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 fiscal quarter ended: March 31, 1994 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: 1-10386
CONVEX COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-1838006
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3000 Waterview Parkway
Richardson, Texas 75080
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (214)497-4000
________________________________________
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. Yes___X___
No_______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 30, 1994
Common Stock - $0.01 par value 25,858,378
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CONVEX COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, Dec. 31,
Assets 1994 1993
--------- ---------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 28,458 $ 43,094
Short-term investments 14,668 13,820
Receivables, net 45,057 60,145
Inventory 31,575 29,150
Current portion of long-term receivables 11,930 13,622
Prepaid expenses and other current assets 20,127 18,671
--------- ---------
Total current assets 151,815 178,502
--------- ---------
Fixed assets, net 39,560 38,910
Long-term receivables 18,048 20,566
Long-term investments 15,721 13,389
Other assets, net 3,306 2,909
--------- ---------
Total assets $ 228,450 $ 254,276
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 10,483 $ 13,529
Accrued payroll and related taxes 5,650 5,358
Current portion of notes payable 10,686 11,347
Deferred revenue 13,290 14,387
Other current liabilities 24,674 29,677
--------- ---------
Total current liabilities 64,783 74,298
--------- ---------
Long-term liabilities:
Notes payable 11,927 14,093
6% convertible subordinated debentures 53,500 53,500
--------- ---------
Total long-term liabilities 65,427 67,593
Shareholders' equity:
Preferred stock ($.01 par value); 5,000,000 shares authorized, -- --
and none outstanding
Common stock ($.01 par value); 40,000,000 shares authorized;
25,812,016 shares and 25,522,883 shares outstanding
in 1994 and 1993, respectively 257 255
Additional capital 150,019 148,973
Accumulated deficit (49,115) (33,283)
Cumulative translation adjustment (2,921) (3,560)
--------- ---------
Total shareholders' equity 98,240 112,385
--------- ---------
Total liabilities and shareholders' equity $ 228,450 $ 254,276
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
CONVEX COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31,
----------------------
1994 1993
--------- ---------
Revenue:
Product and other revenue $ 10,362 $ 41,722
Service revenue 18,057 17,362
--------- ---------
Total revenue 28,419 59,084
========= =========
Costs and expenses:
Cost of product and other revenue 8,280 20,938
Cost of service revenue 12,315 12,007
Research and development 7,869 8,577
Selling, general and administrative 15,436 16,850
Restructuring and other charges -- --
--------- ---------
Total costs and expenses 43,900 58,372
--------- ---------
Operating income (loss) (15,481) 712
Other income (expense), net (287) (645)
--------- ---------
Income (loss) before provision for income taxes (15,768) 67
Provision for income taxes 64 21
--------- ---------
Net income (loss) $ (15,832) $ 46
========= =========
Net income (loss) per common and common
equivalent share $ (.62) $ .00
========= =========
Weighted average number of common and common
equivalent shares outstanding 25,668 25,138
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
CONVEX COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
----------------------
1994 1993
Operating activities: --------- ---------
<S> <C> <C>
Net income (loss) ($15,832) $ 46
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 3,977 3,745
Deferred income taxes (43) (1,044)
Foreign currency (gains) losses 180 (16)
Changes in assets and liabilities:
(Increase) decrease in receivables 15,834 (6,670)
(Increase) decrease in inventory (2,373) 1,076
(Increase) in prepaid expenses and other current assets (1,047) (1,163)
(Increase) decrease in long-term receivables 4,198 (112)
(Decrease) in accounts payable (3,136) (4,800)
Increase (decrease) in income taxes payable (1,583) 675
(Decrease) in other current liabilities (3,585) (2,748)
Increase (decrease) in deferred revenue (1,635) 1,294
--------- --------
Total adjustments 10,787 (9,763)
--------- --------
Net cash (used for) operating activities (5,045) (9,717)
--------- --------
Investing activities:
(Additions) to fixed assets, net (4,110) (2,095)
(Increase) decrease in short-term investments (848) 5,317
(Increase) in long-term investments (2,332) (474)
(Increase) in other assets (769) (114)
Foreign currency hedging activity (735) 231
--------- --------
Net cash provided by (used for) investing activities (8,794) 2,865
--------- --------
Financing activities:
Issuance of common stock under stock option and purchase plans, net 1,047 1,837
Proceeds from long-term debt 282 3,820
Principal payments on long-term debt (3,109) (3,213)
--------- --------
Net cash provided by (used for) financing activities (1,780) 2,444
--------- --------
Effect of exchange rate fluctuations on cash and cash equivalents 983 203
--------- --------
(Decrease) in cash and cash equivalents (14,636) (4,205)
Cash and cash equivalents, beginning of period 43,094 52,599
--------- --------
Cash and cash equivalents, end of period $28,458 $48,394
========= ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
CONVEX COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation of Interim Financial Statements
The accompanying unaudited consolidated financial statements of
Convex Computer Corporation and subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information in footnote disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles has been condensed or
omitted pursuant to those rules and regulations. However, the Company
believes that the disclosures contained herein are adequate to make the
information presented not misleading. It is suggested that these
financial statements be read in connection with the financial statements
and notes thereto included in the Company's most recent annual report to
shareholders.
