
Company.
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<PAGE> 17
ACCOUNTING TREATMENT
Option grants with exercise prices equal to 100% of the fair market value
of the shares on the grant date will not result in a compensation expense to the
Company's earnings. However, the Company must disclose, in footnotes to the
Company's financial statements, the impact those options would have upon the
Company's reported earnings were the value of those options treated as
compensation expense. The number of outstanding options may be a factor in
determining the Company's earnings per share on a fully-diluted basis.
The grant of stock appreciation rights that require certain conditions to
be satisfied before the right may be exercised, such as the occurrence of a
hostile tender offer, will not result in a compensation expense to the Company's
earnings.
NEW PLAN BENEFITS
No stock option grants or direct stock issuances have been made as of the
date hereof under the 1994 Plan on the basis of the 500,000-share increase for
which stockholder approval is sought under this Proposal.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding shares of the
Company's voting Common Stock present or represented at the 1997 Annual Meeting
and entitled to vote on the Proposal is required for approval of the amendments
to the 1994 Plan. If such stockholder approval is not obtained, then the
500,000-share increase to the share reserve will not be effected, and any stock
option grants made on the basis of that share increase will terminate without
ever becoming exercisable for the shares of Common Stock subject to those
options. In addition, the automatic share increase feature pursuant to which the
share reserve under the 1994 Plan will automatically increase on the first day
of January each year will not be implemented. Moreover, the maximum number of
shares set aside for issuance under the Automatic Option Grant Program will
remain limited to 116,666 shares, and the non-employee Board members will not
become eligible to participate in the Discretionary Option Grant Program.
Finally, the maximum number of shares for which any individual participating in
the 1994 Plan may be granted stock options and separately exercisable stock
appreciation rights will not be set at 850,000 shares and the prior
formula-based limitation will be reinstated. The 1994 Plan will, however,
continue to remain in effect, and option grants may continue to be made pursuant
to the provisions of the 1994 Plan in effect immediately prior to the amendments
summarized in this Proposal, until the available reserve of Common Stock as last
approved by the stockholders has been issued pursuant to option grants made
under the 1994 Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
APPROVAL OF THE AMENDMENTS TO THE 1994 PLAN.
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<PAGE> 18
PROPOSAL THREE -- RATIFICATION OF INDEPENDENT ACCOUNTANTS
The Board of Directors has appointed the firm of Ernst & Young LLP,
independent accountants, to audit the financial statements of the Company for
the fiscal year ending December 31, 1997, and is asking the stockholders to
ratify this appointment.
In the event the stockholders fail to ratify the appointment, the Board of
Directors will reconsider its selection. Even if the selection is ratified, the
Board of Directors in its discretion may direct the appointment of a different
independent accounting firm at any time during the year if the Board of
Directors believes that such a change would be in the best interests of the
Company and its stockholders. The affirmative vote of the holders of a majority
of the Company's voting shares represented and voting at the Annual Meeting is
required to ratify the selection of Ernst & Young LLP.
Ernst & Young LLP has audited the Company's financial statements annually
since 1986. A representative of Ernst & Young LLP is expected to be present at
the Annual Meeting, will have the opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE SELECTION OF ERNST & YOUNG LLP TO SERVE AS THE COMPANY'S
INDEPENDENT ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
15
<PAGE> 19
EXECUTIVE COMPENSATION AND RELATED INFORMATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board is responsible for establishing the
cash and equity compensation of the Company's Chief Executive Officer, Dr.
Chandrasekaran, and the Company's other executive officers. All decisions by the
Compensation Committee with respect to cash compensation are reviewed by the
full Board of Directors. However, the Compensation Committee has the sole and
exclusive authority to administer the Company's 1994 Plan and to make option
grants to the Company's executive officers under the 1994 Plan. The Compensation
Committee has furnished the following report with respect to the 1996
compensation of Dr. Chandrasekaran and the Company's other executive officers.
Compensation Policy
The Compensation Committee's principal goals in making its executive
compensation recommendations are (i) to ensure that there exists an appropriate
relationship between executive pay and both the operating performance of the
Company and stockholder value, particularly, but not exclusively, as reflected
in the price of the Company's Common Stock, and (ii) to attract, motivate and
retain key executives in the face of competition within the biopharmaceutical
industry for qualified personnel. To achieve these objectives, the Compensation
Committee's executive compensation policies generally integrate annual base
salaries and other guaranteed payments for Dr. Chandrasekaran and the Company's
other executive officers with bonuses and stock options primarily based upon
corporate and individual performance. In addition to linking executive
compensation directly to stockholder value, the Compensation Committee believes
that stock options, through staged vesting provisions, perform an important role
in motivating and retaining key executives. Performance is measured primarily by
comparison with specific objectives.
Base Salary
The base salary levels for the executive officers were established for the
1996 fiscal year on the basis of the following factors: personal performance,
the estimated salary levels in effect for similar positions at a select group of
companies with which the Company competes for executive talent, and internal
comparability considerations. The Compensation Committee, however, did not rely
upon any specific compensation surveys for comparative compensation purposes.
Instead, the Compensation Committee made its decisions as to the appropriate
market level of base salary for each executive officer on the basis of its
understanding of the salary levels in effect for similar positions at those
companies with which the Company competes for executive talent. The Compensation
Committee estimates that the base salary levels in effect for the Company's
executive officers, including Dr. Chandrasekaran as Chief Executive Officer,
were at the median of the salary levels in effect for similar positions at those
competitor companies. Base salaries will be reviewed on an annual basis, and
adjustments will be made in accordance with the factors indicated above.
Performance Measures
Due to the current stage of the Company's development, the Compensation
Committee believes that corporate performance is not appropriately measured in
terms of traditional financial performance criteria such as profitability and
earnings per share. Rather, the Compensation Committee believes that corporate
performance is appropriately measured by analyzing the degree to which the
Company has achieved certain goals established by the Compensation Committee and
approved by the Board. Accordingly, annual incentive compensation is awarded on
the basis of these non-traditional financial factors.
In evaluating the 1996 compensation of Dr. Chandrasekaran and other
executive officers, the Compensation Committee considered the Company's
achievements during 1996, including progress in clinical and regulatory
development and the development of collaborative relationships. The Company's
ability to achieve such milestones, which are consistent with its goals, was in
large part due to the efforts of Dr. Chandrasekaran and the other executive
officers, and their 1996 compensation reflects such efforts. On the basis of
these
16
<PAGE> 20
achievements, bonuses were approved for the executive officers for fiscal year
1996 as reflected in the Summary Compensation Table which appears later in this
Proxy Statement.
Stock Option Grants
Stock option grants under the 1994 Plan are designed to align the interests
of each executive officer with those of the stockholders and provide each
individual with a significant incentive to manage the Company from the
perspective of an owner with an equity stake in the business. Each grant allows
the individual to acquire shares of Common Stock at a fixed price per share (the
market price on the grant date) over a specified period of time (up to 10
years). Each option generally becomes exercisable in installments over a period
of years, contingent upon the executive officer's continued employment with the
Company. Accordingly, the option will provide a return to the executive officer
only if the executive officer remains employed by the Company during the
applicable vesting period, and then only if the market price of the underlying
shares appreciates over the option term.
The number of shares subject to each option grant will be set at a level
intended to create a meaningful opportunity for stock ownership based on the
officer's current position with the Company, the base salary associated with
that position, the size of comparable awards made to individuals in similar
positions within the industry, the individual's potential for increased
responsibility and promotion over the option term, and the individual's personal
performance in recent periods. The Compensation Committee will also take into
account the executive officer's existing holdings of Common Stock and the number
of vested and unvested options held by that individual in order to maintain an
appropriate level of equity incentive. However, the Compensation Committee does
not intend to adhere to any specific guidelines as to the relative option
holdings of the Company's executive officers.
The option grants made to the executive officers during the 1996 fiscal
year were intended to provide such individuals with a meaningful incentive to
remain in the Company's employ and to contribute to the Company's financial
success in the form of stock price appreciation.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to publicly held companies for compensation exceeding
$1 million paid to certain of the corporation's executive officers. The
limitation applies only to compensation which is not considered to be
performance-based. The non-performance based compensation to be paid to the
Company's executive officers for the 1996 fiscal year did not exceed the $1
million limit per officer, nor is it expected that the non-performance based
compensation to be paid to the Company's executive officers for fiscal 1997 will
exceed that limit. The 1994 Plan is structured so that any compensation deemed
paid to an executive officer in connection with the exercise of option grants
made under that plan will qualify as performance-based compensation which will
not be subject to the $1 million limitation. Because it is very unlikely that
the cash compensation payable to any of the Company's executive officers in the
foreseeable future will approach the $1 million limit, the Compensation
Committee has decided at this time not to take any other action to limit or
restructure the elements of cash compensation payable to the Company's executive
officers. The Compensation Committee will reconsider this decision should the
individual compensation of any executive officer ever approach the $1 million
level.
Grant M. Inman
Jon S. Saxe
PERFORMANCE GRAPH
The following graph compares the monthly percentage change in (i) the
cumulative total stockholder return on the Company's Common Stock from October
18, 1993, the date of the Company's initial public offering, through December
31, 1996 with (ii) the cumulative total return on (a) The Nasdaq Stock Market
(U.S. Index) and (b) the Nasdaq Biotech Index. The comparison assumes (i) an
investment of $100 on October 18, 1993 in each of the foregoing indices and (ii)
reinvestment of dividends, if any. THE STOCK PRICE
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<PAGE> 21
PERFORMANCE SHOWN ON THE GRAPH BELOW REPRESENTS HISTORICAL PRICE PERFORMANCE AND
IS NOT NECESSARILY INDICATIVE OF ANY FUTURE STOCK PRICE PERFORMANCE.
