<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: Commission file number:
September 30, 1995 0-6377
DREXLER TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0176309
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1077 Independence Avenue, Mountain View, CA 94043-1601
(Address of principal executive offices) (Zip Code)
(415) 969-7277
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. /x/ Yes / / No
--- ---
Number of outstanding shares of Common Stock, $.01 par value, at September 30,
1995: 8,799,797
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures which are made are adequate to make the information presented not
misleading. Further, the condensed consolidated financial statements reflect,
in the opinion of management, all adjustments (which included only normal
recurring adjustments) necessary to present fairly the financial position and
results of operations as of and for the periods indicated.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and the notes thereto for the
year ended March 31, 1995, included in the Company's Form 10-K Annual Report.
The results of operations for the six months ended September 30, 1995 are
not necessarily indicative of results to be expected for the entire year ending
March 31, 1996.
-2-
<PAGE> 3
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, SEPT. 30,
1995 1995
---- ----
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 1,050 $ 2,284
Accounts receivable, net................................ 98 196
Inventories............................................. 586 616
Other current assets.................................... 139 156
-------- --------
Total current assets................................. 1,873 3,252
-------- --------
Property and equipment, at cost............................ 12,773 12,865
Less--accumulated depreciation and amortization......... (11,189) (11,313)
-------- --------
Property and equipment, net.......................... 1,584 1,552
Patents, net............................................... 1,074 1,037
-------- --------
Total assets...................................... $ 4,531 $ 5,841
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 420 $ 515
Accrued payroll costs................................... 222 253
Advance payments from customers......................... 216 133
Other accrued liabilities............................... 137 129
-------- --------
Total current liabilities......................... 995 1,030
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized--2,000,000 shares
Outstanding--none
Common stock, $.01 par value:
Authorized--15,000,000 shares
Outstanding--8,358,029 shares at March 31, 1995
and 8,799,797 shares at September 30, 1995........ 83 88
Additional paid-in capital.............................. 27,082 29,246
Accumulated deficit..................................... (23,629) (24,523)
-------- --------
Total stockholders' equity........................... 3,536 4,811
-------- --------
Total liabilities and stockholders' equity........ $ 4,531 $ 5,841
======== ========
</TABLE>
-3-
<PAGE> 4
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales .................................... $ 545 $ 785 $ 1,340 $ 1,547
License fees and royalties ....................... 3 10 13 217
------- ------- ------- -------
Total revenues ................................ 548 795 1,353 1,764
Costs and expenses: ------- ------- ------- -------
Cost of product sales ............................ 332 555 896 1,089
Selling, general, and administrative expenses .... 428 580 938 1,140
Research and engineering expenses ................ 554 321 1,114 653
------- ------- ------- -------
Total costs and expenses ...................... 1,314 1,456 2,948 2,882
------- ------- ------- -------
Operating loss from continuing operations... (766) (661) (1,595) (1,118)
Other income and expense:
Other income ..................................... 4 200 4 200
Other expense .................................... -- (5) -- (5)
Interest income .................................. 4 26 17 32
Interest expense ................................. (1) (1) (2) (3)
------- ------- ------- -------
Total other income, net ....................... 7 220 19 224
------- ------- ------- -------
Loss from continuing operations ............ (759) (441) (1,576) (894)
Income from discontinued operations .................. -- -- 22 --
------- ------- ------- -------
Net loss ................................... $ (759) $ (441) $(1,554) $ (894)
======= ======= ======= =======
Income (loss) per share:
Continuing operations ............................ $ (0.09) $ (0.05) $ (0.19) $ (0.10)
Discontinued operations .......................... -- -- -- --
------- ------- ------- -------
Net loss ................................... $ (0.09) $ (0.05) $ (0.19) $ (0.10)
======= ======= ======= =======
Weighted average common shares ....................... 8,106 8,728 8,106 8,564
======= ======= ======= =======
</TABLE>
-4-
<PAGE> 5
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations .............................. $(1,576) $ (894)
Adjustments to reconcile net loss to net cash used
for operating activities:
Income from discontinued operations ........................... 22 --
Depreciation and amortization ................................. 585 217
Provision for doubtful accounts receivable .................... -- (1)
Changes in operating assets and liabilities:
Increase in accounts receivable ............................... (13) (97)
Increase in inventories ....................................... (35) (30)
(Increase) decrease in other assets ........................... 2 (17)
(Decrease) increase in accounts payable and accrued expenses... (114) 130
Decrease in advance payments from customers ................... (175) (83)
Decrease in liabilities related to discontinued operations .... (60) (12)
------- -------
Net cash used for operating activities ..................... (1,364) (787)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ............................... (133) (107)
Increase in patents .............................................. (41) (41)
------- -------
Net cash used for investing activities ..................... (174) (148)
------- -------
Cash flows from financing activities:
Proceeds from sale of common stock ............................... 25 2,169
------- -------
Net cash provided by financing activities .................. 25 2,169
------- -------
Net increase (decrease) in cash and cash equivalents ....... (1,513) 1,234
Cash and cash equivalents:
Beginning of period .............................................. 2,114 1,050
------- -------
End of period .................................................... $ 601 $ 2,284
======= =======
</TABLE>
-5-
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--FISCAL 1996 SECOND QUARTER AND FIRST SIX MONTHS
COMPARED WITH FISCAL 1995 SECOND QUARTER AND FIRST SIX MONTHS
REVENUES
The Company's total revenues for the second quarter of fiscal 1996 were
$795,000 as compared with $548,000 for last year's second quarter. Total
revenues for the current six-month period were $1,764,000 compared with
$1,353,000 in the same period last year.
