<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from
________ to ______
Commission File Number: 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
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(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 (or for such shorter period that the registrant was
required to file such reports), 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,
1996: 9,088,884
<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, 1996, included in the Company's Form 10-K Annual Report.
The results of operations for the six months ended September 30, 1996 are
not necessarily indicative of results to be expected for the entire year ending
March 31, 1997.
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DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Assets March 31, Sept. 30,
1996 1996
-------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................ $ 2,094 $ 1,639
Accounts receivable .................................. 667 290
Inventories .......................................... 864 1,362
Other current assets ................................. 157 176
-------- --------
Total current assets .............................. 3,782 3,467
-------- --------
Property and equipment, at cost .......................... 13,067 13,221
Less--accumulated depreciation and amortization ...... (11,460) (11,614)
-------- --------
Property and equipment, net ....................... 1,607 1,607
Patents, net ............................................. 982 940
-------- --------
Total assets ................................... $ 6,371 $ 6,014
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ..................................... $ 1,498 $ 458
Accrued payroll costs ................................ 233 299
Advance payments from customers ...................... 177 181
Other accrued liabilities ............................ 136 160
-------- --------
Total current liabilities ......................... 2,044 1,098
-------- --------
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--8,831,674 shares at March 31, 1996 and
9,088,884 shares at September 30, 1996 ......... 88 91
Additional paid-in capital ........................... 29,452 31,121
Accumulated deficit .................................. (25,213) (26,296)
-------- --------
Total stockholders' equity ........................ 4,327 4,916
-------- --------
Total liabilities and stockholders' equity ..... $ 6,371 $ 6,014
======== ========
</TABLE>
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<PAGE> 4
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1995 1996 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Product sales ............................... $ 785 $ 1,013 $ 1,547 $ 1,622
License fees and royalties .................. 10 5 217 14
------- ------- ------- -------
Total revenues ........................... 795 1,018 1,764 1,636
------- ------- ------- -------
Costs and expenses:
Cost of product sales ....................... 555 675 1,089 1,098
Selling, general, and administrative expenses 580 578 1,140 1,212
Research and engineering expenses ........... 321 211 653 447
------- ------- ------- -------
Total costs and expenses ................. 1,456 1,464 2,882 2,757
------- ------- ------- -------
Operating loss ........................ (661) (446) (1,118) (1,121)
Other income and expense:
Other income ................................ 195 5 195 20
Interest income ............................. 26 5 32 21
Interest expense ............................ (1) (1) (3) (3)
------- ------- ------- -------
Total other income, net .................. 220 9 224 38
------- ------- ------- -------
Net loss .............................. (441) (437) (894) (1,083)
Net loss per share .................... $ (0.05) $ (0.05) $ (0.10) $ (0.12)
======= ======= ======= =======
Weighted average common shares .................. 8,728 8,942 8,564 8,895
======= ======= ======= =======
</TABLE>
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<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 ....................................................... $ (894) $(1,083)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization .............................. 217 244
Compensation on stock plan activity ........................ 5 7
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ................. (98) 377
Increase in inventories .................................... (30) (498)
Increase in other assets ................................... (17) (19)
(Decrease) increase in accounts payable and accrued expenses 130 (950)
(Decrease) increase in advance payments from customers
and deferred revenue .................................... (83) 4
Decrease in liabilities related to discontinued operations . (12) --
------- -------
Net cash used for operating activities .................. (782) (1,918)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ............................. (107) (161)
Increase in patents ............................................ (41) (41)
------- -------
Net cash used for investing activities .................. (148) (202)
------- -------
Cash flows from financing activities:
Proceeds from sale of common stock ............................. 2,164 1,665
------- -------
Net cash provided by financing activities ............... 2,164 1,665
------- -------
Net increase (decrease) in cash and cash equivalents .... 1,234 (455)
Cash and cash equivalents:
Beginning of period ............................................ 1,050 2,094
------- -------
End of period .................................................. $ 2,284 $ 1,639
======= =======
</TABLE>
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<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--FISCAL 1997 SECOND QUARTER AND FIRST SIX MONTHS
AS COMPARED WITH FISCAL 1996 SECOND QUARTER AND FIRST SIX MONTHS
Revenues
The Company's total revenues for the second quarter of fiscal 1997 were
$1,018,000 as compared with $795,000 for last year's second quarter. Total
revenues for the current six-month period were $1,636,000 compared with
$1,764,000 for 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 were
$1,622,000 for the first six months of fiscal 1997 as compared with $1,547,000
for the year-earlier period.
