<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, 1997
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
ncorporation or organization) Identification No.)
1077 Independence Avenue, Mountain View, CA 94043-1601
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(650) 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 (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 October
28, 1997: 9,519,351
<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, 1997 included in the Company's Form 10-K Annual Report.
The results of operations for the three months ended September 30, 1997 are
not necessarily indicative of results to be expected for the entire year ending
March 31, 1998.
NET INCOME (LOSS) PER SHARE: Earnings per share for the three- and six-month
periods ended September 30, 1997 is computed using the weighted average number
of shares of common stock outstanding and dilutive common stock equivalents
(using the treasury stock method). Loss per share for the three- and six-month
periods ended September 30, 1996 is computed using the weighted average number
of shares of common stock outstanding and does not include common stock
equivalents, as they are anti-dilutive.
RECEIVABLE ON SALE OF COMMON STOCK: The Company records the receivable on
sale of common stock as a component of current assets when (i) the transaction
is entered into during the quarter, (ii) shares are outstanding for that
quarter, and (iii) payment is made within a reasonably short period of time of
the transaction and prior to statement issuance. The Company had a receivable of
this type at the end of the fiscal 1998 second quarter. Such receivable was
fully paid within two business days of quarter end.
RECENT ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial Accounting
Standards Board (FASB) issued SFAS 128, "Earnings Per Share," which simplifies
the standards for computing earnings per share previously found in Accounting
Principles Board Opinion (APBO) No. 15. SFAS 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per share,
which excludes dilution. SFAS 128 also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entitles
with complex capital structures and requires a reconciliation. Diluted earnings
per share is computed similarly to fully diluted earnings per share pursuant to
APBO No. 15. SFAS 128 must be adopted for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. SFAS 128 requires restatement of all prior-period
earnings per share data presented. The Company does not expect the adoption of
SFAS 128 to have a material impact on its financial statements.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which becomes effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS 130 is not expected to impact the Company's consolidated
financial position or results of operations.
Also in June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," which becomes effective for fiscal years
beginning after December 15, 1997. The Company has yet to determine the impact,
if any, of adoption of this new pronouncement.
FISCAL PERIOD: For purposes of presentation, the Company has indicated its
accounting period as ending on March 31 and its interim quarterly periods as
ending on the corresponding month end. The Company, in fact, operates and
reports quarterly periods ending on the Friday closest to month end. The
three-month period ended October 3, 1997 (presented as September 30, 1997)
contained 14 weeks, whereas the three-month period ended September 27, 1996
(presented as September 30, 1996) contained 13 weeks.
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<PAGE> 3
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
1997 1997
-------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .......................................... $ 2,916 $ 1,720
Accounts receivable ................................................ 615 1,298
Receivable on sale of common stock ................................. -- 1,900
Inventories ........................................................ 852 1,356
Other current assets ............................................... 205 235
-------- --------
Total current assets ............................................ 4,588 6,509
-------- --------
Property and equipment, at cost ....................................... 13,404 14,229
Less--accumulated depreciation and amortization .................... (11,790) (11,992)
-------- --------
Property and equipment, net ..................................... 1,614 2,237
Patents, net .......................................................... 887 839
-------- --------
Total assets ................................................. $ 7,089 $ 9,585
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................................................... $ 501 $ 876
Accrued payroll costs .............................................. 230 284
Advance payments from customers .................................... 2,183 1,018
Other accrued liabilities .......................................... 116 82
-------- --------
Total current liabilities ....................................... 3,030 2,260
-------- --------
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--9,150,416 shares at March 31, 1997 and
9,519,351 shares at September 30, 1997 ...................... 91 95
Additional paid-in capital ............................................ 31,516 34,476
Accumulated deficit ................................................... (27,548) (27,246)
-------- --------
Total stockholders' equity ...................................... 4,059 7,325
-------- --------
Total liabilities and stockholders' equity ................... $ 7,089 $ 9,585
======== ========
</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,
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues ....................................... $ 1,018 $ 2,902 $ 1,636 $ 4,391
------- ------- ------- -------
Costs and expenses:
Cost of sales ............................... 675 1,613 1,098 2,505
Selling, general, and administrative expenses 578 744 1,212 1,392
Research and engineering expenses ........... 211 112 447 223
------- ------- ------- -------
Total costs and expenses ................. 1,464 2,469 2,757 4,120
------- ------- ------- -------
Operating income (loss) ................ (446) 433 (1,121) 271