OPTICAL MEMORY CARD PRODUCTS. Sales of optical memory cards and related
products to value-added resellers (VARs), licensees, and end-user customers
increased to $1,547,000 for the first six months of fiscal 1996 as compared
with $1,340,000 for last year's comparable period.
For the development of commercial market applications for its products,
the Company utilizes VARs as part of its marketing and distribution program for
LaserCard(R) products. Sales to VARs include optical memory cards, the
Company's integration software and device drivers/host adapters, optical card
reader/writers made by a licensee of the Company, and add-on peripherals made
by other companies (such as equipment for adding a digitized photo,
fingerprint, hand template, or signature to the cards). The VARs then may add
application software, personal computers, and other peripherals, and resell
these systems into their end-user markets.
During the first six months of fiscal 1996, the Company commercially sold
approximately 133,000 LaserCard(R) optical memory cards and 244 reader/writers
versus 77,000 cards and 204 reader/writers during the first six months of last
year. Some of the more significant sales of optical memory cards and
reader/writers in the fiscal 1996 first half included: 44,000 cards and 67
reader/writers to an American company for its laser eye-surgery system for
vision correction; 5,000 cards for a Czech Republic bank; 32,000 cards and 47
reader/writers to an Italian customer for several programs (including an
electronic season ticket for the Parma soccer organization); 10,000 cards and
15 reader/writers to a customer in Brazil for a pilot healthcare/social
security program; 10,000 cards and 63 reader/writers to Information Spectrum,
Inc. (a U.S. government contractor) for the U.S. Army's Automated Manifest
System; 4,000 cards for a Honda distributor for issuance to customers as an
automobile warranty/maintenance records card; 5,000 cards for a healthcare
field trial in Saudi Arabia; 2,500 cards and three reader/writers for a
hospital in Portugal; 5,000 cards to a Korean licensee for the initial phase of
a "National Health Card" planned by the Korean government; 1,000 cards for the
"Golden Health Project" planned by the government of the People's Republic of
China.
There can be no assurances that a VAR company will be successful in its
markets and place follow-on orders with the Company for additional quantities
of cards and systems. To upgrade its VAR customer base, the Company will
continue its efforts to enlist additional VARs and eliminate nonproductive
ones. The Company provides marketing leads, technical support, integration
software, application development software tools, and demonstration software to
assist VARs. Eight new VARs purchased initial systems including optical cards
and equipment during the first six months of fiscal 1996.
Software is an important factor in developing the commercial markets for
optical cards. The Company's software consists of optical card device driver
and interface software, system software tools, and demonstration programs. The
Company does not provide software for specific applications, but instead
-6-
<PAGE> 7
depends on its VARs to either integrate optical card products into existing
software products or to write new application software for specific optical card
programs. Several customers have already written optical card software programs
for applications such as automobile warranty/maintenance, cargo manifesting,
electronic money cards/bank debit cards, optical key systems, and various
medical-related applications such as medical image storage and patient
medical/health history cards. Other application software development is
underway by VARs and their customers.
Optical memory cards are used in conjunction with card reader/writer
equipment connected to personal computers and accessed in the same manner as
floppy disk drives. Such reader/writers are incorporated into LaserCard
systems sold to VARs and other customers of the Company. The Company does not
manufacture card reader/writers but does expect to continue purchasing such
equipment from its sole-source supplier, Nippon Conlux Co., Ltd., a Japanese
licensee of the Company. The price, performance, and availability of such
reader/writers are factors in the commercialization of optical cards. The
Company sells reader/writers for a few thousand dollars per unit, and these
units generally include the Company's integration software and device drivers.
Sales of a newly developed, smaller, and faster optical card reader/writer from
Nippon Conlux began in early calendar year 1995. The Company believes that the
smaller size and faster read/write speeds of this new model should have a
positive effect on the optical memory card market.
Two other licensees of the Company have the capability of producing
LaserCard-compatible reader/writers but are not manufacturing them at this
time. The Company can give no assurance that increased production of card
reader/writers will occur in the near term or that high-volume sales and
correspondingly lower prices will result. If market demand increases sharply
over a short period of time, an initial shortage of reader/writers could
result. The Company's inventory level for reader/writers fluctuates based on
the timing of purchases and sales. Currently, the Company has a sales order
backlog for card reader/writers and, therefore, does not maintain an inventory
of this item at this time.
During fiscal 1995, the Company exhibited an optical memory card that also
contains an integrated circuit ("IC"). If orders are received for this hybrid
card, the Company would rely on outside vendors to add a customer-specified IC
to the optical memory card and to provide IC card reader/writers. This
multi-function IC/optical card has the potential to expand the number of card
applications and customers, and therefore the market size, for the Company's
optical memory cards.
LICENSING. License revenues of $200,000 during the first six months of
fiscal 1996 were the result of an agreement which includes a trademark license
and an installment payment toward the purchase of a LaserCard distribution
license. There were no license revenues for the first six months of fiscal
1995. License fees received by the Company are unconditional and
nonrefundable, and no significant obligations remain unfulfilled by the
Company under any of its licenses. The Company is actively pursuing its
efforts to generate additional license revenues; however, license sales by the
Company are sporadic and unpredictable as to timing and type of license. The
magnitude of future license revenues, if any, cannot be predicted or inferred
from past events.