<TABLE>
<CAPTION>
Measurement Period Nasdaq Biotech
(Fiscal Year Covered) InSite Vision Nasdaq Composite Index
<S> <C> <C> <C>
10/18/93 100 100 100
<CAPTION>
Measurement Period
(Fiscal Year Covered) 95.35 96.81 100
<S> <C> <C> <C>
Dec-93 97.67 99.68 100.91
<CAPTION>
Measurement Period
(Fiscal Year Covered) 106.98 102.72 106.85
Measurement Period
(Fiscal Year Covered) 91.86 101.7 94.74
<S> <C> <C> <C>
Mar-94 76.74 95.41 82.52
<CAPTION>
Measurement Period
(Fiscal Year Covered) 62.79 94.17 79.65
Measurement Period
(Fiscal Year Covered) 62.79 94.34 80.82
<S> <C> <C> <C>
Jun-94 59.3 90.59 74.08
<CAPTION>
Measurement Period
(Fiscal Year Covered) 60.47 92.67 77.6
Measurement Period
(Fiscal Year Covered) 59.3 98.25 86.66
<S> <C> <C> <C>
Sep-94 54.65 98.08 86.25
<CAPTION>
Measurement Period
(Fiscal Year Covered) 51.16 99.77 83.43
Measurement Period
(Fiscal Year Covered) 48.84 96.29 84.5
<S> <C> <C> <C>
Dec-94 44.19 96.5 82.3
<CAPTION>
Measurement Period
(Fiscal Year Covered) 41.86 96.91 86.37
Measurement Period
(Fiscal Year Covered) 37.21 101.86 89.56
<S> <C> <C> <C>
Mar-95 30.23 104.87 88.06
<CAPTION>
Measurement Period
(Fiscal Year Covered) 27.91 108.31 91.26
Measurement Period
(Fiscal Year Covered) 25.58 110.95 91.64
<S> <C> <C> <C>
Jun-95 29.07 119.79 102.91
<CAPTION>
Mea surement Period
(Fiscal Year Covered) 41.86 128.48 112.25
Measurement Period
(Fiscal Year Covered) 37.21 130.91 126.29
<S> <C> <C> <C>
Sep-95 43.61 133.91 129.94
<CAPTION>
Measurement Period
(Fiscal Year Covered) 33.14 132.95 125.47
Measurement Period
(Fiscal Year Covered) 20.35 135.92 132.01
<S> <C> <C> <C>
Dec-95 33.14 135.02 155.18
<CAPTION>
Measurement Period
(Fiscal Year Covered) 56.98 136 167.13
Measurement Period
(Fiscal Year Covered) 63.95 141.17 161.9
<S> <C> <C> <C>
Mar-96 51.16 141.34 155.08
<CAPTION>
Measurement Period
(Fiscal Year Covered) 56.98 152.78 161.6
Measurement Period
(Fiscal Year Covered) 63.95 159.57 167.75
<S> <C> <C> <C>
Jun-96 53.49 152.07 150.27
<CAPTION>
Measurement Period
(Fiscal Year Covered) 44.19 138.67 136.18
Measurement Period
(Fiscal Year Covered) 40.7 146.49 144.86
<S> <C> <C> <C>
Jul-96 40.7 157.45 156.22
<CAPTION>
Measurement Period
(Fiscal Year Covered) 38.37 156.75 151.47
Measurement Period
(Fiscal Year Covered) 41.28 165.88 149.75
<S> <C> <C> <C>
Dec-96 55.81 165.67 154.67
<CAPTION>
Measurement Period
(Fiscal Year Covered) 46.51 177.07 168.68
Measurement Period
(Fiscal Year Covered) 40.7 167.98 173.18
<S> <C> <C> <C>
Mar-97 40.12 156.78 149.96
</TABLE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Exchange
Act, which might incorporate future filings made by the Company under those
statutes, the preceding Compensation Committee Report on Executive Compensation
and the Company Stock Performance Graph will not be incorporated by reference
into any of those prior filings, nor will such report or graph be incorporated
by reference into any future filings made by the Company under those Acts.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Grant M. Inman and Jon S.
Saxe. A replacement for Mr. Saxe will be elected following the Annual Meeting.
No member of the Compensation Committee was at any time during the 1996 fiscal
year an officer or employee of the Company.
During the 1996 fiscal year, no executive officer of the Company served as
a member of the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
On May 30, 1995, the Company adopted an addendum to the 1994 Plan which
provides that if an optionee's service is involuntarily terminated within 12
months following a Corporate Transaction (as defined below) in which his or her
options are assumed by the successor corporation or parent thereof, then those
options will immediately accelerate and become fully exercisable for all of the
option shares as fully-vested shares of Common Stock. A "Corporate Transaction"
under the 1994 Plan is defined as a merger or
18
<PAGE> 22
consolidation in which securities possessing more than 50% of the total combined
voting power of the Company's outstanding securities are transferred to a person
or persons different from those who held those securities immediately prior to
such transaction, or the sale, transfer or other disposition of all or
substantially all of the Company's assets in complete liquidation of the
Company. "Involuntary Termination" under the 1994 Plan is defined as the
optionee's involuntary dismissal or discharge by the Company for reasons other
than misconduct, or the optionee's voluntary resignation following (a) a change
in his or her position with the Company which materially reduces his or her
responsibilities or (b) a reduction in his or her level of compensation
(including base salary, fringe benefits and any non-discretionary and
objective-standard incentive payment or bonus award) by more than 15% or (c) a
relocation of the optionee's place of employment by more than 50 miles, and such
change, reduction or relocation is effected by the Company without the
optionee's consent.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned, by the Company's
Chief Executive Officer and each of the Company's next two highest-paid
executive officers whose salary and bonus for fiscal year 1996 was in excess of
$100,000, for services rendered in all capacities to the Company for the 1996,
1995 and 1994 fiscal years (the "Named Executive officers"). No executive
officer who would have otherwise been included in such table on the basis of
salary and bonus earned for the 1996 fiscal year resigned or terminated
employment during that fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- SECURITIES ALL
OTHER ANNUAL UNDERLYING OTHER
NAME AND PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($)(2) COMPENSATION($) OPTIONS/(#) COMPENSATION
- ------------------------------ ---- --------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
S. Kumar Chandrasekaran,
Ph.D. ...................... 1996 262,000 -- 2,592(4) -- --
Chairman of the Board 1995 247,400 25,000 21,414(4) 225,000 --
Chief Executive Officer and 1994 226,000 37,500 16,577(4) -- --
Chief Financial Officer
Lyle M. Bowman, Ph.D.......... 1996 154,445 -- 901(3) -- --
Vice President, Development 1995 134,300 15,000 761(3) 60,000 --
and Operations 1994 122,192 10,700 716(3) -- --
Karen K. Church............... 1996 165,000 -- 1,613(3) -- --
Vice President, Regulatory, 1995 68,750 99,908(5) 720(3) 85,000 --
Quality and Clinical 1994 -- -- -- -- --
</TABLE>
- ---------------
(1) Principal Position determined as of December 31, 1996.
(2) The amounts shown under the Bonus column include cash bonuses earned for the
indicated fiscal years.
(3) Represents amounts paid for excess life insurance coverage.
(4) Until June 1995, any vacation accrued above a two year period was paid out
quarterly. In 1995 and 1994 Dr. Chandrasekaran received $3,980 and $14,423,
respectively, for vacation benefits not taken. In 1996, 1995 and 1994 Dr.
Chandrasekaran received $2,592, $2,424 and $2,154, respectively, for excess
life insurance. In addition, $15,010 was paid to Dr. Chandrasekaran in 1995
as a 1994 salary adjustment.
(5) Ms. Church joined the Company on May 30, 1995. Her 1995 bonus included a
$69,908 relocation bonus and a $15,000 sign-on bonus. Ms. Church resigned
from the Company on March 21, 1997.
OPTION/SAR GRANTS
The following table contains information concerning the grant of stock
options under the Plan to the Named Executive Officers during the 1996 fiscal
year. Except for the limited stock appreciation right
19
<PAGE> 23
described in footnote (2) below which formed part of the option grant made to
each such person, no stock appreciation rights were granted to such person
during the 1996 fiscal year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- ------------------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
- -------------------------- ------------ ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Karen K. Church(2)........ 50,000(3) 26% $ 5.875 01/17/06 $195,250 $485,250
</TABLE>
- ---------------
(1) Potential realizable value is based on assumption that the market price of
the Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the 10-year option term. There can
be no assurance that the actual stock price appreciation over the 10-year
option term will be at the assumed 5% and 10% levels or at any other defined
level.
(2) Ms. Church resigned from the Company on March 21, 1997.
(3) The option has a maximum term of 10 years, subject to earlier termination in
the event of the optionee's cessation of service with the Company. The
option will become exercisable for 25% of the option shares upon her
completion of one year of service measured from the January 17, 1996 grant
date and for the balance in equal daily installments over the next three
years of service thereafter. However, the option will become immediately
exercisable for all the option shares upon an acquisition of the Company by
merger or asset sale, unless the option is assumed by the successor entity.
The option includes a limited stock appreciation right which will result in
the cancellation of that option, to the extent exercisable for vested
shares, upon the successful completion of a hostile tender offer for
securities possessing more than 50% of the combined voting power of the
Company's outstanding voting securities. In return for the cancelled option,
the optionee will receive a cash distribution per cancelled option share
equal to the excess of (i) the highest price paid per share of the Company's
common stock in such hostile tender offer over (ii) the exercise price
payable per share under the cancelled option. The exercise price may be paid
in cash or in shares of Common Stock (valued at fair market value on the
exercise date) or through a cashless exercise procedure involving a same-day
sale of the purchased shares. The Company may also finance the option
exercise by loaning the optionee sufficient funds to pay the exercise price
for the purchased shares and the federal and state income tax liability
incurred by the optionee in connection with such exercise.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the exercise of
options during the 1996 fiscal year by the Company's Chief Executive Officer and
each of the Company's Named Executive Officers and the unexercised options held
by such individuals at the end of such fiscal year. No stock appreciation rights
were exercised by such individuals during the 1996 fiscal year, and no
outstanding stock appreciation rights were held by them at the end of such
fiscal year, except for the special limited stock appreciation right which forms
part of each option grant made to such executive officers. Each option with such
a limited stock appreciation right may be surrendered to the Company upon the
successful completion of a hostile tender offer for securities possessing more
than 50% of the combined voting power of the Company's outstanding securities.