While the financial information furnished is unaudited, the financial
statements included in this report reflect all adjustments (consisting
of normal, recurring adjustments except those provided for during 1993
as part of the restructuring) which the Company considers necessary for
a fair presentation of the results of operations for the interim periods
covered and of the financial condition of the Company at the interim
balance sheet dates. In order to maintain consistency and comparability
between periods presented, certain amounts have been reclassified from
the previously reported 1993 financial statements in order to conform to
1994 presentation.
Inventory
Inventory is recorded at the lower of cost (on a first-in,
first-out basis) or market. Cost includes purchased materials,
manufacturing labor and manufacturing overhead. Inventory consists of
the following (in thousands):
March 31, March 31,
1994 1993
-------- ---------
Raw material $12,797 $13,818
Work-in-process 5,413 5,643
Finished goods 13,365 17,934
--------- ---------
$31,575 $37,395
========= =========
Income Taxes
The provision for income taxes for the three months ended March 31,
1994 is $64,000 on a pretax net operating loss of $15,768,000. The
provision for the same period of 1993 was $21,000 on pretax income of
$67,000. This provision reflects anticipated income (loss) before
taxes, including an estimate of income by taxing jurisdiction. The
Company estimates that it will have no tax benefit for the year from
domestic net operating losses, but certain foreign subsidiaries with net
operating income will have tax expense. The Company has unused foreign
and domestic net operating losses available to offset future income.
Earnings per Common and Common Equivalent Share
The computation of primary earnings per share is based on the
weighted average number of common and common equivalent (stock options)
shares assumed to be outstanding during the period. For the periods
presented, the computation of fully diluted earnings per share resulted
in no significant additional dilution. In periods of net loss, common stock
equivalents have been excluded from the computation since the effect of their
inclusion would be anti-dilutive.
The number of shares used in the computation of primary earnings
per share is determined as follows (in thousands):
Three Months Ended
--------------------
March 31, March 31,
1994 1993
--------- ---------
Weighted average common shares
outstanding during the period 25,668 24,936
Dilutive common share equivalents
related to outstanding stock options -- 202
--------- ---------
Weighted average shares used in
computation 25,668 25,138
========= =========
Legal Proceedings
On August 2 and 7, 1991, two separate complaints were filed
against the Company and certain of its officers and directors in the
United States District Court for the Northern District of Texas. The
two cases were consolidated. Plaintiffs filed a Consolidated Amended
Complaint (the "Amended Complaint") on October 18, 1991, which purports
to be a class action lawsuit on behalf of persons who purchased the
Company's stock between January 31, 1991 and July 29, 1991. The
Amended Complaint alleges that defendants violated specific provisions
of the federal securities laws, namely Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, and Texas common law.
Subsequent to December 31, 1993 the Company reached an agreement
in principle to settle this class action lawsuit, subject to final
approval by the court. The Company has included a charge for the $2.5
million estimated cost of settlement in the fourth quarter 1993 results.
Restructuring and Other Charges
In July 1993, the Company announced a restructuring program
designed to reduce costs and increase the efficiency of the Company's
operations. The program included, among other items, severance of
employees, the consolidation and elimination of certain facilities, the
estimated costs of the write down of certain of the Company's assets, as
well as miscellaneous charges for other matters.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
In the first quarter of 1994, the Company reported revenues of $28
million and a net loss of $16 million. Customer demand was well below
expectations for the current products and well below the level of recent
quarters. Margins fell to 28% in the quarter versus 44% in the same
quarter a year ago and 39% in the previous quarter, due primarily to
price competition on product sales and the effect of fixed manufacturing
overhead on the lower volume. Expenses were down $2 million from the
first quarter of 1993 and about equal to the fourth quarter of 1993 after
adjusting for the one-time expenses incurred in the fourth quarter. The
combination of the low revenue, a difficult pricing environment and fixed
overhead expenses resulted in the large loss for the quarter.
During the month of March the Company shipped the first eight-processor
Exemplar systems to five customers. This represents the initial
shipments of the Company's new PA-RISC based scalable parallel product.
The Company plans to increase the level of shipments of this product in
the second quarter, however, the Company expects overall order rates to
remain low at least through the second quarter of 1994, with revenue
below the level needed to achieve break-even operating results.
The Company believes that order rates for the Company's products will
continue to be adversely affected by economic uncertainties and tight
customer budgets. In addition, customers in the high-performance
technical marketplace are faced with a wide array of choices of
technology which the Company believes will also result in delayed buying
decisions, lengthened sales cycles and intense price competition. As a
result, the Company expects to see continued pricing pressure throughout
1994.
Cash and investments decreased $11 million in the first quarter of 1994.
The Company expects cash to continue to decrease as a result of below
break-even operating results and the capital requirements associated
with bringing two new products to market.