ROYALTIES. Although royalty revenues have not yet reached material
amounts, the Company does anticipate future royalty income on a long-term,
continuing basis from among two royalty-bearing optical memory card
manufacturing licenses and several royalty- bearing, equipment-license upgrades
previously sold. The Company cannot predict whether or when equipment or card
sales by its licensees will result in material royalties to the Company, since
the optical memory card industry is in the early commercial stage. Therefore,
the Company is not relying on royalty income and does not expect it to be a
significant factor in the near term.
-7-
<PAGE> 8
BACKLOG. The Company generally fills orders within 30 days of receipt of
purchase order or release order. Therefore, there is not a consistent order
backlog. At September 30, 1995, the Company's backlog totalled $840,000,
mainly for reader/writers. The Company's quarterly sales are generally
dependent upon new orders placed each quarter. Until a consistent material
level of order backlog is established, the Company's quarterly sales are
subject to material fluctuation.
MARGINS
The gross margin on product sales for the first six months of fiscal 1996
was 30% as compared with 33% for the year-earlier period. Costs related to the
optical memory card facility (depreciation expense, building lease payments,
and other costs) are allocated to cost of sales based upon the level of
manufacturing activity. As the facility is used for research and engineering
purposes when not being used for manufacturing purposes, the remainder of these
expenses are charged to research and engineering expense. During the first six
months of fiscal 1996, facility expenses of $235,000 were allocated to card
manufacturing as compared with $103,000 for last year's comparable period. The
Company anticipates this allocation to increase as production and sales of
optical memory cards increase. Likewise, there will be a decrease in research
and engineering activities and, therefore, a decrease in research and
engineering expenses when the optical memory card facility is used for
manufacturing at a higher degree than at present.
INCOME AND EXPENSES
The Company's losses from continuing operations were $441,000 for the
second quarter of fiscal 1996 as compared with a $759,000 for last year's
second quarter; and $894,000 for the first six months of fiscal 1996 versus
$1,554,000 for the same period last year. The main difference between the
amount for fiscal 1996 as compared with fiscal 1995 can be attributed to (a)
the $200,000 in license revenues received in the fiscal 1996 first quarter, as
discussed above under "Licensing," (b) the $200,000 in other income, as
discussed below under "Other Income and Expense," and (c) a $376,000 decrease
in depreciation expense, as discussed below under "Research and Engineering
Expenses."
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). For the second
quarter and first six months of fiscal 1996, SG&A expenses were $580,000 and
$1,140,000, respectively, as compared with $428,000 and $938,000, respectively,
for the comparable periods in fiscal 1995. Most of this difference is
attributable to a $79,000 increase in payroll expenses and a $68,000 increase
in legal expenses. SG&A spending is expected to continue at current levels for
the short term. The Company's plans include increased marketing activity,
which will be implemented if certain financial goals are achieved.
RESEARCH AND ENGINEERING EXPENSES. Research and engineering expenses were
$321,000 and $653,000, respectively, for the second quarter and first six
months of fiscal 1996 as compared with $554,000 and $1,114,000, respectively,
for last year's comparable periods. Research and engineering expenses
primarily consist of the majority of the operating costs and depreciation and
amortization expenses on the card facility, which is used both for engineering
and for manufacturing. Depreciation and amortization expenses charged to
research and engineering expenses decreased to $58,000 and $115,000,
respectively, for the second quarter and first six months of fiscal 1996 as
compared with $245,000 and $491,000, respectively, for the same periods last
year. This was due mainly to a change in the estimated useful life of the
optical card manufacturing equipment during fiscal 1995.
Because the initial development of the optical card and the design and
construction of the optical card facility are complete, the large initial
development costs are no longer necessary. Therefore, for the short term the
optical card facility expenses are expected to continue at the current level,
except for a possible modest increase. Research and engineering expenses are
expected to decrease as optical card production
-8-
<PAGE> 9
increases and these resources are allocated to production to a greater degree
than at present. The Company believes this reduction will not have any negative
effect on its optical card business. It also is possible that future projects
may require increased spending as the optical card industry grows.
OTHER INCOME AND EXPENSE. Other income for the second quarter of fiscal
1996 consisted of a $200,000 partial payment, received during the fiscal 1996
first quarter, toward a potential license upgrade. This amount was recorded as
deferred revenue at June 30, 1995. During the fiscal 1996 second quarter, this
nonrefundable payment was recognized as income due to the other party's
subsequent default under the agreement. See Part II, Item 3, "Legal
Proceedings."
Interest income for the second quarter of fiscal 1996 was $26,000 versus
$4,000 for last year's second quarter, mainly due to an increase in invested
funds. Interest income for the first six months of fiscal 1996 was $32,000 as
compared with $17,000 for the first six months of fiscal 1995. The Company's
interest expense on short-term loans was $3,000 for the first six months of
fiscal 1996 versus $2,000 for the first six months of fiscal 1995.
DISCONTINUED OPERATIONS. During fiscal 1995, the Company completed
settlement of its remaining commitments related to its emulsion photoplate
operation, which was discontinued during fiscal 1993, at an amount lower than
the Company's accruals for these items. Therefore, discontinued operations had
income of $22,000 for the first six months of fiscal 1995. There was no income
of this type for the first six months of fiscal 1996.