For the development of commercial market applications for its products,
the Company utilizes VAR companies as part of its marketing and distribution
program for LaserCard(R) products. Sales to VARs include the Company's optical
memory cards, the Company's system software, 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 may add application software, personal
computers, and other peripherals, and then resell these products, integrated
into data systems, for end-user customers in their geographic regions.
For the first six months of fiscal 1997, the Company commercially sold
approximately 183,000 LaserCard(R) optical memory cards and 195 reader/writers.
Some of the current applications for the Company's optical memory card products
are: U.S. government-related programs; medical data applications in the United
States; several programs in Italy, including a secure soccer-season ticket; and
two programs in the Philippines--an admission pass/retail purchase log at a
duty-free shopping zone and a vehicle warranty/maintenance records card.
There can be no assurances that any VAR company in any country will be
successful in its markets or field trials or that it will place follow-on orders
with the Company for additional quantities of cards and systems. In order to
upgrade its VAR customer base to increase the probability of success, the
Company will continue its efforts to recruit new VARs and eliminate
nonproductive ones. The Company provides marketing leads, customer support, and
system software to assist VARs.
Software is an important factor in developing the commercial markets for
optical memory cards. The Company's system software consists of optical card
interface software/device drivers, file systems, software development tools, and
demonstration software. The Company does not provide software for specific
applications, but instead depends on its VARs to integrate optical card products
into existing software products, write new application software for specific
optical card programs, or license software from other VARs. Several VARs have
written optical card software programs for applications such as automobile
warranty/maintenance, cargo manifesting, digital optical key systems,
admissions/ID, data logging systems, and various medical-related applications
such as medical image storage and 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
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<PAGE> 7
LaserCard systems sold to VARs and other customers 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
interface software/device drivers.
The Company does not manufacture card reader/writers but instead
continues to purchase such equipment from a Japanese licensee, Nippon Conlux
Co., Ltd., currently the Company's sole supplier of reader/writers. The
Company's inventory level for reader/writers fluctuates based on the timing of
purchases and sales. As of the end of the fiscal 1997 second quarter, the
Company had over 100 reader/writers in inventory. 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. Also, an interruption or change
in the supply of reader/writers could cause a delay in product shipments and a
possible loss of sales, which would affect operating results adversely.
LICENSES. There were no license revenues for the first six months of
fiscal 1997, as compared with revenues of $200,000 for the fiscal 1996 first six
months, from an agreement that included a trademark license and a LaserCard
distribution license payment. 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 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.
BACKLOG. The Company generally fills most orders within 30 to 120 days of
receipt of purchase order or release order. Therefore, to date there has not
been a consistent, large order backlog. The Company's quarterly sales are
generally dependent upon new orders placed each quarter. Until a large order
backlog is established, the Company's quarterly sales will be subject to
material fluctuation.
Margins
The gross margin on product sales for the first six months of fiscal 1997
was 32% as compared with 30% for the year-earlier period.
The gross margin on optical memory card sales will fluctuate based upon
type and volume of cards sold. As card manufacturing for commercial orders
increases, the Company's optical memory card manufacturing facility is used less
for the purposes of research and engineering. Therefore, more of the
manufacturing facility costs (depreciation expense, building lease payments, and
other costs) are allocated to cost of card manufacturing, and less of these
costs are charged to research and engineering. For the first six months of
fiscal 1997 and fiscal 1996, respectively, the Company allocated 49% and 37% of
the facility expenses to card manufacturing for commercial orders and marketing
samples. When the Company reaches a production level of approximately 1.5
million cards per year for commercial orders, the cost allocation percentages
should become relatively fixed, with essentially all of the card manufacturing
facility costs allocated to cost of product
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<PAGE> 8
sales. The facility expenses will then become a fixed cost component of product
sales and should decrease on a per-card basis as volumes increase.
Income and Expenses
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). For the fiscal 1997
second quarter and first six months, SG&A expenses were $578,000 and $1,212,000,
respectively, as compared with $580,000 and $1,140,000, respectively, for the
same periods last year. Most of this difference for the first six months is
attributable to increased payroll expenses. SG&A spending is expected to
continue at current levels for the short term. If certain financial goals are
achieved, the Company's plans include increased marketing and customer support
activity.