Revenue
Total revenue for the first quarter of 1994 was $28 million, a 52%
decrease from the $59 million reported for the first quarter of 1993 and
a 38% decrease from the $46 million reported for the fourth quarter of
1993, as shown in the table below:
Quarter ended
---------------------------
Revenue ($000,000) 3/31/94 3/31/93 12/31/93
------------------ -------- ------- --------
Product and Other 10 42 25
Service 18 17 21
Total 28 59 46
3/31/94 Quarter Revenue -
Percent change from quarter ended
---------------------------------
Product and Other Revenue - -75% -58%
Service Revenue - 4% -15%
Total Revenue - -52% -38%
Unit Shipments
--------------
C3800 2 11 8
C3400 4 10 8
Meta Series 4 10 12
Exemplar SPP 7 - -
The 75% decline in product revenue versus the first quarter of 1993 and
the 58% decline versus the previous quarter is due to decreased order
rates on the C3 product line. The Company entered the quarter with no
backlog on the high-end C3800 product and was able to close only two
transactions. The Company continues to experience a high level of
competition from workstations in the C-Series compute-server markets, as
well as order delays due to customers anticipating new product
introductions.
Shipments of the Company's PA-RISC based systems, the Meta Series and
the new Exemplar SPP, remained about flat in total number of systems
delivered. The Exemplar product line reflects the first shipments of
the Company's new scalable parallel product, following the product
announcement in mid-March. A total of seven Exemplar systems were
shipped to five customers, with each system consisting of a single eight
processor hypernode. Systems in larger configurations are planned to be
introduced throughout 1994 as the final development effort on larger
configurations is completed.
Service revenue increased 4% in the first quarter of 1994 versus the same
quarter in 1993 but was 15% below the fourth quarter of 1993. Service
revenue includes both maintenance contracts as well as systems
integration revenue, and accounted for 64% of the Company's total
revenue in the first quarter of 1994. Systems integration is a line of
business the Company entered during 1992 in which it performs a service
for the customer by integrating hardware and software from other vendors
with Convex hardware and software. Systems integration revenue also includes
the third party integration components of both the data management business
and the Meta Series product line. The change in the service revenue across
these periods is primarily due to the fluctuations in the level of
systems integration business. The Company believes the amount of
systems integration revenue will fluctuate from quarter-to-quarter and
will depend to a large degree on the success of the data management
business. In addition, the Company believes that in 1994, maintenance
contract revenue will show little or negative growth unless the Company
is able to achieve growth in product revenues.
The Company believes the current economic and competitive environment is
causing its customers and prospects to reduce their capital spending
levels and to delay making decisions to purchase high dollar capital
goods such as the Company's products. The Company also believes the
current competitive environment has put increased pressure on the
Company's present compute-server products. In addition, the Company has
introduced one new product family and plans to introduce a second in
1994 (please refer to the discussion under "Research and Development").
Some customers, anticipating the availability of these new products, may
further delay purchases of the Company's current products until the new
products are available.
The Company manufactures and ships its products as promptly as
practicable upon receipt of a purchase order, and generally does not
maintain a significant backlog. With no significant product backlog
entering the second quarter of 1994, the Company's future financial
performance will depend entirely on its ability to generate new orders
for shipment in the same quarter in which the orders are received.
Finally, because a significant portion of the Company's shipments occur
in the last month of a quarter, minor timing differences in the receipt
of customer purchase orders and in the Company's shipments can have a
significant impact on the Company's quarterly financial results. Due to
the high average selling price and low unit volume of the Company's
sales, failure to complete a small number of sales transactions before
the end of a quarter can have a significant negative impact on financial
results.
Gross Margin
Gross margins declined to 28% of revenue in the first quarter of 1994
versus 44% in the first quarter of 1993 and 39% in the fourth quarter of
1993. The change is primarily due to the change in product margin.
Quarter ended
--------------------------
Gross Margins % Revenue 3/31/94 3/31/93 12/31/93
----------------------- -------- ------- --------
Product Margin 20 50 44
Service Margin 32 31 34
Total Margin 28 44 39
Product margin declined to 20% in the first quarter of 1994 versus the 44%
- - 50% historical range shown in the table. While approximately 11
points of this decline is attributable to the fixed overhead absorption
on the lower volume, the remaining decrease is believed to be due to
increased pricing competition on the C3 product lines. Improvement in
the Company's product margin is dependent on two factors: Market
acceptance and the general competitiveness of the new products and
higher total product volume which would improve fixed overhead
absorption compared to the first quarter.
Gross margin on the service business has not shown the same volatility
although the slightly higher margin percentage in the fourth quarter of
1993 was due primarily to higher than normal margins on the systems
integration business.
Expenses
Expenses for the first quarter of 1994 were held constant with the
previous quarter, after adjusting for $5 million in Restructuring and
Other charges and $2 million of bad debt expenses incurred in the fourth
quarter. Expenses were $2 million below the same quarter in 1993, with
reductions in all areas plus reduced commission expense on the lower
revenue. The Company intends to tightly manage resources and maintain
overhead expenses at the current levels through 1994.
Quarter ended
--------------------------
Expenses ($000,000) 3/31/94 3/31/93 12/31/93
-------------------- ------- ------- --------
Research and Development 8 9 8
Selling, General and Administrative 15 17 18
Restructuring and Other - - 5
Quarter ended
--------------------------
Expenses % Revenue 3/31/94 3/31/93 12/31/93
------------------ ------- ------- --------
Research and Development 28 15 18
Selling, General and Administrative 54 29 40
Restructuring and Other - - 10
Research and Development
Research and development expenditures were $8 million in the first
quarter of 1994, down 8% from the first quarter of 1993 and down 4% from
the fourth quarter of 1993. The decline in revenue in the first quarter
of 1994 has increased these expenditures as a percentage of revenue.