LIQUIDITY
As of September 30, 1995, the Company had cash and cash equivalents of
$2,284,000 and a current ratio of 3.2 to 1. Net cash used for operating
activities was $787,000 for the first six months of fiscal 1996 as compared
with $1,364,000 for last year's first six months. The Company had no long-term
debt as of September 30, 1995.
The Company has not established a line of credit. Generally, the
Company's customers make advance payments, in whole or in part, at time of
order placement, because the Company's optical memory cards are usually made to
custom specifications that are specific to each customer, end user, or
application. Therefore, the Company believes that working capital should be
sustainable provided order levels increase. The Company may negotiate a line
of credit if and when it becomes appropriate.
At the current level of product sales, the Company does not generate cash
or profits from operations. To fund its operations, the Company requires
either a substantial increase in order levels of optical cards, sales of
additional licenses, or additional financing. Based on current raw material
costs and other expense calculations, the Company estimates that it will break
even on cash flow if it achieves annual sales in the range of 1.5 to 2 million
cards.
The Company's card manufacturing facility has a designed production
capacity of 25 million to 40 million cards per year, depending on card type and
color printing requirements. To implement this capacity, some portions of the
card facility require additional equipment or upgrades; for example, in-process
QA inspection equipment. The Company has prepared an incremental plan for this
equipment and upgrades and for adding production employees when large
quantities of cards are ordered. This plan requires an estimated $3 million in
capital improvements to attain the 25 million card production level and would
be implemented in stages. For example, the Company's optical card
manufacturing facility currently has an annualized machine capacity to produce
approximately 3 million cards. The estimated incremental capital equipment
expenditures required for the following production capacities are: 6 million
cards annually,
-9-
<PAGE> 10
$500,000; 10 million cards annually, $400,000; 15 million cards annually,
$400,000; 25 million cards annually, $1.7 million. The incremental stages
would be implemented as customer orders and customer financial commitments are
of a sufficient magnitude to justify each step.
At September 30, 1995, the Company had an accumulated deficit of
$24,523,000. The Company anticipates that the size of its losses will decrease
due to anticipated increases in sales of optical memory cards and related
products. However, if increased commercialization is delayed and the Company
does not realize such increased sales, its losses will remain at previous
levels, except in the event of sporadic sales of licenses which range in price
from approximately $1 million for a card distribution license to over $10
million for a card manufacturing license.
During the first six months of fiscal 1996, the Company had cash receipts,
net of expenses, of $449,000 from the private placement of 115,000 shares of
its common stock. These shares have not been registered under the Securities
Act of 1933 and cannot be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. The
Company has agreed to file an S-3 registration statement covering certain of
the shares sold by the Company under private placements in fiscal years 1994,
1995, and 1996. At such time as the SEC approves the registration, the
shareholders may resell the shares.
During the first six months of fiscal 1996, Company employees and
consultants purchased from the Company 325,150 shares of registered common
stock, at an average price of $5.24 per share, through the exercise of stock
options under the Company's 1991 Stock Option Plan, which resulted in
additional cash receipts to the Company of $1,705,000. As of September 30,
1995, Company employees and consultants held unexercised, vested options to
purchase 862,900 shares of common stock at exercise prices ranging from $4.25
to $9.06 per share, for an aggregate amount of $5,571,000 and an average price
of $6.46 per share.
The Company will vigorously continue its marketing and licensing efforts
and will consider opportunities for additional equity financing in order to
strengthen its cash position, to accelerate its marketing and sales activities,
and to add software and manufacturing capabilities to more rapidly build sales
of optical memory cards. The Company is not aware of any material adverse
trends that would limit its ability to finance operations through additional
equity placements, if required. However, the Company cannot guarantee that
such financing would be available, if needed.
STOCK PRICE VOLATILITY
The Company's common stock price is subject to significant volatility due
to fluctuations in revenues, earnings, capitalization, liquidity, press
coverage, and financial market interest. Some of these factors may be
exacerbated because the Company operates solely in the optical memory card
products industry, which is in the early stage of commercialization.
PART II. OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
On September 28, 1995, the Company filed a complaint against LeRoy A.
Pesch, Genus Technology Corporation, LAPESCH & Company, and Genus Technology,
N.V., in Santa Clara County California Superior Court, to collect an $800,000
balance due under an upgrade license agreement entered into between the Company
and Genus Technology Corporation. The other defendants are guarantors and/or
co-obligors. The defendants are required to respond to the complaint by
November 15, 1995.
-10-
<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's September 15, 1995 Annual Meeting of Stockholders, the
Company's stockholders (i) re-elected the Board of Directors; and (ii) approved
amendments to the 1991 Stock Option Plan, including an increase in the number
of shares reserved thereunder by 400,000 shares.
On the amendment of the Stock Option Plan, 6,699,522 shares were voted in
favor, constituting more than 77% of the 8,689,179 shares outstanding as of the
proxy record date of July 18, 1995. The number of negative votes cast with
respect to the amendments to the Stock Option Plan was 1,205,623.
There were no other matters submitted to a vote of security holders during
the quarter for which this report is filed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibit Number Description Page Number
-------------- ----------- -----------
<S> <C> <C> <C>
10.1 Amended "1991 Stock Option Plan" (Amended with 12
Stockholder Approval in Fiscal 1996 Second Quarter)
</TABLE>
No other exhibits are included in this report as the contents of
the required exhibits are either not applicable to Registrant, to be provided
only if Registrant desires, or contained elsewhere in this report.