Other income and expense:
Other income (expense), net ................. 5 18 20 (5)
Interest income ............................. 5 21 21 51
Interest expense ............................ (1) (1) (3) (3)
------- ------- ------- -------
Total other income, net .................. 9 38 38 43
------- ------- ------- -------
Income (loss) before income taxes ...... (437) 471 (1,083) 314
Provision for income taxes ..................... -- 11 -- 12
------- ------- ------- -------
Net income (loss) ...................... $ (437) $ 460 $(1,083) $ 302
======= ======= ======= =======
Net income (loss) per share .................... $ (0.05) $ 0.05 $ (0.12) $ 0.03
======= ======= ======= =======
Weighted average number of common
and common equivalent shares ................... 8,942 9,525 8,895 9,355
======= ======= ======= =======
</TABLE>
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<PAGE> 5
DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $(1,083) $ 302
Adjustments to reconcile net income (loss) to net cash used
for operating activities:
Depreciation and amortization .............................. 244 292
Compensation on stock plan activity ........................ 7 14
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ................. 377 (683)
Increase in inventories .................................... (498) (504)
Increase in other assets ................................... (19) (30)
(Decrease) increase in accounts payable and accrued expenses (950) 395
(Decrease) increase in advance payments from customers
and deferred revenue ..................................... 4 (1,165)
------- -------
Net cash used for operating activities ................... (1,918) (1,379)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ............................ (161) (827)
Increase in patents ........................................... (41) (40)
------- -------
Net cash used for investing activities ................... (202) (867)
------- -------
Cash flows from financing activities:
Proceeds from sale of common stock ............................ 1,665 1,050
------- -------
Net cash provided by financing activities ................ 1,665 1,050
------- -------
Net decrease in cash and cash equivalents ................ (455) (1,196)
Cash and cash equivalents:
Beginning of period ........................................... 2,094 2,916
------- -------
End of period ................................................. $ 1,639 $ 1,720
======= =======
</TABLE>
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<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--FISCAL 1998 SECOND QUARTER AND FIRST SIX MONTHS
COMPARED WITH FISCAL 1997 SECOND QUARTER AND FIRST SIX MONTHS
Revenues
For the fiscal 1998 second quarter ended September 30, 1997, the Company's
total revenues were $2,902,000 compared with $1,018,000 for last year's second
quarter. Total revenues for the current six-month period were $4,391,000
compared with $1,636,000 for the same period last year.
PRODUCT SALES. Sales of LaserCard(R) optical memory cards and related
products to value-added resellers (VARs), licensees, and end-user customers were
$3,961,000 for the first six months of fiscal 1998 compared with $1,622,000 for
last year's comparable period. The Company sold 202 reader/writer units for the
fiscal 1998 first six months compared with 195 reader/writer units for the first
six months of fiscal 1997.
Optical memory card sales for the fiscal 1998 first six months were 850,000
cards compared with 183,000 cards for last year's first six months. The increase
in sales of optical memory cards resulted primarily from a $7.1 million order
received in February 1997 for 2 million optical memory cards for the U.S.
Immigration and Naturalization Service (INS). Of these, approximately 608,000
cards were delivered during the first six months of fiscal 1998. Deliveries
under this order are expected to average approximately 200,000 cards per month.
Applications for the Company's optical memory card products include: medical
data applications in the United States; various programs in Europe and Asia; two
programs in the Philippines--an admission pass/retail purchase log at a
duty-free shopping zone and a vehicle warranty and maintenance records card; and
United States government-related programs--the U.S. Department of Defense
"automated manifest card" and the U.S. Immigration and Naturalization Service
"border crossing card" and "green card."
For the development of commercial markets and applications for its products,
the Company utilizes VAR companies as part of its marketing and distribution
program for LaserCard 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.
There can be no assurances that any new or existing 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
technical 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 and maintenance records, 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.
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<PAGE> 7
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 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
and is typically approximately 50 to 75 units. 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 adversely affect operating results.
DEVELOPMENT CONTRACT. Under a customer-funded development contract for a
multi-technology workstation, development contract revenues were $365,000 for
the second quarter of fiscal 1998 and $420,000 for the fiscal 1998 first six
months versus no revenue of this type in the previous fiscal year. Upon
completion of the development program, revenues of $500,000 to $800,000 will
have been recorded on this contract, and the Company does not anticipate
material ongoing revenues of this type in the future.
LICENSES. There were no licenses sold in the fiscal 1998 or fiscal 1997
first six months. The Company no longer relies on license fees to finance
operations.
ROYALTIES. Royalty revenues were $10,000 for the first six months of fiscal
1998 compared with $14,000 for the same period last year. The Company cannot
predict whether or when equipment or card sales by its licensees will result in
material royalties to the Company. Therefore, the Company is not relying on
royalty income and does not expect it to be a significant factor in the near
term.