The Company remains committed to aggressive efforts to bring two new
product families to market in 1994 and expects research and development
expenses during 1994 to be approximately the same amount as 1993.
However, because these two product families are critical to the
Company's competitiveness and future financial results, some increase in
spending may be necessary to complete these two products.
The Company's new scalable parallel Exemplar product family, announced in
mid-March and based on Hewlett-Packard Company's PA-RISC technology,
introduced both a completely new hardware platform and a completely new suite
of software products. The software products include a new operating system
that incorporates components from several sources. The integration and
performance tuning of these components is critical to the overall
success of the product. These efforts will continue throughout 1994 as
the development efforts for the top-end of the product line are
completed. While the Company believes these efforts will be successful,
there can be no assurance that overall performance of the new operating
system will reach satisfactory levels as a result of these efforts.
Market acceptance of this product family is also highly dependent on
third party software vendors porting their applications to the product.
While the Company is working with a number of vendors to accomplish this
result, there can be no assurance that the third-party vendors will
undertake the necessary efforts, or that the porting efforts will yield
competitive software applications on the Company's new product.
The Company is also presently developing the next generation C Series
family of products. This generation is intended to replace the existing
C3 Series of products. The new products will be compatible with
existing C Series products and are planned to deliver improved
performance at approximately the same prices as the existing products.
The development effort for this product family is nearing completion,
but the completion and ultimate introduction of this product line is
dependent on the Company receiving a number of key semiconductor
components from its suppliers. While the Company believes that it will
receive the necessary devices, there can be no assurance that the
suppliers of these devices will successfully complete their development
efforts or once completed that they will be capable of manufacturing
these devices in quantities sufficient to allow the Company to achieve
volume production of the new product families.
Both the next generation C Series product and the Exemplar product
family make use of leading edge semiconductor devices. The Company
currently has only one source for certain key components. The Company's
ability to manufacture its new products in production quantities will
require that the Company receive sufficient quantities of these
semiconductor devices from its vendors. In addition, there are still
significant technical and manufacturing uncertainties involved in the
Company successfully bringing these new products to the market. There
can be no assurance that the Company's new products, once introduced,
will gain market acceptance, or that the Company will receive adequate
supplies of critical components.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of
1994 were $3 million below the fourth quarter of 1993 and $1 million
below the first quarter of 1993. The $3 million decrease from fourth
quarter 1993 is due to lower sales commissions on the reduced volume and
the fact that the fourth quarter of 1993 included over $2 million of
one-time charges related to the bankruptcy of an international leasing
company and financial difficulties of another customer. These expenses
as a percentage of revenue have increased in the first quarter of 1994,
but the Company believes the current selling resources will be necessary
to support the introduction of the new products planned for 1994.
Restructuring and Other Expenses
With a substantial decline in order rates and revenue in the first half
of 1993, in July the Company implemented a restructuring program
designed to reduce annualized costs by $22 million and to increase the
efficiency of the Company's operations. The restructuring also
reflected a strategic decision to write down certain assets based on an
analysis of future demand for both the C3800 and C3400 product families.
The $32 million charge taken in the second quarter comprised $7 million
for severance costs of approximately 185 employees, $22 million for
costs associated with reducing factory capacity in the Richardson
manufacturing facility and to write down certain of the Company's
assets, and $3 million in miscellaneous and other charges. An
additional $5 million charge was taken in the fourth quarter for the
estimated cost of settling the 1991 class action lawsuit and for
additional asset write-downs.
The $36 million restructuring charge involves cash expenditures of
approximately $17 million, all funded from working capital. Of this
amount, $10 million had been spent at the end of the first quarter of
1994 and the Company expects the remaining $7 million to be
substantially spent by mid-1994. In addition, the Company estimates
that it has reduced annual expenses by over $22 million. The expense
reductions include payroll and benefit expenses of approximately $15
million, depreciation, rent and maintenance expenses of $5 million and
$2 million of other expenses. There can be no assurance, however, that
this program will improve the Company's financial performance.
The company ended the first quarter of 1994 with 993 employees, 173
fewer than the previous year with most of the reductions coming in the
manufacturing area.
Other Income and Expense
Other income for the first quarter of 1994 dropped slightly from the
first quarter of 1993 and the fourth quarter of 1993. This item
consists of interest earned less interest expenses incurred and certain
costs associated with implementing the Company's foreign currency
hedging program. Interest income will continue to decline in line with
the decreasing cash balances, however, the current quarter benefited
from an increase in interest income due to an adjustment based on a U.S.
tax refund.
Income Taxes
The operating loss for the Company in the first quarter of 1994 is
anticipated to result in no U.S. tax benefit in the current year. The
Company believes it may incur tax expenses in various foreign
subsidiaries which could result in a net tax expense for the year. At
March 31, 1994 the Company had foreign and domestic operating loss
carryforwards which are available to offset future taxable income. The
realization of the tax benefits related to the loss carryforwards is
dependent on the future profitability of the Company and its foreign
subsidiaries.