In return for the surrendered option, the executive officer will be entitled to
a cash distribution from the Company in an amount per surrendered option share
equal to the excess of (a) the highest reportable price per share of stock paid
in such hostile tender offer over (b) the exercise price payable for such share.
20
<PAGE> 24
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
NUMBER OF AGGREGATE DECEMBER 31, 1996 DECEMBER 31, 1996(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
S. Kumar Chandrasekaran,
Ph.D.................. -- -- 296,666 225,000 $ 1,601,996 $ 731,250
Lyle M. Bowman, Ph.D.... -- -- 76,165 60,000 $ 411,291 $ 195,000
Karen K. Church(2)...... -- -- 25,000 110,000 $ 31,250 $ 231,250
</TABLE>
- ---------------
(1) Calculated on the basis of the closing sale price per share of the Common
Stock on the Nasdaq National Market of $6.00 on December 31, 1996.
(2) Ms. Church resigned from the Company on March 21, 1997.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who beneficially own more than 10% of a registered class of the
Company's equity securities, to file with the United States Securities and
Exchange Commission (the "SEC") initial reports of beneficial ownership and
reports of changes in beneficial ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than 10% stockholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) reports they file.
Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that during the fiscal year ended December 31, 1996, its
officers, directors and holders of more than 10% of the Common Stock complied
with all Section 16(a) filing requirements.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of February 28, 1997, by (i) each
person who is known by the Company to beneficially own more than five percent of
the Company's Common Stock, (ii) the Chief Executive Officer and each of the
other executive officers of the Company named in the Summary Compensation Table,
(iii) each director and nominee for director at the Annual Meeting, and (iv) all
current executive officers and directors as a group. Except as otherwise
indicated, the Company believes that each of the beneficial owners of the Common
Stock listed below has sole investment power with respect to such shares,
subject to community property laws, where applicable.
21
<PAGE> 25
<TABLE>
<CAPTION>
BENEFICIALLY OWNED(1)(6)
-------------------------------------
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
- -------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
New York Life Insurance Company(2)............................ 1,132,813 8.6%
51 Madison Avenue
New York, NY 10010-1603
General Motors Investment Management Corporation.............. 1,007,902 7.8%
767 5th Avenue
New York, NY 10153
S. Kumar Chandrasekaran, Ph.D.(3)............................. 343,192 2.6%
Lyle M. Bowman, Ph.D.(4)...................................... 89,998 *
Karen K. Church(5)............................................ 40,993 *
Mitchell H. Friedlaender, M.D................................. 0 *
Grant M. Inman................................................ 10,000 *
John E. Lucas................................................. 38,000 *
Anders P. Wiklund............................................. 0 *
Jon S. Saxe................................................... 0 *
All current executive officers and directors as a group (9
persons)(3, 4, 5)........................................... 542,032 4.1%
</TABLE>
- ---------------
* Less than one percent of the outstanding Common Stock.
(1) Percentage of beneficial ownership is calculated assuming 12,936,400 shares
of Common Stock were outstanding on February 28, 1997. This percentage also
includes Common Stock of which such individual or entity has the right to
acquire beneficial ownership within 60 days of February 28, 1997, including
but not limited to the exercise of an option; however, such Common Stock
shall not be deemed outstanding for the purpose of computing the percentage
owned by any other individual or entity. Such calculation is required by
General Rule 13d-3(1)(i) under the Exchange Act.
(2) Includes 192,308 shares issuable upon the exercise of warrants exercisable
within 60 days of February 28, 1997.
(3) Includes 296,666 shares subject to stock options exercisable on February 28,
1997 or within 60 days thereafter.
(4) Includes 76,165 shares subject to stock options exercisable on February 28,
1997 or within 60 days thereafter.
(5) Represents shares subject to stock options exercisable on February 28, 1997
or within 60 days thereafter.
(6) Information presented regarding beneficial ownership of the Company's Common
Stock is as of February 28, 1997, the most recent practicable date for which
data is reasonably available to the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 13, 1996, the Company entered into a one year consulting
agreement with John E. Lucas, a director of the Company, pursuant to which Mr.
Lucas will serve as an advisor and consultant in the fields of public relations,
mergers and acquisitions and special assignments. In exchange for the consulting
services provided by Mr. Lucas, the Company has agreed to pay Mr. Lucas a
consulting fee in the amount of $3,900 per month.
On November 1, 1996, the Company entered into a one year consulting
agreement with Anders P. Wiklund, a director of the Company, pursuant to which
Mr. Wiklund will serve as an advisor and consultant in the field of business
development. In exchange for the consulting services provided by Mr. Wiklund,
the Company has agreed to pay Mr. Wiklund a consulting fee in the amount of
$5,000 per month.
22
<PAGE> 26
ANNUAL REPORT AND FORM 10-K
A copy of the Annual Report of the Company for the fiscal year ended
December 31, 1996 (the "Annual Report") and the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (the "Form 10-K"), as filed with the
Securities and Exchange Commission, have been mailed concurrently with this
Proxy Statement to all stockholders entitled to notice of and to vote at the
Annual Meeting. Neither the Annual Report nor the Form 10-K is incorporated into
this Proxy Statement and neither is considered proxy soliciting material.
OTHER MATTERS
Proposals of stockholders of the Company which are intended to be presented
by such stockholders at the Company's annual meeting of stockholders in 1998
must be received by the Company no later than December 31, 1997 in order that
they may be included in the proxy statement and form of proxy relating to that
meeting.
The Company knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters properly come before
the Annual Meeting, it is the intention of the persons named in the enclosed
form of proxy to vote the shares they represent as the Board of Directors may
recommend. Discretionary authority with respect to such other matters is granted
by the execution of the enclosed proxy.
THE BOARD OF DIRECTORS
Dated: April 17, 1997
23
<PAGE> 27
INSITE VISION INCORPORATED
1994 STOCK OPTION PLAN
(Amended and Restated as of March 17, 1997)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSES OF THE PLAN
A. The 1994 Stock Option Plan (the "Plan") was adopted
as the 1993 Stock Plan as of July 28, 1993 to be effective October 25, 1993 (the
"Effective Date") to promote the interests of InSite Vision Incorporated, a
Delaware corporation (the "Corporation"), by providing eligible individuals with
the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation (or its parent or subsidiary corporations). This
amendment and restatement changes the name of the Plan to the 1994 Stock Option
Plan and is effective as of January 1, 1994.
B. This Plan serves as the successor to the
Corporation's 1989 Stock Plan (the "1989 Plan"), and no further option grants
shall be made under the 1989 Plan from and after the Effective Date. All options
outstanding under the 1989 Plan on such Effective Date are hereby incorporated
into this Plan and shall accordingly be treated as outstanding options under
this Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the express terms and conditions of the instrument evidencing
such grant, and no provision of this Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of the Corporation's common stock
thereunder or their exercise of any outstanding stock appreciation rights
thereunder.
C. For purposes of the Plan, the following provisions
shall be applicable in determining the parent and subsidiary corporations of the
Corporation:
Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a PARENT corporation of the Corporation, provided each
such corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
<PAGE> 28
Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a SUBSIDIARY of the Corporation, provided each such
corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate
components: the Discretionary Option Grant Program specified in Article Two and
the Automatic Option Grant Program specified in Article Three. Under the
Discretionary Option Grant Program, eligible individuals may be granted options
to purchase shares of the Corporation's common stock. Under the Automatic Option
Grant Program, each eligible member of the Corporation's Board of Directors (the
"Board") will automatically receive an option grant to purchase shares of the
Corporation's common stock.
B. The provisions of Articles One and Four of the Plan
shall apply to the Discretionary Option Grant Program and the Automatic Option
Grant Program and shall accordingly govern the interests of all individuals in
the Plan.
III. ADMINISTRATION OF THE PLAN
A. Article Two of the Plan shall be administered by a
committee ("Committee") of two (2) or more non-employee Board members appointed
by the Board. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time.
B. The Committee which shall act as Plan Administrator
(the "Plan Administrator") shall have full power and authority (subject to the
express provisions of the Plan) to establish such rules and regulations as it
may deem appropriate for the proper administration of the Discretionary Option
Grant Program and to make such determinations and interpretations concerning
such program and any outstanding option under Article Two as it may deem
necessary or advisable. Decisions of the Plan Administrator shall be final and
binding on all parties with an interest in any outstanding option under the
Plan.
C. Administration of the Automatic Option Grant Program
shall be self-executing in accordance with the express terms and conditions of
Article Three.
2.
<PAGE> 29
IV. ELIGIBILITY FOR OPTION GRANTS
A. The persons eligible to participate under Article Two
of the Plan shall be limited to the following:
(i) officers and other employees of the
Corporation (or its parent or subsidiary corporations) who
render services which contribute to the management, growth and
financial success of the Corporation (or any parent or
subsidiary corporation);
(ii) non-employee members of the Board or the
non- employee members of the board of directors of any parent
or subsidiary corporation:
(iii) those consultants or independent contractors
who provide valuable services to the Corporation (or any
parent or subsidiary corporation).
B. Non-employee members of the Board shall also be
eligible to receive automatic option grants pursuant to the provisions of
Article Three (such individuals shall, for purposes of Articles Three and Four,
be referred to as "Eligible Directors").