Backlog
As of September 30, 1997, the backlog for optical memory cards was
approximately $5.3 million, or 1.5 million cards. This backlog includes 1.4
million cards scheduled for shipment at the rate of approximately 200,000 card
per month through March of 1998, under the INS contract described on the
preceding page. As is the case in all U.S. government procurement, the
government reserves the right to change specifications, delay deliveries, and
cancel all or part of the order.
Margins
The gross margin on product sales and the development contract revenues for
the first six months of fiscal 1998 was 43% compared with 32% for the prior-year
period. The Company believes that gross margins for the remainder of fiscal 1998
will continue at levels above fiscal 1997, due to higher production volumes. The
gross margin on optical memory card sales will fluctuate based upon type and
volume of cards sold. With the increase in card manufacturing for commercial
orders, 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 1998, the Company allocated substantially all of the facility expenses to
card manufacturing versus approximately 49% of these expenses for last year's
first six months.
Income and Expenses
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). For the fiscal 1998
second quarter and first six months, SG&A expenses were $744,000 and $1,392,000,
respectively, compared with $578,000 and $1,212,000, respectively, for the
second quarter and first six months of fiscal 1997. The $180,000 increase in
expenses for the first
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<PAGE> 8
six months of fiscal 1998 is due mainly to a $109,000 increase in payroll
expenses and a $38,000 bad-debt reserve. The Company's plans include increased
marketing and customer technical support activity, to be implemented during
fiscal 1998.
RESEARCH AND ENGINEERING EXPENSES. Research and engineering expenses were
$112,000 and $223,000, respectively, for the second quarter and first six months
of fiscal 1998 compared with $211,000 and $447,000, respectively, for the
year-earlier periods. The expense reduction is due primarily to accounting for
facility costs rather than an actual reduction in research and engineering. 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 activity in the respective areas. Substantially all of these
expenses were allocated to card production during the first six months of fiscal
1998 because of the substantial increase in card production. During the first
six months of fiscal 1997, approximately half of these expenses were allocated
to research and engineering.
The Company continues to undertake ongoing research and engineering project
activities. However, research and engineering expenses for fiscal year 1998 are
expected to be less than for fiscal year 1997, as optical card production
increases and card manufacturing resources are allocated to card production to a
greater degree than last fiscal year. Future projects will require increased
spending as the optical card industry grows.
OTHER INCOME AND EXPENSE. Net other income for the first six months of
fiscal 1998 was $43,000 compared with $38,000 for the first six months of fiscal
1997. The Company purchases Japanese yen for payment of reader/writers purchased
from a Japanese supplier. Thus, the Company's normal operations are subject to
gains or losses on fluctuations in the yen/dollar exchange rate. Net other
income for the fiscal 1998 first six months included a $5,000 loss on foreign
currency exchange versus a $20,000 gain on foreign currency exchange during the
comparable period last year.
Interest income for the first six months of fiscal 1998 was $51,000 compared
with $21,000 for the year-earlier period, due to changes in average invested
funds. The Company's interest expense on short-term loans was $3,000 for the
first six months of fiscal 1998 and fiscal 1997.
LIQUIDITY
As of September 30, 1997, the Company had cash and cash equivalents of
$1,720,000, a current ratio of 2.9 to 1, and no long-term debt. Net cash used
for operating activities was $1,379,000 for the fiscal 1998 first six months
compared with $1,918,000 for the first six months of fiscal 1997. The net cash
used for operating activities during the first six months of fiscal 1998
consisted of $608,000 provided by revenues less expenses, minus $1,987,000 used
for changes in operating assets and liabilities. The cash used for changes in
operating assets and liabilities consisted of a $683,000 increase in accounts
receivable, a $504,000 increase in inventories, and a $1,165,000 decrease in
advance payments from customers, partially offset by a $365,000 change in other
items.
The current level of revenues is sufficient to generate cash from operations
after expenses, primarily due to the INS order. Fluctuations in operating assets
and liabilities will use cash in some quarters and provide cash in other
quarters. If the INS order is not renewed and there are delays in other
customers' development of optical-card based programs and corresponding
commercialization of the Company's optical cards and related products, losses
could recur.
Cash increased to approximately $3,600,000 on October 7, 1997, from the
receipt of $1,900,000 in payment for 200,000 shares of common stock, split
amongst three investors in private-placement transactions entered into during
the Company's fiscal 1998 second quarter. The Company has agreed to file an S-3
registration statement covering these shares in the near future. At such time as
the SEC approves the registration statement, the shareholders may resell the
shares on the open market.