Liquidity and Capital Resources
During the first quarter of 1994, the Company's cash and investments
balance declined by $11 million. This follows a decline of $12 million
in the fourth quarter of 1993. In addition, the Company spent $4
million during the quarter for fixed asset additions, reflecting the
higher level of investment required to support the introduction of the
two new product families. The Company expects the rate of capital
expenditures to continue at or above this rate for the balance of 1994.
The Company's cash, cash equivalents and investment balances totaled
approximately $59 million at the end of the first quarter of 1994. The
Company believes this source of liquidity will be sufficient to meet
cash requirements for at least the next twelve months if the Company is
able to successfully execute its plans to improve the utilization of
current assets and if the Company can increase the revenue and margin
levels above the rates achieved in the first quarter. With financial
performance in the near term expected to be below break-even, the
Company expects cash balances to decrease. To help ensure the
transition to the new products, the Company may seek to secure lines of
working capital.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit
Number Description
------- -----------
10.7 Convex Computer Corporation Amended and Restated 1991
Stock Option Plan
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
fiscal quarter ended March 31, 1994.
SIGNATURE
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.
CONVEX COMPUTER CORPORATION
Registrant
BY: J. CAMERON MCMARTIN
---------------------
J. Cameron McMartin
Chief Financial Officer and
Vice President, Finance
(Principal Finance and
Accounting Officer)
Dated: May 12, 1994
EXHIBIT 10.7
CONVEX COMPUTER CORPORATION
AMENDED AND RESTATED
1991 STOCK OPTION PLAN
1. Purpose of the Plan.
The purpose of the CONVEX COMPUTER CORPORATION 1991 STOCK OPTION PLAN
("Plan") is to advance the interests of Convex Computer Corporation
("Convex") and its stockholders, by (a) enabling Convex to attract and
retain the best available personnel for positions of substantial
responsibility, (b) encouraging Employees, Consultants and Directors to
acquire and retain a proprietary interest in Convex, and (c) promoting
the long-term success of Convex.
At the discretion of the Board, and as reflected in written option
agreements, options granted under this Plan may be either "incentive
stock options," as defined in Section 422 of the Code or "non-statutory
stock options."
2. Definitions.
(a) Board: The Committee, if one has been appointed, or the Convex
Board of Directors if there is no Committee.
(b) Code: The Internal Revenue Code of 1986, as amended.
(c) Common Stock: Convex' Common Stock, $.01 par value per share.
(d) Committee: The Committee appointed by the Board of Directors
under Section 3, if one has been appointed. If no Committee has been
appointed, this term will refer to the Board of Directors as a whole.
(e) Consultant: Any person who is engaged by Convex or any
Subsidiary to render consulting services for compensation.
(f) Continuous Status: As an Employee, Consultant or Director is
the absence of any interruption or termination of service. Service will
not be considered interrupted for sick leave, military leave or other
leave approved by the Board provided that either the leave does not
exceed 90 days or reemployment on expiration of the leave is guaranteed
by contract or statute.
(g) Date of Grant: The date an Option is granted under the Plan,
which will be the date the Board authorized the Option unless the Board
has specified a later date.
(h) Date of Exercise: The date on which an Option is validly
exercised under the Plan.
(i) Director: A member of the Convex Board of Directors.
(j) Employee: Any person, including Officers and Directors, who is
employed by Convex, its Parent or any of its Subsidiaries. The payment
of Directors' fees is not sufficient to constitute "employment."
(k) Exchange Act: The Securities Exchange Act of 1934, as amended.
(l) Incentive Stock Option: An Option intended to qualify as an
incentive stock option under Section 422 of the Code.
(m) Option: A stock option granted under the Plan.
(n) Optionee: An Employee, Consultant or Director who has been granted an
Option which has not expired.
(o) Outside Director: A Director who is not an Employee.
(p) Parent: A "parent corporation," whether now or hereafter existing,
under Section 424(e) of the Code.
(q) Rule 16b-3: Rule 16b-3 under the Exchange Act, or any successor rule
thereto.
(r) Share: A share of Common Stock, as adjusted under Section 9 of the
Plan.
(s) Subsidiary: A "subsidiary corporation," whether now or hereafter
existing, under Section 424(f) of the Code.
(t) Successors: The legal representatives of a deceased Optionee's estate
or the persons who acquire the right to exercise an Option by bequest,
inheritance or the death of the Optionee.
3. Administration of the Plan.
(a) Procedure. The Plan will be administered by (1) the Board, if the
Board may administer the Plan as one which qualifies under Rule 16b-3 as a
discretionary plan, or (2) a Committee designated by the Board. If a
Committee is designated by the Board, it will be constituted to permit the
Plan to be a discretionary plan under Rule 16b-3. Once constituted, the
Committee will continue to exist until otherwise directed by the Board. From
time to time the Board may increase or decrease the size of the Committee,
appoint additional members, remove members (with or without cause) and appoint
new members in their place, fill vacancies and remove all members of the
Committee (thereafter directly administering the Plan), all to the extent
which Rule 16b-3 permits in respect of plans intended to qualify as
discretionary.
(b) Authority. Subject to the terms of the Plan and the direction of the
Board, the Committee will have full power to implement the Plan including, but
not limited to, the power to determine:
(1) The Employees and Consultants to whom Options may from time to time
be granted.