(b) No reports on Form 8-K were filed by Registrant during the quarter
for which this report is filed.
DREXLER TECHNOLOGY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ Jerome Drexler Chairman of the Board of November 10, 1995
- ------------------ Directors and President
Jerome Drexler (Principal Executive Officer)
/s/Steven G. Larson Vice President and Treasurer November 10, 1995
- ------------------- (Principal Financial Officer and
Steven G. Larson Principal Accounting Officer)
-11-
<PAGE> 12
EXHIBIT INDEX
Ex. 10.1 Amended "1991" Stock Plan" (Amended with Stockholder Approval
in Fiscal 1996 Second Quarter)
Ex. 27 Financial Data Schedule
<PAGE> 1
THIS MATERIAL CONSTITUTES PART OF THE
PROSPECTUS DATED JULY 6, 1995, COVERING
THESE SECURITIES, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
DREXLER TECHNOLOGY CORPORATION
1991 STOCK OPTION PLAN
1. Purposes. Drexler Technology Corporation (hereinafter called
the "Company") has adopted this 1991 Stock Option Plan (this "Plan") to enhance
the concern of the Company's key employees, officers, directors and consultants
in the success of the Company by giving them an ownership interest in the
Company, and to give them an incentive to continue their service to the
Company.
2. Stock Subject to Plan. The Company shall reserve 1,670,000
shares of its $0.01 par value Common Stock (hereinafter called the "Shares") to
be issued upon exercise of the options which may be granted from time to time
under this Plan. In addition, those of the shares reserved for issuance under
the Company's 1986 Stock Option Plan on March 1, 1991, (i) which were not then
subject to outstanding options or (ii) which were then subject to outstanding
options which subsequently lapse, shall also be reserved for issuance pursuant
to the exercise of options granted from time to time under this Plan. As it
may from time to time determine, the Board of Directors of the Company
(hereinafter called the "Board") may authorize that the Shares may be
comprised, in whole or in part, of authorized but unissued shares of the Common
Stock of the Company or of issued shares which have been reacquired. If
options granted under this Plan terminate or expire before being exercised in
whole or in part, the Shares subject to those options which have not been
issued may be subjected to subsequent options granted under this Plan.
3. Administration of this Plan. The Board shall appoint a Stock
Option Committee (hereinafter called the "Committee") which shall consist of not
less than two (2) members of the Board, and, at the election of the Board or if
the Board consists of less than two directors, may consist of the entire Board,
to administer this Plan. Subject to the express provisions of this Plan and
guidelines which may be adopted from time to time by the Board, the Committee
shall have plenary authority in its discretion (a) to determine the individuals
to whom, and the time at which, options are granted, and the number and purchase
price of the Shares subject to each option; (b) to determine whether the options
granted shall be "incentive stock options" within the meaning of Section 422A of
the Internal Revenue Code of 1986, as amended (hereinafter called the "Code"),
or non-statutory stock options, or both; (c) to interpret this Plan and
prescribe, amend and rescind rules and regulations relating to it; (d) to
determine the terms and provisions (and amendments thereof) of the respective
option agreements subject to Section 6 of this Plan, which need not be
identical, including, if the Committee shall determine that a particular option
is to be an incentive stock option, such terms and provisions (and amendments
thereof) as the Committee deems necessary to provide for an incentive stock
option or to conform to any change in any law, regulation, ruling or
interpretation applicable to incentive stock options; and (e) to make any and
all determinations which the Committee deems necessary or advisable in
administering this Plan. The Committee's determination on the foregoing matters
shall be conclusive. The Committee may delegate any of the foregoing authority
to the President with respect to options granted to or which are held by persons
who are neither officers nor directors of the Company.
-1-
<PAGE> 2
4. Persons Eligible. The Committee may grant incentive stock
options to key employees of the Company or its subsidiaries (including officers
and directors) and non-statutory stock options to key employees or consultants
(including officers and directors) of the Company or its subsidiaries. For this
purpose, "employee" shall conform to the requirements of Section 422A of the
Code, and "subsidiary" means subsidiary corporations as defined in Section 425
of the Code.
The aggregate fair market value (determined as of the time the
option is granted) of the Shares with respect to which incentive stock options
are exercisable for the first time during any calendar year (under all
incentive stock option plans of the Company or its parent or subsidiaries)
shall not exceed $100,000.
5. Changes in Capital Structure.
a. Effect on this Plan. In the event of changes in the
outstanding capital stock of the Company by reason of any stock dividend, stock
split or reverse split, reclassification, recapitalization, merger or
consolidation, acquisition of 80 percent or more of its gross assets or stock,
reorganization or liquidation, the Committee and/or the Board shall make such
adjustments in the aggregate number and class of shares available under this
Plan as it deems appropriate, and such determination shall be final, binding
and conclusive.
b. In Outstanding Options. Should a stock dividend,
stock split, reverse stock split, reclassification, or recapitalization occur,
then the Committee and/or the Board shall make such adjustments in (i) the
number and class of shares to which optionees will thereafter be entitled upon
exercise of their options and (ii) the price which optionees shall be required
to pay upon such exercise as it in its sole discretion in good faith deems
appropriate, and such determination shall be final, binding, and conclusive.