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<PAGE> 9
The Company has not established a line of credit. Generally, the Company's
customers make advance payments, in whole or in part, at the 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 September 30, 1997, the Company's accumulated deficit was reduced to
$27,246,000, as a result of the profit recorded for the first six months of
fiscal 1998. Stockholders' equity increased 80%, or $3,266,000, to $7,325,000
during the first six months of fiscal 1998 due to the $302,000 profit, the
$1,900,000 private placement investment, and $1,064,000 received by the Company
for stock issued under the Employee Stock Purchase Plan and the 1991 Stock
Option Plan.
The Company's total deferred income tax asset was $16,114,000 at March 31,
1997. If utilized, the total deferred income 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 2012,
amounts from state income tax net operating losses that will expire at various
dates from 1998 through 2002, 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.
In view of the uncertain value of this asset, the Company has recorded a full
valuation allowance against it; therefore, no part of the total deferred tax
asset of $16,114,000 has been added to stockholders' equity on the Company's
balance sheet.
The Company is planning to install an additional $3 million of capital
equipment and leasehold improvements in its card production facility by the end
of July 1998. These assets are for the production of advanced optical cards with
new features and for manufacturing-process improvements and will result in a
production capacity of 8 million cards annually. The Company believes that an
additional investment of about $7 million in production equipment and automatic
inspection equipment may be required to produce the more advanced optical cards
at rates approximating 25 million cards per year. Currently, the Company intends
to purchase such equipment incrementally as commercial orders for optical memory
cards justify increased production capacity. The Company will make additional
capital expenditures for cost savings and other purposes.
During the fiscal 1998 first six months, Company employees and consultants
purchased from the Company 165,250 shares of registered common stock, at an
average price of $6.18 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 $1,020,000. As of September 30, 1997, Company employees and
consultants held unexercised, vested, in-the-money options to purchase 560,817
shares of common stock at exercise prices ranging from $4.56 to $10.75 per
share, for an average of $7.27 per share. These stock options, if exercised,
would provide the Company with cash in the amount of $4,079,000.
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. In particular, the ability of the Company to
maintain a profitable level of optical memory card sales is subject to risks and
uncertainties with respect to customer diversification, customer expansion, the
economic availability of reader/writers, the implementation of ongoing
commercial applications by customers, and the economic configuration and
operation of the Company's card manufacturing facility for increased output
levels. Such factors are described in the Company's Report on Form 10-K and
other documents filed by the Company from time to time with the Securities and
Exchange Commission.
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<PAGE> 10
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's September 26, 1997 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 450,000 shares.
Of the 9,238,066 shares outstanding as of the record date of August 1, 1997,
8,437,682 shares were voted by proxy, equaling 92.30% 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 8,117,759; 8,116,080; and
8,116,080, respectively, and votes withheld were 400,130; 401,809; and 401,809,
respectively. On the amendment of the 1991 Stock Option Plan, 7,766,215 shares
were voted in favor; there were 652,975 negative votes and 98,299 abstentions;
and broker non-votes totalled 710,177.
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
(a) Exhibit No. Exhibit Description
10.1 Amended "1991 Stock Option Plan"
(Approved by Stockholders on September 26, 1997)
27 Financial Data Schedule
The above-listed exhibits are filed herewith. 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 3, 1997 /s/Jerome Drexler
---------------------------------------
Jerome Drexler, Chairman of the Board
of Directors and Chief Executive Officer
(Principal Executive Officer)
Date: November 3, 1997 /s/Steven G. Larson
---------------------------------------
Steven G. Larson, Vice President of
Finance and Treasurer (Principal
Financial Officer and Principal
Accounting Officer)
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<PAGE> 11
EXHIBIT INDEX
Ex. 10.1 Amended "1991 Stock Option Plan"
(Approved by Stockholders on September 26, 1997)
Ex. 27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
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 2,370,000 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 Chief Executive Officer 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
May 12, 1997, which amendment was approved by the shareholders on September 26,
1997. 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
-6-
<PAGE> 7
ATTACHMENT A
TO 1991 STOCK OPTION PLAN
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, 1997 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1997 (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-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,720
<SECURITIES> 0
<RECEIVABLES> 3,198
<ALLOWANCES> 0
<INVENTORY> 1,356
<CURRENT-ASSETS> 6,509
<PP&E> 14,229
<DEPRECIATION> 11,992
<TOTAL-ASSETS> 9,585
<CURRENT-LIABILITIES> 2,260
<BONDS> 0
0
0
<COMMON> 34,571
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,585
<SALES> 4,381
<TOTAL-REVENUES> 4,391
<CGS> 2,505
<TOTAL-COSTS> 2,505
<OTHER-EXPENSES> 1,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 314
<INCOME-TAX> 12
<INCOME-CONTINUING> 302
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
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