(2) Whether, and to what extent Options are granted.
(3) The number of Shares to be covered by each Option.
(4) The forms of agreements to be used under the Plan.
(5) The terms of any Option (including the share price, any restrictions
or limitations, any vesting or exercise acceleration, any waiver of forfeiture
restrictions affecting an Option and/or the Shares covered by that Option,
based in each case on such factors as the Committee determines, in its sole
discretion, to be appropriate).
(6) The forms of payment that will be acceptable consideration for
exercise of an Option.
(7) Whether, to what extent and under what circumstances Common Stock will
be deferred, either automatically or at the election of the Optionee
(including providing for and determining the amount of any deemed earnings on
deferred amounts during a deferral period).
(8) The fair market value of the Common Stock under Section 6(c).
(9) Whether the exercise price of an Option should be reduced to the
then-current fair market value of the Common Stock if that value has declined
since the date the Option was granted.
The Committee will have the authority to construe and interpret the Plan, to
authorize the execution of such instruments on behalf of Convex as may
berequired to effectuate the grant of Options, to prescribe, amend and rescind
rules and regulations relating to the Plan and to make all other
determinations necessary or advisable for the administration of the Plan.
4. Stock Subject To Options.
Subject to Section 9, no more than 4,960,000 Shares (plus, in the case of
non-statutory stock options, the number of additional shares that are
reacquired under the Plan) may be issued upon the exercise of Options. If an
Option terminates or expires, or is cancelled or surrendered, the unpurchased
Shares subject to that Option will again be available for grants under the
Plan unless Convex reacquired the Shares by exercising its repurchase rights
or the Plan has been terminated.
5. Eligibility.
(a) Contribution. Any Director, Employee or Consultant deemed by the
Committee to have the potential to contribute to the future success of Convex
will be eligible to receive Options; provided, however, that (1) Options
granted to Outside Directors will only be made in accordance with Section 8,
and (2) Incentive Stock Options will be granted only to Employees.
(b) Designation. Each Option will be designated in the written option
agreement as either an Incentive Stock Option or a non-statutory stock option.
Notwithstanding this designation, Options will be treated as non-statutory
stock options to the extent the aggregate fair market value of the Shares
under Options that have been designated as Incentive Stock Options and that
can be exercised for the first time by an Optionee during any calendar year
(under all plans of Convex) exceeds $100,000.
For purposes of this Section 5(b), Options will be taken into account in
the order in which they were granted, and the fair market value of the shares
will be determined as of when the Option was granted.
(c) Rights. Neither the Plan nor the granting of an Option will alter
the right of Convex', its Parent or its Subsidiaries to terminate an
individual's status as an Employee, Consultant or Director at any time and for
any reason. Nor does either confer any rights or privileges to continue as an
Employee, Consultant or Director, or any other rights and privileges, except
as specifically provided in the Plan.
6. Terms and Conditions of Options.
Options will be evidenced by an agreement that is executed by Convex and
the Optionee ("Agreement"). The Agreement will be in the form as the
Committee may from time to time approve, subject to the following:
(a) Designation. The Committee will cause each Option, at the time of
grant, to be clearly designated in the Agreement as either an Incentive Stock
Option or a non-statutory Stock Option.
(b) Price. The per Share exercise price for Shares to be issued on
exercise of an Option will be the price as determined by the Committee,
subject to the following:
(1) In the case of Incentive Stock Options, the per share exercise
price will be set at 110% (or more) of fair market value on the date of the
grant for Employees who, at the time of the grant, own more than 10% of the
voting power of all classes of stock of Convex, any Parent or any Subsidiary,
and will be set at 100% (or more) of fair market value on the date of grant
for all other Employees.
(2) In the case of non-statutory stock options, the per share
exercise price will be set at 110% (or more) of fair market value on the date
of the grant for any person who, at the time of the grant, owns more than 10%
of the voting power of all classes of stock of Convex, any Parent or any
Subsidiary, and, subject to Section 8, will be set at 85% (or more) of fair
market value on the date of grant for all others.
(c) Fair Market Value. The Committee will determine fair market value by
reference to the per share closing price of the Common Stock on the New York
Stock Exchange, as reported in the Wall Street Journal.
(d) Payment of Option Price. Consideration for Shares to be issued on
exercise of an Option, including the method of payment, will be determined by
the Committee and may consist of cash, check, delivery of previously owned
Common Stock which, on the date of surrender, has (1) been owned by the
Optionee for more than six months or not acquired directly from Convex, and
(2) has a fair market value equal to the aggregate exercise price of the
Shares under the Option being exercised, or any combination of the foregoing
and/or other consideration or method of payment as may be permitted by law.
(e) Option Term. In the case of an Option granted to an Employee who,
at the time of grant, owns more than 10% of the voting power of all classes of
the stock of Convex, any Parent or any Subsidiary, the term of the Option will
be as set by the Committee but will in no event exceed five years. In the
case of all other Options, the term of the Option will be as set by the
Committee but will in no event exceed 10 years from the date of grant.
(f) Rights as a Stockholder. Neither an Optionee nor his Successors
will have any of the rights of a Convex stockholder until the certificates
evidencing Shares that they have purchased are properly delivered. Except as
provided in Section 9, no adjustment will be made for a dividend or other
right whose record date occurs before the stock certificate is issued.