Notwithstanding the foregoing, such adjustment shall have the result that an
optionee exercising an option subsequent to such occurrence would pay the same
aggregate exercise price to exercise the entire option and would then hold the
same class and aggregate number of shares as if such optionee would have
exercised the outstanding option immediately prior to such occurrence.
c. In the event of any merger or consolidation of the
Company (except with a subsidiary) or any acquisition of 80 percent or more of
its gross assets or stock, or any reorganization or liquidation of the Company
(an "Event"), the Board shall make arrangements (the "Arrangements") which
shall be binding upon the holders of unexpired options then outstanding under
this Plan as the Board, in its sole discretion, in good faith determines to be
in the best interests of the Company, which determination shall be final,
binding, and conclusive. The possible arrangements include, but are not
limited to, the substitution of new options for any portion of such unexpired
options, the assumption of any portion of such unexpired options by any
successor to the Company, the acceleration of the expiration date of any
portion of such unexpired options to a date not earlier than thirty (30) days
after notice to the optionee, or the cancellation of such portion in exchange
for the payment by any successor to the Corporation of deferred compensation to
the optionee, in an amount equal to the difference between the fair market
value of the Shares subject to such unexpired portion and the aggregate
exercise price of the Shares under the terms of such unexpired portion on the
date of the Event, in installments which correspond to the vesting schedule of
the unexpired option. The Board shall not be obligated to arrange such
substitution or assumption to comply with Section 425(a) of the Code or to
accelerate the exercisability of a portion of an option when it accelerates the
expiration date of such portion. The Board or Committee may from time to time
issue guidelines as to what Arrangements it deems appropriate should an Event
occur. The guidelines currently issued by the Board of Directors are attached
hereto as Attachment A. These guidelines may be changed at any time without
notice. Accordingly, optionees
-2-
<PAGE> 3
have no vested right with respect to the Arrangements which may be made upon the
occurrence of an Event.
6. Terms and Conditions of Options. Each option granted under
this Plan shall be evidenced by a stock option agreement (hereinafter called
"Agreement") which is not inconsistent with this Plan, and the form of which
the Committee and/or Board may from time to time determine, provided that the
Agreement shall contain the substance of the following:
a. Option Price. The option price shall be not less
than 100% of the fair market value of the Shares at the time the option is
granted, which shall be the date the Committee and/or Board, or its delegate,
awards the grant. If the optionee, at the time the option is granted, owns
stock possessing more than ten percent (10%) of the total combined voting power
of all the classes of stock of the Company or of its parent or subsidiaries (a
"Principal Shareholder"), the option price of incentive stock options granted
such Principal Shareholder shall be not less than 110% of the fair market value
of the Shares at the time the option is granted. The fair market value of the
Shares shall be determined and the option price of the Shares set by the
Committee and/or Board or its delegate in accordance with the valuation methods
described in Section 20.2031-2 of the Treasury Regulations.
b. Method of Exercise. At the time of purchase, Shares
purchased under options shall be paid for in full either (i) in cash, (ii) at
the discretion of the Board, with a promissory note secured by the Shares
purchased, (iii) at the discretion of the Committee and/or Board, with
outstanding stock of the Company at such value as the Board shall determine in
its sole discretion to be the fair market value of such stock on the date of
exercise in accordance with the valuation methods discussed in Section
20.2031-2 of the Treasury Regulations, or (iv) a combination of promissory note
(if permitted pursuant to (ii) above), stock (if permitted pursuant to (iii)
above), and/or cash. If outstanding stock is used as payment and such stock
was acquired upon prior exercise of an option granted under this Plan or the
Company's 575,000 share 1986 Stock Option Plan, then such stock must have been
held by the optionee for at least one year subsequent to such prior exercise
and two years subsequent to the grant of the prior exercised option. To the
extent that the right to purchase Shares has accrued under an option, the
optionee may exercise said option from time to time by giving written notice to
the Company stating the number of Shares with respect to which the optionee is
exercising the option, and submitting with said notice payment of the full
purchase price of said Shares either in cash or, at the discretion of the Board
and/or Committee as described above, with a promissory note, outstanding stock
of the Company, or a combination of cash, promissory note, and/or such stock.
As soon as practicable after receiving such notice and payment, the Company
shall issue, without transfer or issue tax to the optionee (or other person
entitled to exercise the option), and at the main office of the Company or such
other place as shall be mutually acceptable, a certificate or certificates
representing such Shares out of authorized but unissued Shares or reacquired
Shares of its capital stock, as the Board and/or Committee, or its delegate,
may elect, for the number of Shares to be delivered. The time of such delivery
may be postponed by the Company for such period as may be required for it with
reasonable diligence to comply with such procedures as may, in the opinion of
counsel to the Company, be desirable in view of federal and state laws,
including corporate securities laws and revenue and taxation laws. If the
optionee (or other person entitled to exercise the option) fails to accept
delivery of any or all of the number of Shares specified in such notice upon
tender of delivery of the certificates representing them, the right to exercise
the option with respect to such undelivered Shares may be terminated.
c. Option Term. The Committee and/or Board or its
delegate may grant options for any term, but shall not grant any options for a
term longer than ten (10) years from the date the option is granted (except in
the case of an incentive stock option granted to a Principal Shareholder in
which
-3-
<PAGE> 4
case the term shall be no longer than five (5) years from the date the
option is granted). Each option shall be subject to earlier termination as
provided in this section 6 of this Plan.