C. The Plan Administrator shall have full authority to
determine which eligible individuals are to receive discretionary option grants
under Article Two, the number of shares to be covered by each such grant,
whether the granted option is to be an incentive stock option ("Incentive
Option") which satisfies the requirements of Section 422 of the Internal Revenue
Code or a non-statutory option not intended to meet such requirements, the time
or times at which each such option is to become exercisable, and the maximum
term for which the option is to remain outstanding.
V. STOCK SUBJECT TO THE PLAN
A. Shares of the Corporation's common stock, par value
$0.01 per share ("Common Stock") shall be available for issuance under the Plan
and shall be drawn from either the Corporation's authorized but unissued shares
of Common Stock or from reacquired shares of Common Stock, including shares
repurchased by the Corporation on the open market. The aggregate number of
shares available for issuance under the Plan from and after the Effective Date
shall not exceed 2,488,853 shares of Common Stock, subject to adjustment from
time to time in accordance with the provisions of this Section V. Such share
reserve includes (i) the initial number of shares reserved on the Effective
Date, including outstanding options granted under the 1989 Plan that were
incorporated into this Plan, (ii) a 500,000-share increase authorized by the
Board on March 29, 1994, and
3.
<PAGE> 30
approved by the stockholders on May 31, 1994, and (iii) an additional
500,000-share increase authorized by the Board on March 17, 1997, subject to
stockholder approval at the 1997 Annual Meeting. To the extent one or more
outstanding options under the 1989 Plan which have been incorporated into this
Plan are subsequently exercised, the number of shares issued with respect to
each such option shall reduce, on a share-for-share basis, the number of shares
available for issuance under this Plan.
B. The number of shares of Common Stock available for
issuance under the Plan shall automatically increase on the first day of January
each calendar year, beginning with the 1998 calendar year, by an amount equal to
two and one-half percent (2.5%) of the total number of shares of the
Corporation's Common Stock outstanding on December 31st of the immediately
preceding calendar year. All options granted on the basis of each such annual
share increase shall be non-statutory options under the federal tax laws.
C. The maximum number of shares available for issuance
under the Plan pursuant to the Automatic Option Grant Program in effect for
non-employee Board members pursuant to Article Three shall not exceed 150,000
shares of Common Stock, subject to adjustment from time to time in accordance
with the provisions of this Section V.
D. The maximum number of shares of Common Stock for
which any one participant in the Plan may be granted stock options and
separately exercisable stock appreciation rights over the term of the Plan shall
be limited to 850,000 shares, subject to adjustment from time to time in
accordance with the provisions of this Section V. For purposes of the foregoing
limitation, stock options and stock appreciation rights granted prior to January
1, 1994 shall not be taken into account.
E. Should one or more outstanding options under this
Plan (including any outstanding options under the 1989 Plan incorporated into
this Plan) expire or terminate for any reason prior to exercise in full
(including any option cancelled in accordance with the cancellation-regrant
provisions of Section IV of Article Two of the Plan), the shares subject to the
portion of the option not so exercised shall be available for subsequent option
grant under the Plan. Shares subject to any option or portion thereof
surrendered or cancelled in accordance with Section V of Article Two and Section
III of Article Three of the Plan shall not be available for subsequent option
grant under the Plan. Should the exercise price of an outstanding option under
the Plan (including any option incorporated from the 1989 Plan) be paid with
shares of Common Stock or should shares of Common Stock otherwise issuable under
the Plan be withheld by the Corporation in satisfaction of the withholding taxes
incurred in connection with the exercise of an outstanding option under the
Plan, then the number of shares available for issuance under the Plan shall be
reduced by the gross
4.
<PAGE> 31
number of shares for which the option is exercised, and not by the net number of
shares of Common Stock issued to the option holder.
F. In the event any change is made to the Common Stock
issuable under the Plan by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without receipt of
consideration, then appropriate adjustments shall be made to (i) the maximum
number and/or class of securities issuable under the Plan, (ii) the maximum
number and/or class of securities issuable under the Automatic Option Grant
Program, (iii) the maximum number and/or class of securities issuable for which
any one individual may be granted stock options and separately exercisable stock
appreciation rights under the Plan after December 31, 1993, (iv) the number
and/or class of securities for which stock options are to be granted to
newly-elected or continuing non-employee Board members under the Automatic
Option Grant Program and (v) the number and/or class of securities and price per
share in effect under each outstanding option under the Plan (including each
outstanding option incorporated into this Plan from the 1989 Plan). The purpose
of such adjustments to the outstanding options shall be to preclude the
enlargement or dilution of rights and benefits under those options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
5.
<PAGE> 32
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to this Article Two shall be
authorized by action of the Plan Administrator and may, at the Plan
Administrator's discretion, be either Incentive Options or non-statutory
options. Individuals who are not Employees may only be granted non-statutory
options. Each option granted shall be evidenced by one or more instruments in
the form approved by the Plan Administrator. Each such instrument shall,
however, comply with the terms and conditions specified below, and each
instrument evidencing an Incentive Option shall, in addition, be subject to the
applicable provisions of Section II of this Article Two.
A. Option Price.
1. The option price per share shall be fixed by
the Plan Administrator, but in no event shall the option price per share be less
than the fair market value per share of Common Stock on the date of the option
grant.
2. The option price shall become immediately
due upon exercise of the option and, subject to the provisions of Section VI of
this Article Two and the instrument evidencing the grant, shall be payable in
one of the following alternative forms:
- cash or check made payable to the
Corporation's order;
- shares of Common Stock held by the optionee
for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued at
fair market value on the Exercise Date (as such term is defined below);
or
- through a broker-dealer sale and remittance
procedure pursuant to which the optionee shall provide irrevocable
instructions (I) to a designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to
cover the aggregate option price payable for the purchased shares plus
all applicable federal and state income and employment taxes required
to be withheld by the Corporation in connection with such purchase and
(II) to the Corporation to deliver the certificates for
6.
<PAGE> 33
the purchased shares directly to such brokerage firm in order to
complete the sale transaction.
For purposes of this Section I.A.2, the Exercise Date
shall be the date on which written notice of the option exercise is delivered to
the Corporation. Except to the extent the sale and remittance procedure is used
in connection with the exercise of the option, payment of the option price for
the purchased shares must accompany such notice.
3. The fair market value per share of Common
Stock on any relevant date under the Plan shall be determined in accordance with
the following provisions:
- If the Common Stock is at the time listed or
admitted to trading on any national stock exchange, then the Fair
Market Value shall be the closing selling price per share of Common
Stock on the date in question on the stock exchange determined by the
Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions
on such exchange. If there is no reported sale of Common Stock on such
exchange on the date in question, then the Fair Market Value shall be
the closing selling price on the exchange on the last preceding date
for which such quotation exists.
- If the Common Stock is not at the time
listed or admitted to trading on any national stock exchange but is
traded on the Nasdaq National Market, the Fair Market Value shall be
the closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the closing selling price on the last
preceding date for which such quotation exists on the Nasdaq National
Market shall be determinative of Fair Market Value.
B. Term and Exercise of Options.
Each option granted under this Article Two shall be
exercisable at such time or times, during such period, and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
instrument evidencing the option grant. No such option, however, shall have a
maximum term in excess of ten (10) years from the grant date.
7.
<PAGE> 34
C. Limited Transferability of Options. During the
lifetime of the optionee, Incentive Options shall be exercisable only by the
optionee and shall not be assignable or transferable other than by will or by
the laws of descent and distribution following the optionee's death. However,
non-statutory options may, in connection with the optionee's estate plan, be
assigned in whole or in part during the optionee's lifetime to one or more
members of the optionee's immediate family or to a trust established exclusively
for one or more such family members. The assigned portion may only be exercised
by the person or persons who acquire a proprietary interest in the option
pursuant to the assignment. The terms applicable to the assigned portion shall
be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
D. Termination of Service.
1. Except to the extent otherwise provided
pursuant to Section VII of this Article Two, the following provisions
shall govern the exercise period applicable to any options held by the
optionee at the time of cessation of Service or death.
- Should the optionee cease to remain in
Service for any reason other than death or permanent disability, then
the period for which each outstanding option held by such optionee is
to remain exercisable shall be limited to the three (3)-month period
following the date of such cessation of Service.
- In the event such Service terminates by
reason of permanent disability (as defined in Section 22(e)(3) of the
Internal Revenue Code), then the period for which each outstanding
option held by the optionee is to remain exercisable shall be limited
to the twelve (12)-month period following the date of such cessation of
Service.
- Should the optionee die while in Service or
during the three (3)-month period following his or her cessation of
Service, then the period for which each of his or her outstanding
options is to remain exercisable shall be limited to the twelve
(12)-month period following the date of the optionee's cessation of
Service. During such limited period, the option may be exercised by the
personal representative of the optionee's estate or by the person or
persons to whom the option is transferred pursuant to the optionee's
will or in accordance with the laws of descent and distribution.
- Under no circumstances, however, shall any
option be exercisable after the specified expiration date of the option
term.
8.
<PAGE> 35
- Each such option shall, during such limited
exercise period, be exercisable for any or all of the shares for which
the option is exercisable on the date of the optionee's cessation of
Service. Upon the expiration of such limited exercise period or (if
earlier) upon the expiration of the option term, the option shall
terminate and cease to be exercisable.
2. The Plan Administrator shall have complete
discretion, exercisable either at the time the option is granted or at any time
while the option remains outstanding, to permit one or more options held by the
optionee under this Article Two to be exercised, during the limited period of
exercisability provided under Section I.D.1 above, not only with respect to the
number of shares for which each such option is exercisable at the time of the
optionee's cessation of Service but also with respect to one or more subsequent
installments of purchasable shares for which the option would otherwise have
become exercisable had such cessation of Service not occurred.
- The Plan Administrator shall have full power
and authority to extend the period of time for which any option granted
under this Article Two is to remain exercisable following the
optionee's cessation of Service or death from the limited period in
effect under Section I.D.1 of this Article Two to such greater period
of time as the Plan Administrator shall deem appropriate; provided,
however, that in no event shall such option be exercisable after the
specified expiration date of the option term.