RESEARCH AND ENGINEERING EXPENSES. Research and engineering expenses were
$211,000 and $447,000, respectively, for the fiscal 1997 second quarter and
first six months versus $321,000 and $653,000, respectively, for last year's
comparable periods. The optical memory card facility is used for both
engineering and manufacturing. Therefore, the facility costs (depreciation
expense, building lease payments, and other costs) are allocated between
manufacturing and engineering based upon the level of manufacturing activity.
As optical card production increases and card manufacturing resources are
allocated to card production to a greater degree than at present, reported
research and engineering expenses are expected to decrease. The Company believes
that the reduction in card manufacturing facility expenses allocated to research
and engineering will not have any negative effect on its optical card business
since research and engineering projects are continuing. 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 first six months of fiscal
1996 included $200,000 from a forfeited deposit on a license agreement that was
not consummated. Other income for the fiscal 1997 first six months also included
a $20,000 gain on foreign currency exchange; there was no income of this type
for the first six months of last year. Interest income for the first six months
of fiscal 1997 was $21,000 as compared with $32,000 for the year-earlier period.
LIQUIDITY
As of September 30, 1996, the Company had cash and cash equivalents of
$1,639,000 and a current ratio of 3.2 to 1. Cash used for operating activities
was $1,918,000 for the first six months of fiscal 1997 as compared with $782,000
for last year's first six months. The increase in cash used was due mainly to
the $950,000 decrease in accounts payable during the first six months of fiscal
1997. As of September 30, 1996, the Company had no long-term debt.
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. The
Company believes that although working capital requirements should grow in
proportion to product shipment levels, the advance payments will reduce the need
for working capital financing. The Company may negotiate a line of credit if and
when it becomes appropriate, although no assurance can be made that such
financing would be available, if needed.
At the current level of product sales, the Company does not generate cash
or profits from operations. At September 30, 1996, the Company had an
accumulated deficit of $26,296,000; and, except for sporadic
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<PAGE> 9
sales of licenses (which in the past have ranged in price from approximately $1
million for a card distribution license to $10 million for a card manufacturing
license), quarterly losses are anticipated until there is increased
commercialization of the Company's products. Thus, 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 operations at annual sales of approximately 1.5 million
optical memory cards along with sales of related hardware. If there is slow
progress by customers in the development and implementation of LaserCard-based
programs, this could extend the period during which the Company would need
additional financing.
The Company's total deferred tax asset was $14,953,000 at March 31, 1996.
If utilized, the deferred tax asset would reduce future tax expense and
payments. Included are amounts derived from federal income tax net operating
losses that will expire at various dates from 2001 through 2011, amounts from
state income tax net operating losses that will expire at various dates from
1997 through 2001, and amounts from tax credits that will expire from 2000
through 2004. The ability of the Company to utilize this deferred tax asset is
contingent upon generating sufficient income within the stated time periods;
therefore, it is uncertain that the deferred tax asset will be realized.
Accordingly, the Company has recorded a full valuation allowance against this
asset; and, therefore, the net deferred tax asset is not included on the
Company's balance sheet at this time.
The Company's plan to increase card production capacity calls for the
addition over several years of $4.3 million in capital equipment to the card
manufacturing facility and additional production employees when customer orders
are of sufficient magnitude to justify each incremental step. This investment in
capital equipment would be implemented incrementally, as follows: to increase
the current production equipment capabilities from 3 million to 6 million cards
annually, $500,000; for producing up to 10 million cards annually, $2.4 million
more; for producing up to 25 million cards annually, $1.4 million more. The
Company may make additional capital investments for cost savings and other
purposes.
During the first six months of fiscal 1997, Company employees and
consultants purchased from the Company 255,500 shares of registered common
stock, at an average price of $6.48 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 $1,657,000. As of September 30, 1996, Company
employees and consultants held unexercised, vested options to purchase 681,833
shares of common stock at exercise prices ranging from $4.25 to $12.62 per
share, for an average of $6.92 per share. These stock options, if exercised,
would provide the Company cash in the amount of $4,720,000.
The Company will continue its product marketing activities and its
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
materially adverse trends that would limit its ability to finance operations
through additional equity financings, if required. However, the Company cannot
guarantee that such equity 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.