d. Exercise of Options. Each option granted under this
Plan shall be exercisable on such date or dates, upon or after the occurrence
of certain events, or upon or after the achievement of certain performance
milestones (which dates may be accelerated or which occurrences or achievements
may be waived in whole or in part or extended at the discretion of the
Committee and/or Board or its delegate) and during such period and for such
number of Shares as shall be determined by the Committee and/or Board or its
delegate. An incentive option granted to a non-officer may not be exercised at
any time unless the optionee shall have continuously served, to the extent
determined by the Committee and/or Board or its delegate, as an employee of the
Company or its subsidiary throughout a period commencing at the date an option
is granted and ending no more than three (3) months and no less than thirty
(30) days before an attempted exercise of the option, and, if applicable,
unless the Committee and/or Board or its delegate shall determine and notify
the optionee in writing that certain events have occurred or certain
performance milestones have been achieved.
e. Nonassignability of Option Rights. No option shall
be assignable or transferable by the optionee except by will or by the laws of
descent and distribution. During the life of an optionee, the option shall be
exercisable only by the optionee.
f. Effect of Termination of Employment or Death or
Disability. In the event the optionee's employment with the Company and/or its
subsidiaries ceases, as determined by the Committee, during the optionee's
lifetime for any reason, including retirement, any incentive option or
unexercised portion thereof granted to a non-officer optionee which is
otherwise exercisable shall terminate unless exercised within a period not to
exceed three (3) months nor to be less than thirty (30) days of the date on
which such employment ceased but not later than the date of expiration of the
option period. In the event of the death or disability (as defined in Code
Section 22(e)(3)) of the optionee while employed or within a period not to
exceed three months nor to be less than thirty (30) days of the date on which
such employment ceases, any option or unexercised portion thereof granted to
the optionee, if otherwise exercisable by the optionee at the date of death or
disability, may be exercised by the optionee (or by the optionee's personal
representatives, heirs or legatees) at any time prior to the expiration of one
year from the date of death or disability of the optionee but not later than
ten (10) years from the date of grant of such option except that, in the case
of an incentive option granted to a Principal Shareholder, not later than five
(5) years from the date of grant of such option.
g. Rights of Optionee. The optionees shall have no
rights as a stockholder with respect to any Shares subject to an option until
the date of issuance of a stock certificate to the optionee for such Shares.
No adjustment shall be made for dividends or other rights of which the record
date is prior to the date such stock certificate is issued. Neither this Plan,
nor any action or agreement thereunder, shall confer any rights of employment,
any rights to election or retention as an officer or director, or any rights to
serve as a consultant.
7. Use of Proceeds. The proceeds from the sale of stock pursuant
to options granted under this Plan shall constitute general funds of the
Company.
8. Amendment of Plan. The Board of Directors may at any time
amend this Plan, provided that no amendment may affect any then outstanding
options or any unexercised portions thereof absent the optionee's consent, and
provided further that any such amendment materially increasing the number of
Shares reserved under this Plan, materially altering the persons or class of
persons eligible to be granted
-4-
<PAGE> 5
stock options under this Plan, causing options granted to employees and intended
to be incentive options under this Plan not to qualify as "incentive stock
options" under Section 422A of the Code, or amending this Section 8 shall be
subject to shareholder approval. Any amendment to this Plan which would cause
the acquisition or disposition of an option granted under this Plan by an
officer or director of the Company not to be exempt from the operation of
Section 16(b) of the Securities Exchange Act of 1934 pursuant to rules and
regulations promulgated pursuant to such Section, case law or SEC releases or
no-action letters interpreting such Section, or new Federal statute or
amendments to such Section, shall also be subject to shareholder approval.
9. Effective Date and Termination of Plan. This Plan was adopted
by the Board of Directors on November 30, 1990, and was approved by the
shareholders on March 1, 1991. This Plan was most recently amended by the board
of directors on July 6, 1995, which amendment was approved by the shareholders
on September 15, 1995. The Board may terminate this Plan at any time. If not
earlier terminated, this Plan shall terminate November 30, 2000. Termination of
this Plan will not affect rights and obligations theretofore granted and then in
effect.
This Plan, the granting of any option hereunder, and the
issuance of stock upon the exercise of any option, shall be subject to such
approval or other conditions as may be required or imposed by any regulatory
authority having jurisdiction to issue regulations or rules with respect
thereto, including the securities laws of various governmental entities.
10. Automatic Option Grants to Directors. Subject to registration
and qualification under federal and state securities laws as is advised by
counsel, the Company's current and future directors are hereby granted options
under this Plan as follows: (i) on the date of the Company's Annual Meeting of
Shareholders, each of the Company's directors who serves as a member of the
Stock Option Committee, who is re-elected at such meeting to another term as a
director, and who has served the Company as a director for the immediately
preceding nine-month period, shall automatically and without any further action
by the Board be granted a Non- Statutory Stock Option to purchase 6,000 shares
of the Company's Common Stock; and (ii) on the date any person first becomes a
director, whether through election by the Company's shareholders or appointment
by the Board of Directors to fill a vacancy, each such person shall
automatically and without further action by the Board be granted a Non-Statutory
Stock Option to purchase 15,000 shares of the Company's Common Stock.