3. For purposes of the foregoing provisions of this
Section I.D (and for all other purposes under the Plan):
- The optionee shall be deemed to remain in
the SERVICE of the Corporation for so long as such individual renders
services on a periodic basis to the Corporation (or any parent or
subsidiary corporation) in the capacity of an Employee, a non-employee
member of the Board or an independent consultant or advisor.
- The optionee shall be considered to be an
EMPLOYEE for so long as such individual remains in the employ of the
Corporation or one or more of its parent or subsidiary corporations,
subject to the control and direction of the employer entity as to the
work to be performed and the manner and method of performance.
9.
<PAGE> 36
E. Stockholder Rights.
An optionee shall have no stockholder rights with
respect to any shares covered by the option until such individual shall have
exercised the option and paid the option price for the purchased shares.
II. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable
to all Incentive Options granted under this Article Two. Incentive Options may
only be granted to individuals who are Employees. Options which are specifically
designated as "non-statutory" options when issued under the Plan shall not be
subject to such terms and conditions.
A. Dollar Limitation. The aggregate fair market value
(determined as of the respective date or dates of grant) of the Common Stock for
which one or more options granted to any Employee under this Plan (or any other
option plan of the Corporation or its parent or subsidiary corporations) may for
the first time become exercisable as incentive stock options under the federal
tax laws during any one calendar year shall not exceed the sum of One Hundred
Thousand Dollars ($100,000). To the extent the Employee holds two or more such
options which become exercisable for the first time in the same calendar year,
the foregoing limitation on the exercisability of such options as incentive
stock options under the federal tax laws shall be applied on the basis of the
order in which such options are granted.
B. 10% Stockholder. If any individual to whom an
Incentive Option is granted is the owner of stock (as determined under Section
424(d) of the Internal Revenue Code) possessing 10% or more of the total
combined voting power of all classes of stock of the Corporation or any one of
its parent or subsidiary corporations ("10% Stockholder"), then the option price
per share shall not be less than one hundred and ten percent (110%) of the fair
market value per share of Common Stock on the grant date, and the option term
shall not exceed five (5) years measured from the grant date.
Except as modified by the preceding provisions of this Section
II, the provisions of the Plan shall apply to all Incentive Options granted
hereunder.
III. CORPORATE TRANSACTION/CHANGES IN CONTROL
A. In the event of any Corporate Transaction or Change
in Control (as defined below), each option which is at the time outstanding
under this Article Two shall automatically accelerate so that each such option
shall, immediately prior to the specified effective date for the Corporate
Transaction or Change in Control, respectively, become fully exercisable with
respect to the total number of shares of Common Stock at the time
10.
<PAGE> 37
subject to such option and may be exercised for all or any portion of such
shares. However, an outstanding option under this Article Two shall not so
accelerate upon a Corporate Transaction if and to the extent such option is, in
connection with the Corporate Transaction, either to be assumed by the successor
corporation or parent thereof or be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation or parent
thereof. The determination of comparability shall be made by the Plan
Administrator, and its determination shall be final and binding.
B. A "Corporate Transaction" shall mean any of the
following stockholder-approved transactions:
(a) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(b) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
C. For all purposes under the Plan, a "Change in
Control" shall mean a change in control of the Corporation of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), whether or not the Corporation is then subject to such
reporting requirement, other than a Corporate Transaction; provided that,
without limitation, a Change in Control shall be deemed to have occurred if:
(i) any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other
entity, or any syndicate or group deemed to be a person under
Section 14(d)(2) of the Exchange Act, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), directly or
indirectly, of securities of the Corporation representing
forty percent (40%) or more of the combined voting power of
the Corporation's then outstanding securities entitled to vote
in the election of directors of the Corporation, pursuant to a
tender or exchange offer made directly to the Corporation's
stockholders which the Board does not recommend such
stockholders to accept; or
11.
<PAGE> 38
(ii) a change in the composition of the Board occurs
over any period of two (2) consecutive years or less such that
a majority of the Board ceases for any reason to be comprised
of individuals who either (A) have been Board members
continuously since the beginning of that period or (B) have
been elected or nominated for election as Board members during
such period by a vote of at least three-fourths (3/4) of the
Board members described in clause (A) who were still in office
at the time Board approved such election or nomination.
D. Upon the consummation of the Corporate Transaction,
all outstanding options under this Article Two shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation or its
parent company. Any options accelerated in connection with the Change in Control
shall remain fully exercisable until the expiration or sooner termination of the
option term.
E. Each outstanding option under this Article Two which
is assumed in connection with the Corporate Transaction or is otherwise to
continue in effect shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply and pertain to the number and class of
securities which would have been issued to the option holder, in consummation of
such Corporate Transaction, had such person exercised the option immediately
prior to such Corporate Transaction. Appropriate adjustments shall also be made
to the option price payable per share, provided the aggregate option price
payable for such securities shall remain the same. In addition, the class and
number of securities available for issuance under the Plan following the
consummation of the Corporate Transaction shall be appropriately adjusted.
F. The grant of options under this Article Two shall in
no way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
G. The exercisability as incentive stock options under
the federal tax laws of any options accelerated under this Section III in
connection with a Corporate Transaction or Change in Control shall remain
subject to the dollar limitation of Section II of this Article Two. To the
extent such dollar limitation is exceeded, the accelerated option shall be
exercisable as a non-statutory option under the federal tax laws.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected optionees, the
cancellation of any or all outstanding options under this Article Two and to
grant in substitution new options under
12.
<PAGE> 39
the Plan covering the same or different numbers of shares of Common Stock but
having an option price per share not less than the fair market value of the
Common Stock on the new grant date (or one hundred ten percent (110%) of such
fair market value in the case of an Incentive Option granted to a 10%
Stockholder).
V. STOCK APPRECIATION RIGHTS
A. Each officer of the Corporation subject to the
short-swing profit restrictions of the federal securities laws shall be granted
limited stock appreciation rights in tandem with his or outstanding options
under this Article Two. Upon the occurrence of a Hostile Take-Over, each
outstanding option with such a limited stock appreciation right shall
automatically be cancelled, and the optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Take-Over Price of the shares of Common Stock at the time subject to the
cancelled option (whether or not the option is otherwise at the time exercisable
for those shares) over (ii) the aggregate exercise price payable for such
shares. The cash distribution payable upon such cancellation shall be made
within five (5) days following the consummation of the Hostile Take-Over. The
Plan Administrator shall pre-approve, at the time the limited stock appreciation
right is granted, the subsequent exercise of that right in accordance with the
terms of the grant and the provisions of this Section V.A. No additional
approval of the Plan Administrator or the Board shall be required at the time of
the actual option cancellation and cash distribution.
B. For purposes of Section V.A, the following
definitions shall be in effect:
A Hostile Take-Over shall be deemed to occur in the
event any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) directly or indirectly acquires beneficial
ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities
possessing more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a tender or exchange offer
which the Board does not recommend the Corporation's stockholders to accept.
The Take-Over Price per share shall be deemed to be
equal to the greater of (a) the fair market value per share on the date of
cancellation, as determined pursuant to the valuation provisions of Section
I.A.3 of this Article Two, or (b) the highest reported price per share paid in
effecting such Hostile Take-Over. However, if the cancelled option is an
Incentive Option, the Take-Over Price shall not exceed the clause (a) price per
share.
13.
<PAGE> 40
C. The shares of Common Stock subject to any option
surrendered or cancelled for an appreciation distribution pursuant to this
Section V shall NOT be available for subsequent option grant under the Plan.
VI. LOANS OR INSTALLMENT PAYMENTS
The Plan Administrator may assist any optionee (including any
officer) in the exercise of one or more outstanding options under this Article
Two, including the satisfaction of any federal and state income and employment
tax obligations arising therefrom, by (a) authorizing the extension of a loan to
such optionee from the Corporation or (b) permitting the optionee to pay the
option price for the purchased Common Stock in installments over a period of
years. The terms of any loan or installment method of payment (including the
interest rate and terms of repayment) will be established by the Plan
Administrator in its sole discretion. Loans and installment payments may be
granted with or without security or collateral (other than to optionees who are
consultants or independent contractors, in which event the loan must be
adequately secured by collateral other than the purchased shares), but the
maximum credit available to the optionee shall not exceed the sum of (i) the
aggregate option price (less par value) of the purchased shares plus (ii) any
federal and state income and employment tax liability incurred by the optionee
in connection with the exercise of the option.
14.
<PAGE> 41
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
The individuals eligible to receive automatic option grants
pursuant to the provisions of this Article Three shall be limited to (i) those
individuals who are first elected or appointed as non-employee Board members on
or after the Effective Date, whether through appointment by the Board or
election by the Corporation's stockholders, provided they have not otherwise
been in the prior employ of the Corporation (or any parent or subsidiary
corporation) and (ii) those individuals who continue to serve as non-employee
Board members at one or more Annual Stockholder Meetings held while this
Automatic Grant Program remains in effect, commencing with the 1994 Annual
Meeting.
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Dates. Option grants will be made under this
Article Three on the dates specified below:
(i) Each individual who first becomes a
non-employee Board member at any time after October 25, 1993, whether
through election at an Annual Stockholders Meeting or through
appointment by the Board, and who has not previously been in the employ
of the Corporation (or any parent or subsidiary corporation) shall
automatically be granted upon the terms and conditions of this Article
Three, at the time of such initial election or appointment, a
non-statutory stock option to purchase 10,000 shares of Common Stock. A
non-employee Board member who replaces a Board member shall not receive
an initial 10,000-share grant if both the new and former Board member
are affiliated with the same investment fund or similar entity.