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<PAGE> 10
FORWARD-LOOKING STATEMENTS
Certain statements made above relating to plans, objectives, and economic
performance go beyond historical information and may provide an indication of
future results. To that extent, they are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
each is subject to factors that could cause actual results to differ from those
in the forward-looking statement. Such factors are described above and in the
documents filed by the Company from time to time with the Securities and
Exchange Commission, including Form S-3 Registration Statement 33-88588.
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. ("Genus"), 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. The other defendants are guarantors and/or co-obligors.
On November 29, 1995, the defendants answered by denying the allegations
of the complaint and asserting as a cross-complaint that defendant Genus was
wrongly denied the right to purchase 400,000 shares of the Company's common
stock at a purchase price of $5.75 per share. On January 16, 1996, the parties
entered into a stipulation to submit all issues raised in this litigation to
binding arbitration before the American Arbitration Association. On May 20,
1996, Dr. Pesch filed a Chapter 11 bankruptcy petition, thereby effecting an
automatic stay of the arbitration proceedings as to Dr. Pesch (but not as to the
other defendants).
On August 28, 1996, the Arbitrator entered an award holding that the
defendants, other than Dr. Pesch, are liable in the amount of $800,000, plus
interest and costs, and that these defendants are not entitled to any offset,
reduction in award, or affirmative relief based on the cross-complaint. On
September 6, 1996, Dr. Pesch's bankruptcy proceedings were dismissed without
discharge of his debts.
The Company will seek to obtain judicial judgments against all the
defendants, based on the Arbitrator's award and Dr. Pesch's avoidance of the
arbitration proceedings. There can be no assurance that the Company will be
successful in collecting on any such judgment. No portion of the $800,000
balance due is recorded in the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's September 20, 1996 Annual Meeting of Stockholders, the
Company's stockholders (i) re-elected the Board of Directors; and (ii) approved
an amendment to the 1991 Stock Option Plan to increase in the number of shares
reserved thereunder by 250,000 shares.
Of the 8,900,624 shares outstanding as of the record date of July 23,
1996, a total of 7,813,915 shares were voted by proxy, equaling 87.77% and
constituting a quorum. On the election of directors, votes cast for the election
of Messrs. Jerome Drexler, Arthur Hausman, and William E. McKenna were
7,387,339; 7,385,164; and 7,385,339, respectively, and votes withheld were
426,576; 428,751; and 428,576, respectively. On the amendment of the 1991 Stock
Option Plan, 7,183,698 shares were voted in favor; there were 540,149 negative
votes and 78,268 abstentions; and broker non-votes totalled 1,100,509.
There were no other matters submitted to a vote of security holders
during the quarter for which this report is filed.
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<PAGE> 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibit Description
10.1 Amended Drexler Technology
Corporation "1991 Stock Option Plan";
amendment approved by stockholder vote
on September 20, 1996.
27 Financial Data Schedule
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.
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:
DREXLER TECHNOLOGY CORPORATION
(Registrant)
Date: November 8, 1996 /s/Jerome Drexler
-----------------------------------
Jerome Drexler,
Chairman of the Board of Directors and President
(Principal Executive Officer)
Date: November 8, 1996 /s/Steven G. Larson
-----------------------------------
Steven G. Larson,
Vice President of Finance and Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
11
<PAGE> 12
EXHIBIT INDEX
Ex. 10.1 Amended "1991 Stock Option Plan"
(Amendment Approved by Stockholder Vote on September 20, 1996)
Ex. 27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
THIS MATERIAL CONSTITUTES PART OF THE
PROSPECTUS DATED MAY 28, 1996, 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 1,920,000
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.
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<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 May 28, 1996, which amendment was approved by the shareholders
on September 20, 1996. 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 MAY 28, 1996 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, 1996 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996 (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-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,639
<SECURITIES> 0
<RECEIVABLES> 290
<ALLOWANCES> 0
<INVENTORY> 1,362
<CURRENT-ASSETS> 3,467
<PP&E> 13,221
<DEPRECIATION> 11,614
<TOTAL-ASSETS> 6,014
<CURRENT-LIABILITIES> 1,098
<BONDS> 0
0
0
<COMMON> 31,212
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,014
<SALES> 1,622
<TOTAL-REVENUES> 1,636
<CGS> 1,098
<TOTAL-COSTS> 1,098
<OTHER-EXPENSES> 1,659
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (1,083)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,083)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,083)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