The exercise price for such options shall be equal to the
trading price of the Company's stock on the date of grant in the
over-the-counter market calculated pursuant to subparagraphs (b) and (c) of
Section 20.2031-2 of the Treasury Regulations. The date of grant of an option
shall, for all purposes, be the date determined in accordance with the terms of
this Section 10. The foregoing options shall be for a term of five years and
are to be exercisable as follows: (i) the 6,000 option share grants to re-
elected directors shall be immediately exercisable in full; and (ii) the 15,000
option share grants to newly elected or appointed directors shall be
exercisable in cumulative increments of one-third each at the end of 24 months,
36 months, and 48 months if the optionee is still a director of the Company or
its subsidiaries. Upon the occurrence of an event described in Section 5(b) of
this Plan, the number of option shares which a director shall be granted
pursuant to the foregoing formula, and the class of stock which is the subject
of such option grant, shall be automatically adjusted such that directors
receiving an automatic option grant subsequent to the occurrence of such event
shall receive the same aggregate number of option shares, and would then hold
the same class of stock, as if such director had been granted the option prior
to the occurrence of such event.
-5-
<PAGE> 6
In the event an automatic option grant(s) pursuant to this
Section 10 would result in option shares having been granted in excess of the
number of option shares then remaining available for grant under this Plan,
then such option grant(s) shall be made contingent upon a proper amendment to
this Plan to accommodate such grants.
Notwithstanding Section 8 of this Plan, the foregoing
automatic option grant formula may not be amended more than once every six
months, other than to comport with changes to the Internal Revenue Code, the
Employee Retirement Income Security Act, or the rules thereunder.
11. Limited Authority to Alter Terms of Options. Within the
parameters of Section 6 of this Plan, the Board of Directors may, at their
discretion, alter the terms of options to be granted pursuant to Section 10
hereof, or which were previously granted pursuant to Section 10 hereof, except
insofar as a term relates to (a) the persons eligible to participate in the
automatic option grant program, or (b) the timing, pricing, or amount of an
option granted or to be granted pursuant to such Section 10.
Attachment: 2 pages
6
<PAGE> 7
THIS MATERIAL CONSTITUTES PART OF THE
PROSPECTUS DATED JULY 6, 1995 COVERING
THESE SECURITIES, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
ATTACHMENT A
DREXLER TECHNOLOGY CORPORATION
COMPENSATION COMMITTEE
POLICY GUIDELINE FOR ADJUSTMENT OF STOCK OPTIONS
IN THE EVENT OF AN ACQUISITION
November 30, 1990
Background
The Company's 1991 Stock Option Plan (the "Plan") presently provides
that in the event of a merger or other recapitalization, this Committee or the
Board of Directors shall make appropriate adjustments to the terms of the
outstanding options. The Plan gives only minor guidance as to what adjustments
would be considered "appropriate."
Policy
(1) In the event of the acquisition of all or substantially all of
the Company's assets or capital stock, adjustments are deemed
"appropriate" if:
(a) The vested portion of options may be exercised prior
to the acquisition on not less than 30 days' notice;
and
(b) Arrangements are made so that subject to continued
employment of the optionee with the successor
corporation, the unvested portion of options will
receive one of the following benefits:
(i) A replacement option that can be exercised on
the same vesting schedule at the same total
exercise price to purchase the stock or other
securities of the successor corporation that
would have been received had the unvested
option shares been outstanding at the time of
the acquisition; or
(ii) A cash payment made with respect to each
option share at the time of vesting equal to
the excess of the per-share value paid for
the acquisition (whether in cash or in
securities of the successor corporation) over
the option exercise price.
-7-
<PAGE> 8
(2) In the event the employment relationship between the employee
and the successor corporation is terminated within one year of
the date of the sale of the Company, it is intended that 100%
of the remaining unvested portion of all options held by such
employee on the date of the sale of the Company would vest and
remain exercisable for at least 90 days after the termination,
provided that:
(a) The employee had been employed by the Company
continuously (except for approved leaves of absence)
for at least two years prior to the date of the sale
of the Company; and
(b) The employment relationship of the successor
corporation and the employee was not terminated by
either:
(i) Resignation by the employee; or
(ii) By the successor corporation due to acts of
moral turpitude on the part of the employee
such as theft, embezzlement, fraud,
dishonesty, misappropriation or conversion of
funds committed against the Company or
successor corporation, or due to the
employee's material breach of an agreement
with the Company or successor corporation
concerning disclosure and ownership of
inventions, conflict of interest, or
confidentiality of information.
In the event the successor corporation had not assumed outstanding
Company options but rather was paying deferred compensation whenever Company
options vested, then the successor corporation would pay the employee the
amount corresponding to such accelerated vesting.
Effect
This policy guideline may be changed at any time by this Committee or
the Company's Board of Directors. It does not constitute a part of this Plan.
The right of the Company or its successors to terminate the employment of an
optionee, with or without cause, shall not be affected by this guideline.
# # # #
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheets at September 30, 1995 (Unaudited) and the
Condensed Consolidated Statements of Operation for the Six Months Ended
September 30, 1995 (Unaudited) and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,284
<SECURITIES> 0
<RECEIVABLES> 196
<ALLOWANCES> 0
<INVENTORY> 616
<CURRENT-ASSETS> 3,252
<PP&E> 12,865
<DEPRECIATION> 11,313
<TOTAL-ASSETS> 5,841
<CURRENT-LIABILITIES> 1,030
<BONDS> 0
<COMMON> 29,334
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,841
<SALES> 1,547
<TOTAL-REVENUES> 1,764
<CGS> 1,089
<TOTAL-COSTS> 1,089
<OTHER-EXPENSES> 1,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (894)
<INCOME-TAX> 0
<INCOME-CONTINUING> (894)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (894)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