(g) Exercise. Subject to Section 8, Options may be exercised at any
time, from time to time and in no particular order (if the Optionee holds more
than one Option) from the Date of Grant through the earliest of expiration,
cancellation, surrender or termination of the Option. Notwithstanding the
foregoing, no Option may be exercised before stockholder approval of the Plan
has been obtained.
The exercise of each Option will be subject to the condition that if,
at any time, Convex believes the satisfaction of withholding tax or other
withholding liabilities, or the listing, registration or qualification of any
Share on any securities exchange or under any state or federal law, or the
consent or approval of any regulatory body, is necessary or desirable as a
condition of, or in connection with, the issuance of the underlying Shares,
then the exercise will not be effective unless the same has been effected or
obtained free of any conditions not acceptable to Convex.
(h) Non-transferability. No Option may be transferred or assigned by
an Optionee, whether voluntarily or by operation of law, other than by will or
the laws of descent and distribution. During an Optionee's lifetime, Options
may only be exercised by the Optionee. No Option or the Shares covered
thereby will be (1) pledged or hypothecated in any way, or (2) subject to
execution, attachment or similar process except with the prior written consent
of the Committee.
(i) Termination of Status. If an Employee, Consultant or Director ceases to
serve as such for any reason other than permanent disability or death, he may
exercise his Option to the extent that he was entitled to do so at the date of
termination, but only within 30 days (or such other period of time as is
determined by the Committee which, in the case of an Incentive Stock Option,
is determined at the time of grant and will not exceed 90 days) after the date
his service ceases. To the extent he was not entitled to exercise an Option
on the date of termination, or if he does not exercise an Option which he was
entitled to exercise within the time specified, the Option will terminate.
(j) Permanent Disability. If an Employee, Consultant or Director is unable
to continue as such due to his total and permanent disability (as defined in
Section 22(e)(3) of the Code), he may exercise his Option to the extent that
he was entitled to do so at the date he became disabled, but only within six
months (or such other period of time as is determined by the Committee which,
in the case of an Incentive Stock Option, is determined at the time of grant
and will not exceed 90 days) after the date his service ceases. To the extent
he was not entitled to exercise an Option on the date of disability, or if he
does not exercise an Option which he was entitled to exercise within the time
specified, the Option will terminate.
(k) Death While Employed. If an Optionee dies while still an Employee,
Consultant or Director, and if that Optionee has had Continuous Status as an
Employee, Consultant or Director since the date the Option was granted, the
Option may be exercised by the Optionee's Successor at any time within six
months after the day the Optionee dies, but only to the same extent that would
otherwise have applied had the Optionee not died and continued to maintain
Continuous Status through the date of exercise.
(l) Death After Termination of Continuous Status. If an Optionee dies
within 30 days (or, with respect to Optionees other than Outside Directors, such
other period of time as is determined by the Committee which, in the case of
an Incentive Stock Option, is determined at the time of grant and will not
exceed 90 days) after his Continuous Status as an Employee, Consultant or
Director has terminated, the Option may be exercised by the Optionees
Successor at any time within six months after the day the Optionee dies, but
only to the same extent that the Option could have been exercised on the date
of termination.
(m) Rule 16b-3. Options granted to individuals who are subject to
Section 16(b) of the Exchange Act must comply with Rule 16b-3. They must also
contain any additional conditions or restrictions required by Rule 16b-3 for
Plan transactions to qualify for the maximum exemptions allowable under the
Exchange Act.
7. Allotment of Shares.
The Committee will determine the number of Option Shares that will from time
to time be offered to Employees, Consultants and Directors. The grant of an
Option will not entitle the Optionee to participate, or disqualify him from
participating, in any other grant under the Plan.
8. Outside Directors.
This Section 8 may not be amended more than once every six months, other than
to comport with changes in the Code, the Employee Retirement Income Security
Act of 1974, as amended, or the rules under either. Grants of Options under
this Section will be automatic, non-discretionary and strictly in accordance
with the following:
(a) No Discretion. No one will have any discretion in selecting which
Outside Directors will be granted Options or in determining the number of Option
Shares which they are granted; provided, however, that nothing in this Plan
will prevent an Outside Director from declining to receive an Option.
(b) Automatic Grant. On the December first of every year during the life of
the Plan, each person who is then an Outside Director will automatically be
granted an Option to purchase 5,000 Shares of Common Stock.
(c) Option Terms. The terms of Options granted to Outside Directors will
be as follows:
(1) The term of the Option will be 10 years.
(2) Subject to Section 6(i), the Option can be exercised only so long as
the Outside Director remains a Director or within three months after termination
as an Outside Director.
(3) The exercise price per Share will be 100% of the fair market value
on the date the Option is granted.
(4) The Option will vest as to 25% of the Shares subject to the Option
on each anniversary of the date of grant.
(5) In no event will an Option be capable of being exercised before
shareholder approval of the Plan has been obtained.