(ii) On the date of each Annual Stockholders
Meeting held after the Effective Date, beginning with the 1994 Annual
Stockholders Meeting, each individual who is to continue to serve as a
non-employee Board member shall automatically be granted a
non-statutory stock option to purchase 5,000 shares of Common Stock,
provided such individual did not receive a 10,000-share grant in the
same calendar year.
15.
<PAGE> 42
The 10,000-share limitation on the initial automatic option
grants and the 5,000-share limitation on periodic grants to be made to each
Eligible Director shall be subject to periodic adjustment pursuant to the
applicable provisions of paragraph V.E of Article One.
B. Exercise Price. The exercise price per share shall be
equal to one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the automatic grant date.
C. Payment. The option price shall become immediately
due upon exercise of the option and shall be payable in one of the alternative
forms specified in Section I.A.2 of Article Two.
D. Option Term. Each automatic grant under this Article
Three shall have a maximum term of ten (10) years measured from the automatic
grant date.
E. Exercisability. Each automatic option grant for
10,000 or 5,000 shares shall become exercisable for the option shares one (1)
year after the date of grant, provided the Eligible Director remains a member of
the Board through such date. Each such option shall remain exercisable until the
expiration or sooner termination of the option term.
F. Limited Transferability. Each automatic grant under
this Article Three may, in connection with the optionee's estate plan, be
assigned in whole or in part during the optionee's lifetime to one or more
members of the optionee's immediate family or to a trust established exclusively
for one or more such family members. The assigned portion may only be exercised
by the person or persons who acquire a proprietary interest in the option
pursuant to the assignment. The terms applicable to the assigned portion shall
be the same as those in effect for the option immediately prior to such
assignment.
G. Effect of Termination of Board Membership.
1. Should the Eligible Director cease to be a
Board member for any reason (other than death or Permanent Disability (as
defined in Code Section 22(e)(3)) while holding an automatic option grant under
this Article Three, then he or she shall have a three (3)-month period following
the date of such cessation of Board membership in which to exercise such option
for any or all of the shares of Common Stock for which the option is exercisable
at the time the Eligible Director ceases service as a Board member.
2. Should the Eligible Director cease to be a
Board member by reason of Permanent Disability while holding an automatic option
grant under this Article Three, then he or she shall have a six (6)-month period
following the date of such cessation
16.
<PAGE> 43
of Board membership in which to exercise such option for any or all of the
shares of Common Stock for which the option is exercisable at the time the
Eligible Director ceases service as a Board member.
3. Should the Eligible Director die while
serving as a Board member or during the three (3)-month period following his or
her cessation of Board service, then the option may subsequently be exercised,
for any or all of the shares of Common Stock for which the option is exercisable
at the time of the Eligible Director's cessation of Board membership, by the
personal representative of his or her estate or by the person or persons to whom
the option is transferred pursuant to the Eligible Director's will or in
accordance with the laws of descent and distribution. Any such exercise must,
however, occur within six (6) months after the date of the Eligible Director's
death.
4. In no event shall any automatic grant under
this Article Three remain exercisable after the specified expiration date of the
ten (10)-year option term. Upon the expiration of the applicable exercise period
in accordance with subparagraphs 1, 2 and 3 above or (if earlier) upon the
expiration of the ten (10)-year option term, the automatic grant shall terminate
and cease to be exercisable.
H. Stockholder Rights. The holder of an automatic option
grant under this Article Three shall have no stockholder rights with respect to
any shares covered by such option until such individual shall have exercised the
option and paid the exercise price for the purchased shares.
I. Remaining Terms. The remaining terms and conditions
of each automatic option grant shall be as set forth in the prototype Director
Automatic Grant Agreement attached as Exhibit A to the Plan.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKEOVER
A. Each automatic option grant outstanding at the time
of a Corporate Transaction or a Change in Control shall automatically accelerate
so that each such option shall, immediately prior to the specified effective
date for such Corporate Transaction or Change in Control, become fully
exercisable with respect to the total number of shares of Common Stock at the
time subject to such option and may be exercised for all or any portion of such
shares at any time prior to the expiration or sooner termination of the option
term. Upon the consummation of the Corporate Transaction, all automatic option
grants under this Article Three shall terminate and cease to be outstanding.
17.
<PAGE> 44
B. Upon the occurrence of a Hostile Take-Over, each
outstanding automatic option grant made pursuant to the provisions of this
Article Three shall automatically be cancelled and the optionee shall in return
be entitled to a cash distribution from the Corporation calculated in accordance
with Section V.B of Article Two and payable at the time and in the manner set
forth in Section V.B of Article Two. Stockholder approval of this March 17, 1997
restatement of the Plan shall constitute pre-approval of each option
subsequently granted under this Article Three with such a cancellation provision
and the subsequent cancellation of that option in accordance with the terms of
this Section III.B. No additional approval of the Board or any Plan
Administrator shall be required at the time of the actual option cancellation
and cash distribution.
C. The automatic option grants outstanding under this
Article Three shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
D. The shares of Common Stock subject to each option
cancelled in connection with the Hostile Take-Over shall NOT be available for
subsequent issuance under this Plan.
18.
<PAGE> 45
ARTICLE FOUR
MISCELLANEOUS
I. AMENDMENT OF THE PLAN
The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects whatsoever.
However, no such amendment or modification shall, without the consent of the
holders, adversely affect rights and obligations with respect to options at the
time outstanding under the Plan. In addition, certain amendments may require
stockholder approval pursuant to applicable laws or regulations.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares or
cash upon the exercise of stock options or stock appreciation rights granted
under the Plan shall be subject to the satisfaction of all applicable federal,
state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion and
upon such terms and conditions as it may deem appropriate (including the
applicable safe-harbor provisions of Rule 16b-3 of the Exchange Act) provide any
or all holders of outstanding option grants under Article Two with the election
to have the Corporation withhold, from the shares of Common Stock otherwise
issuable upon the exercise of such options, one or more of such shares with an
aggregate fair market value equal to the designated percentage (any multiple of
5% specified by the optionee) of the federal and state income and employment
taxes ("Taxes") incurred in connection with the acquisition of such shares. In
lieu of such direct withholding, one or more optionees may also be granted the
right to deliver shares of Common Stock to the Corporation in satisfaction of
such Taxes. The withheld or delivered shares shall be valued at the Fair Market
Value on the applicable determination date for such Taxes.
III. EFFECTIVE DATE AND TERM OF PLAN
A. This Plan, as successor to the Corporation's 1989
Plan, became effective as of the October 25, 1993 Effective Date. The Plan was
subsequently amended and restated by the Board on December 15, 1993 with the
purpose of, among other provisions, deleting direct stock issuances and renaming
the Plan to the 1994 Stock Option Plan. On March 29, 1994 the Board amended and
restated the Plan to increase the number of shares of Common Stock issuable
thereunder by 500,000 shares and to impose a limitation on the maximum number of
shares of Common Stock for which any one participant in the Plan may be granted
stock options and separately exercisable stock appreciation rights after
19.
<PAGE> 46
December 31, 1993. The 1994 restatement was approved by the Corporation's
stockholders in May 1994.
B. On March 17, 1997, the Board adopted amendments to
the Plan (the "1997 Amendment") to effect the following changes: (i) increase
the maximum number of shares of Common Stock available for issuance over the
term of the Plan by an additional 500,000 shares; (ii) implement an automatic
share increase feature pursuant to which the number of shares of Common Stock
available for issuance under the Plan will automatically increase on the first
day of January each year, beginning January 1, 1998, by two and one-half percent
(2.5%) of the total number of shares of Common Stock outstanding on the last day
of December in the immediately preceding year; (iii) increase the maximum number
of shares available for issuance under the Automatic Option Grant Program in
effect under the Plan by an additional 33,334 shares to 150,000 shares; (iv)
impose a specific limitation of 850,000 shares on the maximum number of shares
for which any one participant may be granted stock options and separately
exercisable stock appreciation rights in the aggregate under the 1994 Plan; (v)
render the non-employee Board members eligible to receive option grants under
the Discretionary Option Grant Program; (vi) remove certain restrictions on the
eligibility of non-employee Board members to serve as Plan Administrator;
and(vii) effect a series of additional changes to the provisions of the Plan
(including the stockholder approval requirements, the transferability of
non-statutory stock options and the elimination of the six (6)-month holding
period requirement as a condition to the exercise of stock appreciation rights)
in order to take advantage of the recent amendments to Rule 16b-3 of the
Securities and Exchange Commission which exempts certain officer and director
transactions under the 1993 Plan from the short-swing liability provisions of
the Federal securities laws. The 1997 Amendment is subject to stockholder
approval at the 1997 Annual Meeting, and no option grants made on the basis of
the 500,000-share increase shall become exercisable in whole or in part unless
and until the 1997 Amendment is approved by the stockholders. Should such
stockholder approval not be obtained at the 1997 Annual Meeting, then each
option grant made pursuant to the 500,000-share increase shall terminate and
cease to remain outstanding, and no further option grants shall be made on the
basis of that share increase. In addition, the automatic share increase feature
pursuant to which the share reserve under the Plan will automatically increase
on the first day of January each year will not be implemented. Finally, the
maximum number of shares set aside for issuance under the Automatic Option Grant
Program will remain limited to 116,666 shares, and the non-employee Board
members will not become eligible to participate in the Discretionary Option
Grant Program. However, the provisions of the Plan as in effect immediately
prior to the 1997 Amendment shall automatically be reinstated, and option grants
may thereafter continue to be made pursuant to the reinstated provisions of the
Plan. All option grants made prior to the 1997 Amendment shall remain
outstanding in accordance with the terms and conditions of the respective
instruments evidencing those options, and nothing in the 1997 Amendment shall be
deemed to modify or in any way affect those outstanding options or issuances.
20.