9. Adjustments Upon Changes in Capitalization or Merger.
(a) Adjustments. Subject to required action by the Convex stockholders,
(a) the number of Shares covered by each Option, (b) the number of Shares
authorized for issuance under the Plan and as to which either Options have not
yet been granted or Shares have been returned to the Plan following
cancellation or expiration of an Option, and (c) the price per Share covered
by outstanding Options, will be proportionately adjusted to reflect increases
or decreases in the number of issued shares of Common Stock effected without
Convex receiving consideration. Conversion of convertible securities will not
be treated as having been effected without Convex receiving consideration.
(b) Board Decision. This adjustment will be made by the Board, whose
determination will be final. Except as provided in this Section, the issuance
of shares of any class of stock (or the issuance of securities which are
convertible into shares of any class of stock) will not affect the number or
price of Shares subject to an Option.
(c) Winding Up. If a dissolution or liquidation of Convex is proposed,
Options will terminate immediately before the dissolution or liquidation is
consummated unless the Board has provided otherwise. The Board, in its
discretion, may declare that an Option will terminate on another date and may
give an Optionee the right to exercise Options as to any part of the Optioned
Shares, including those which could not otherwise be exercised.
(d) Sale or Merger. If Convex proposes to sell all or substantially all of
its assets or to merge with or into another corporation, Options will be assumed
or an equivalent option will be substituted by the successor corporation (or a
parent or subsidiary of the successor corporation) unless the Board, in its
discretion and in lieu of the assumption or substitution, permits the Optionee
to exercise the Option as to all of the Option Shares, including those which
could not otherwise be exercised. If the Board so permits, it will notify the
Optionee that the Option can be exercised for 30 days from the date of the
notice. The Option will terminate on expiration of the 30-day period.
10. Amendment and Termination.
(a) Amendment and Termination. The Board may amend the Plan at any time, or
from time to time, and may terminate it without stockholder approval.
Notwithstanding the foregoing, approval of the holders of a majority of the
outstanding shares entitled to vote is required for amendments which increase
the number of shares for which options may be granted, materially change the
standards of eligibility or constitute an amendment for which stockholder
approval is required to comply with Rule 16b-3 or Section 422 of the Code.
(b) Effect. No amendment or termination of the Plan will unilaterally
affect or impair Options already granted or any existing option or stockholder
agreements. These will remain in full force and effect as if the Plan had not
been amended or terminated, unless mutually agreed otherwise in a written
document signed by all affected parties.
11. Adoption of the Plan.
The adoption of the Plan, and any action of the Board with respect to it, will
not be deemed to give an Employee, Consultant or Director the right to be
granted an Option to purchase Shares or any other rights. The only exception
will be rights evidenced by an Agreement, or an amendment thereto, which has
been duly authorized by the Board and executed on behalf of Convex and then
only to the extent and on the terms which are contained in that Agreement or
amendment.
12. Term of the Plan.
No Options will be granted more than ten years from the earlier of the date
the Plan is adopted or the date the Plan has been approved by Convex
stockholders.
13. Conditions on Issuance of Shares.
Shares will not be issued on exercise of an Option unless, in the opinion of
counsel for Convex, the exercise and the issuance and delivery of the Shares
complies with all relevant provisions of law. This will include, without
limitation, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations under both, and the requirements of the New York Stock
Exchange.
14. Reservation of Shares.
During the term of the Plan, Convex will at all times have available a
sufficient number of Shares to satisfy the requirements of the Plan. If
Convex is unable to obtain the necessary authority from any regulatory body
having jurisdiction, Convex will have no liability for failing to issue or
sell Shares which, in the opinion of counsel for Convex, require such
authority.
15. Stockholder Approval.
Required approvals of Convex stockholders will be solicited substantially in
accordance with Section 14(a) of the Exchange Act and the rules and
regulations promulgated thereunder. Approval of amendments will be solicited
on or before the first annual meeting of stockholders held after an Option is
granted under the Plan, as then amended, to an Officer or Director. If
stockholder approval is obtained at a duly held stockholders' meeting, it must
be obtained by the affirmative vote of those holding a majority of Convex'
outstanding shares. If stockholder approval is obtained by written consent,
it must be obtained by the unanimous written consent of all Convex
stockholders. Notwithstanding the foregoing, a lesser degree of stockholder
approval at a meeting or by written consent will be sufficient if the Board
determines, in its discretion after consultation with counsel, that doing so
will comply with all applicable laws and will not adversely affect the
qualification of the Plan under Rule 16b-3 or Section 422 of the Code.
16. Information to Optionees.
Notice that an Option has been granted to an Optionee will be given to the
Optionee within a reasonable period of time after the grant date. During the
period an Optionee has one or more Options outstanding, Convex will provide
the Optionee with copies of its annual reports and all other information which
it provides to its stockholders. Convex need not provide this information if
Options under the Plan are only granted to key employees whose duties assure
their access to equivalent information.
Adopted by the Board of Directors of
Convex Computer Corporation
on the 14th of March, 1991,
and approved by the stockholders of
Convex Computer Corporation
on the 9th of May 1991.
Amended by the Board of Directors of
Convex Computer Corporation
on the 12th of March, 1992,
and approved by the stockholders of
Convex Computer Corporation
on the 14th of May, 1992.
Amended by the Board of Directors of Convex Computer Corporation on the 28th
of January 1993, and approved by the stockholders of Convex Computer
Corporation on the 13th of May 1993.