<PAGE> 47
B. Each option issued and outstanding under the 1989
Plan immediately prior to the Effective Date shall be incorporated into this
Plan and treated as an outstanding option under this Plan, but each such option
shall continue to be governed solely by the terms and conditions of the
instrument evidencing such grant, and nothing in this Plan shall be deemed to
affect or otherwise modify the rights or obligations of the holders of such
options with respect to their acquisition of shares of Common Stock thereunder
or their exercise of outstanding stock appreciation rights thereunder.
C. The Plan shall terminate upon the earlier of (i) July
27, 2003 or (ii) the date on which all shares available for issuance under the
Plan have been issued pursuant to the exercise of options granted under Article
Two. If the date of termination is determined under clause (i) above, then no
options outstanding on such date shall be affected by the termination of the
Plan, and such securities shall thereafter continue to have force and effect in
accordance with the provisions of the instruments evidencing such options.
D. Options may be granted under this Plan to purchase
shares of Common Stock in excess of the number of shares then available for
issuance under the Plan, provided each option granted is not to become
exercisable, in whole or in part, at any time prior to stockholder approval of
an amendment authorizing a sufficient increase in the number of shares issuable
under the Plan.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares pursuant to options granted under the Plan shall be used for general
corporate purposes.
V. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any
option hereunder, and the issuance of stock upon the exercise or surrender of
any such option shall be subject to the procurement by the Corporation of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it and the stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be
issued or delivered under the Plan unless and until there shall have been
compliance with all applicable requirements of federal and state securities
laws, including the filing and effectiveness of a Form S-8 registration
statement for the shares of Common Stock issuable under the Plan, and all
applicable listing requirements of any securities exchange on which stock of the
same class is then listed.
21.
<PAGE> 48
VI. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation in establishing the
Plan, nor any action taken by the Plan Administrator hereunder, nor any
provision of the Plan shall be construed so as to grant any individual the right
to remain in the employ or Service of the Corporation (or any parent or
subsidiary corporation) for any period of specific duration, and the Corporation
(or any parent or subsidiary corporation retaining the services of such
individual) may terminate such individual's employment or Service at any time
and for any reason, with or without cause.
VII. MISCELLANEOUS PROVISIONS
A. The right to acquire Common Stock or other assets
under the Plan may not be assigned, encumbered or otherwise transferred by any
optionee.
B. The provisions of the Plan shall be governed by the
laws of the state of California, as such laws are applied to contracts entered
into and performed in such state.
C. The provisions of the Plan shall inure to the benefit
of, and be binding upon, the Corporation and its successors or assigns, whether
by Corporate Transaction or otherwise, and the optionees, the legal
representatives of their respective estates, their respective heirs or legatees
and their permitted assignees.
22.
<PAGE> 49
EXHIBIT A
Director Automatic Grant Agreement
23.
<PAGE> 50
INSITE VISION INCORPORATED
1994 STOCK OPTION PLAN
NON-EMPLOYEE DIRECTOR OPTION AGREEMENT
RECITALS
A. Under the Automatic Option Grant Program in effect under
the Corporation's 1994 Stock Option Plan (the "Plan"), the non-employee members
of the Corporation's Board of Directors (the "Board") will automatically receive
periodic option grants designed to reward them for services they have rendered
to the Corporation and to encourage them to continue in the service of the
Corporation.
B. Optionee is a non-employee member of the Board, and this
Agreement is executed pursuant to, and is intended to carry out the purposes of,
the Plan in connection with the automatic grant on this day of a stock option to
purchase shares of the Corporation's common stock ("Common Stock") under Article
Three of the Plan.
C. The granted option is intended to be a non-statutory option
which does not meet the requirements of Section 422 of the Internal Revenue
Code.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and
conditions set forth in this Agreement, the Corporation hereby grants to
Optionee, as of the automatic grant date (the "Grant Date") specified in the
accompanying Notice of Automatic Option Grant (the "Grant Notice"), a stock
option to purchase up to that number of shares of common stock (the "Option
Shares") as is specified in the Grant Notice. The Option Shares shall be
purchasable from time to time during the option term at the option price per
share (the "Option Price") specified in the Grant Notice, which is one hundred
percent (100%) of the fair market value of the Common Stock on the Grant Date.
2. OPTION TERM. This option shall have a term of ten
(10) years measured from the Grant Date and shall accordingly expire at the
close of business on the expiration date specified in the Grant Notice
("Expiration Date"), unless sooner terminated in accordance with Paragraph 5 or
6.
3. LIMITED TRANSFERABILITY. This option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
<PAGE> 51
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
4. EXERCISABILITY. This option shall become exercisable
for the Option Shares one (1) year after the Grant Date, provided Optionee
remains in Board service through such date. This option shall thereafter remain
so exercisable until the expiration or sooner termination of the option term.
5. CESSATION OF BOARD SERVICE. Should Optionee's service
as a Board member cease while this option remains outstanding, then the option
term specified in Paragraph 2 shall terminate (and this option shall cease to be
exercisable) prior to the Expiration Date in accordance with the following
provisions:
(i) This option shall immediately terminate and
cease to be outstanding for any Option Shares for which the option is
not exercisable at the time of Optionee's cessation of Board service.
(ii) Should Optionee cease Board service (for any
reason other than Permanent Disability or death) while this option
remains outstanding, then the period for exercising this option shall
be reduced to a three (3)-month period commencing with the date of such
cessation of Board service. During such limited period of
exercisability, this option may not be exercised for more than the
number of Option Shares (if any) for which it is exercisable on the
date of Optionee's cessation of Board service. Upon the expiration of
such three (3)-month period or (if earlier) upon the Expiration Date,
this option shall terminate and cease to be exercisable.
(iii) Should Optionee cease Board service by
reason of Permanent Disability while this option is outstanding, then
Optionee shall have a period of six (6) months (commencing with the
date of such cessation of Board service) during which to exercise this
option for any or all of the Option Shares for which this option is
exercisable at the time of Optionee's cessation of Board service. Upon
the expiration of such six (6)-month period or (if earlier) upon the
Expiration Date, this option shall terminate and cease to be
exercisable. "Permanent Disability" shall mean the inability to engage
in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months.
2.
<PAGE> 52
(iv) Should Optionee die while serving as a Board
member or during the three (3)-month period following Optionee's
cessation of Board service, then the personal representative of
Optionee's estate or the person or persons to whom this option is
transferred pursuant to Optionee's will or in accordance with the laws
of descent and distribution shall have the right to exercise the option
for any or all of the Option Shares for which this option is
exercisable at the time of Optionee's cessation of Board service (less
any Option Shares subsequently purchased by Optionee prior to death).
Such right shall lapse, and this option shall terminate and cease to
remain outstanding, upon the earlier of (A) the expiration of the six
(6)-month period measured from the date of Optionee's death or (B) the
Expiration Date.
6. ADJUSTMENT IN OPTION SHARES. In the event any change
is made to the Common Stock issuable under the Plan by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares, or other change affecting the outstanding Common Stock as a class
without receipt of consideration, then appropriate adjustments shall be made to
(i) the total number and/or class of Option Shares subject to this option and
(ii) the Option Price payable per share in order to reflect such change and
thereby preclude the dilution or enlargement of Optionee's rights and benefits
hereunder.
7. SPECIAL ACCELERATION OF OPTION.
A. In the event of any of the following
stockholder-approved transactions (a "Corporate Transaction"):
(i) a merger or consolidation in which
securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from those who held those
securities immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of
all or substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation,
the exercisability of this option shall, to the
extent the option is at such time outstanding but not otherwise fully
exercisable, automatically accelerate so that such option shall, immediately
prior to the specified effective date for the Corporate Transaction, become
fully exercisable for all of the Option Shares and may be exercised for all or
any portion of such shares.
3.
<PAGE> 53
B. This option, to the extent not previously exercised,
shall terminate upon the consummation of the Corporate Transaction and cease to
be outstanding, except to the extent assumed by the successor corporation (or
its parent company) in such Corporate Transaction.
C. This Agreement shall not in any way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise make changes
in its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
8. CHANGE IN CONTROL/HOSTILE TAKE-OVER.
A. In the event of any Change in Control (as defined
below), the exercisability of this option shall automatically accelerate so that
the option shall, immediately prior to the specified effective date for the
Change in Control, become fully exercisable for all of the Option Shares at the
time subject to this option and may be exercised for all or any portion of the
Option Shares at any time prior to the expiration or sooner termination of the
option term.
B. For all purposes under the Plan, a Change in Control
shall mean a change in control of the Corporation of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Corporation is then subject to such
reporting requirement; provided that, without limitation, a Change in Control
shall be deemed to have occurred if:
(i) any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other
entity, or any syndicate or group deemed to be a person under
Section 14(d)(2) of the Exchange Act, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), directly or
indirectly, of securities of the Corporation representing
forty percent (40%) or more of the combined voting power of
the Corporation's then outstanding securities entitled to vote
in the election of directors of the Corporation, pursuant to a
tender or exchange offer made directly to the Corporation's
stockholders which the Board does not recommend such
stockholders to accept; or
(ii) a change in the composition of the Board occurs
over any period of two (2) consecutive years or less such that
a majority of the Board ceases for any reason to be comprised
of individuals who either (A) have been Board members
continuously since the beginning of that period or (B) have
been elected or nominated for election as Board members during
such period by
4.
<PAGE> 54
a vote of at least three-fourths (3/4) of the Board members
described in clause (A) who were still in office at the time
Board approved such election or nomination.
C. In the event there should occur a Hostile Take-Over
(as defined below), then this option shall be automatically cancelled on the
fifth (5th) business day following such Hostile Take-Over in exchange for a cash
distribution from the Corporation in an amount equal to the excess of (I) the
Take-Over Price of all the Option Shares at the time subject to the cancelled
option, over (II) the aggregate Option Price payable for such shares.
Stockholder approval of the March 17, 1997 restatement of the Plan at the 1997
Annual Meeting shall constitute pre-approval of the cancellation of this option
in accordance with the terms of this Paragraph 8.C. No additional approval of
the Board or any Plan Administrator shall be required at the time of the actual
option cancellation and cash distribution.
D. Definitions:
A "Hostile Take-Over" shall be deemed to occur in the
event any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is
controlled by or is under common control with, the Corporation)
directly or indirectly acquires beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer which the Board does not recommend the Corporation's stockholders
to accept.
The "Take-Over Price" per share shall be deemed to be
equal to the greater of (a) the Fair Market Value per share on the date
of cancellation (as determined in accordance with the provisions of
Paragraph 9.B below) or (b) the highest reported price per share paid
in effecting such Hostile Take-Over.
E. This Agreement shall in no way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
9. MANNER OF EXERCISING OPTION.
A. In order to exercise this option with respect to all
or any part of the Option Shares for which this option is at the time
exercisable, Optionee (or in the case of exercise after Optionee's death,
Optionee's executor, administrator, heir or legatee, as the case may be) must
take the following actions:
5.
<PAGE> 55
(i) Execute and deliver to the Secretary of the
Corporation a written notice of exercise in substantially the form of
Exhibit I attached hereto in which there is specified the number of
Option Shares for which the option is exercised.
(ii) Pay the aggregate Option Price for the purchased
shares in one or more of the following alternative forms:
(a) Cash or check made payable to the Corporation's
order;
(b) Shares of Common Stock held by Optionee for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date (as such terms are defined below); or
(c) Through a broker-dealer sale and remittance procedure
pursuant to which the Optionee shall provide irrevocable instructions
(I) to a designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the
aggregate Option Price payable for the purchased shares plus all
applicable federal and state income and employment taxes required to be
withheld by the Corporation in connection with such purchase and (II)
to the Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale
transaction; or
(iii) Furnish to the Corporation appropriate documentation
that the person or persons exercising the option (if other than
Optionee) have the right to exercise this option.
B. For purposes of this Agreement the Exercise Date
shall be the date on which the Exercise Notice shall have been delivered to the
Corporation. Except to the extent the sale and remittance procedure specified in
subparagraph (ii)(c) of paragraph A above may be utilized to exercise this
option, payment of the Option Price for the purchased shares must accompany such
notice. For all valuation purposes under this Agreement, the Fair Market Value
per share of Common Stock on any relevant date shall be the closing selling
price per share of Common Stock on the date in question on the Nasdaq National
Market, as such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If there is no
closing selling price on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such quotation
exists on the Nasdaq National Market.
6.
<PAGE> 56
C. As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate or certificates representing the
Option Shares purchased and paid for in accordance herewith.
D. In no event may this option be exercised for any
fractional shares.
10. STOCKHOLDER RIGHTS. The holder of this option shall
not have any of the rights of a stockholder with respect to the Option Shares
until such individual shall have exercised this option, paid the Option Price
for the purchased shares and been issued one or more certificates for the
purchased shares.
11. NO IMPAIRMENT OF RIGHTS. Nothing in this Agreement
shall be construed or interpreted so as to affect adversely or otherwise impair
the right of the Corporation or the stockholders to remove Optionee from Board
service at any time in accordance with the provisions of applicable law.
12. COMPLIANCE WITH LAWS AND REGULATIONS.
A. The exercise of this option and the issuance of the
Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange on which
shares of the Corporation's Common Stock may be listed at the time of such
exercise and issuance.
B. In connection with the exercise of this option,
Optionee shall execute and deliver to the Corporation such representations in
writing as may be requested by the Corporation in order for it to comply with
the applicable requirements of federal and state securities laws.
13. SUCCESSORS AND ASSIGNS. Except to the extent
otherwise provided in Paragraph 3 or 7, the provisions of this Agreement shall
inure to the benefit of, and be binding upon, the successors, administrators,
heirs, legal representatives and assigns of Optionee and the successors and
assigns of the Corporation.
14. LIABILITY OF CORPORATION.
A. If the Option Shares covered by this Agreement
exceed, as of the Grant Date, the number of shares of Common Stock which may
without stockholder approval be issued under the Plan, then this option shall be
void with respect to such excess shares unless stockholder approval of an
amendment sufficiently increasing the number of shares
7.
<PAGE> 57
of Common Stock issuable under the Plan is obtained in accordance with the
provisions of Article Four, Section III of the Plan.
B. The inability of the Corporation to obtain approval
from any regulatory body having authority deemed by the Corporation to be
necessary to the lawful issuance and sale of any Common Stock pursuant to this
option shall relieve the Corporation of any liability with respect to the
non-issuance or sale of the Common Stock as to which such approval shall not
have been obtained. However, the Corporation shall use its best efforts to
obtain all such approvals.
15. NOTICES. Any notice required to be given or delivered
to the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation in care of the Corporate Secretary at the Corporate
Offices at 965 Atlantic Avenue, Alameda, California 94501. Any notice required
to be given or delivered to Optionee shall be in writing and addressed to
Optionee at the address indicated below Optionee's signature line on the Grant
Notice. All notices shall be deemed to have been given or delivered upon
personal delivery or upon deposit in the U.S. mail, postage prepaid and properly
addressed to the party to be notified.
16. CONSTRUCTION/GOVERNING LAW. This Agreement and the
option evidenced hereby are made and granted pursuant to the Plan and are in all
respects limited by and subject to the express terms and provisions of the Plan.
The interpretation, performance and enforcement of this Agreement shall be
governed by the laws of the State of California without resort to that state's
conflict-of-laws rules.
8.
<PAGE> 58
EXHIBIT I
NOTICE OF EXERCISE OF STOCK OPTION
I hereby notify InSite Vision Incorporated (the "Corporation")
that I elect to purchase __________ shares of the Corporation's Common Stock
(the "Purchased Shares") pursuant to that certain option (the "Option") granted
to me on __________, 199_ to purchase up to __________ shares of such Common
Stock at an option price of $__________ per share (the "Option Price").
Concurrently with the delivery of this Exercise Notice to the
Secretary of the Corporation, I shall pay to the Corporation the Option Price
for the Purchased Shares in accordance with the provisions of my agreement with
the Corporation evidencing the Option and shall deliver whatever additional
documents may be required by such agreement as a condition for exercise.
______________________________ ______________________________
Date Optionee
Address:
_________________________
_________________________
Print name in exact manner
it is to appear on the
stock certificate:
_________________________
_________________________
Address to which certificate
is to be sent, if different
from address above:
_________________________
_________________________
Social Security Number:
_________________________
<PAGE> 59
PROXY
INSITE VISION INCORPORATED
965 Atlantic Avenue, Alameda, California 94501
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned revokes all previous proxies, acknowledges receipt of the Notice
of the Annual Meeting of Stockholders and the Proxy Statement and appoints S.
Kumar Chandrasekaran, Ph.D. and Michael D. Baer, and each of them, the Proxy of
the undersigned, with full power of substitution, to vote all shares of Common
Stock of InSite Vision Incorporated (the "Company") held of record by the
undersigned on April 4, 1997, either on his or her own behalf or on behalf of
any entity or entities, at the Annual Meeting of Stockholders of the Company to
be held June 2, 1997, and at any adjournment or postponement thereof, with the
same force and effect as the undersigned might or could do if personally present
thereat. The shares represented by this Proxy shall be voted in the manner set
forth below.
1. To elect the following directors to serve until the 1998 annual meeting
of stockholders or until their respective successors are elected and qualified:
<TABLE>
<S> <C> <C>
FOR WITHHOLD AUTHORITY TO VOTE
S. Kumar Chandrasekaran, Ph.D. / / / /
FOR WITHHOLD AUTHORITY TO VOTE
Mitchell H. Friedlaender, M.D. / / / /
FOR WITHHOLD AUTHORITY TO VOTE
Grant M. Inman / / / /
FOR WITHHOLD AUTHORITY TO VOTE
John E. Lucas / / / /
FOR WITHHOLD AUTHORITY TO VOTE
Anders P. Wiklund / / / /
</TABLE>
2. To approve a series of amendments to the Company's 1994 Stock Option
Plan (the "1994 Plan"), including (i) an increase in the total number of shares
of the Company's Common Stock authorized for issuance under the 1994 Plan by an
additional 500,000 shares, (ii) implement an automatic share increase feature
pursuant to which the number of shares of Common Stock available for issuance
under the 1994 Plan will automatically increase on the first day of January each
year, beginning January 1, 1998, by 2% of the total number of shares of Common
Stock outstanding on the last day of December in the immediately preceding year,
(iii) impose a specific share limitation of 850,000 shares on the maximum number
of shares of the Company's Common Stock for which any one participant may be
granted stock options under the 1994 Plan and (iv) increase by an additional
33,334 shares of the Company's Common Stock the portion of the share reserve
which may be issued pursuant to the Automatic Option Grant Program in effect
under the 1994 Plan for the non-employee directors.
/ / FOR / / AGAINST / / ABSTAIN
<PAGE> 60
3. To ratify the Board of Directors' selection of Ernst & Young LLP to
serve as the Company's independent accountants for the fiscal year ending
December 31, 1997.
/ / FOR / / AGAINST / / ABSTAIN
4. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
(PLEASE DATE AND SIGN ON REVERSE SIDE)
This Proxy, when properly executed, will be voted in the manner directed herein.
THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE DIRECTORS LISTED AND FOR THE
OTHER PROPOSALS IF NO SPECIFICATION IS MADE.
Please sign exactly as your name(s) is (are) shown on the stock certificate to
which the Proxy applies. When shares are held by joint tenants, both should
sign. When signing as an attorney, executor, administrator, trustee or guardian,
please give full title, as such. If a corporation, please sign in full corporate
name by the President or other authorized officer. If a partnership, please sign
in the partnership name by an authorized person.
Dated:____________________________, 1997
________________________________________
Signature
________________________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
