<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
[ ] 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 0-21422
OPTi Inc.
(Exact name of registrant as specified in this charter)
CALIFORNIA 77-0220697
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
888 Tasman Drive Milpitas, California 95035
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (408) 486-8000
Indicate by check mark whether the registrant (1) has filed all reports 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 [ ]
The number of shares outstanding of the registrant's common stock as of March
31, 1997 was 12,705,993
================================================================================
<PAGE>
OPTi, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
----
a) Condensed Consolidated Statements of Operations 3
for the three months ended March 31, 1997 and 1996
b) Condensed Consolidated Balance Sheets 4
as of March 31, 1997 and December 31, 1996
c) Condensed Consolidated Statements of Cash Flows 5
for the three months ended March 31, 1997 and 1996
d) Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults on Senior Securities 9
Item 4. Submission of Matters to a Vote of Shareholders 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
<PAGE>
OPTi Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
------------------------------------------
1997 1996
------------------ ---------------
(000's omitted, except per share data)
Net Sales $23,621 $36,315
Costs and expenses:
Cost of sales 17,417 34,087
Research and development 3,188 3,189
Selling, general, and
administrative 3,971 4,437
------------------ ---------------
Total costs and expenses 24,576 41,713
------------------ ---------------
Operating loss (955) (5,398)
Interest and other income, net 559 663
------------------ ---------------
Loss before benefit
of income taxes (396) (4,735)
Benefit of income taxes (137) (1,610)
------------------ ---------------
Net loss ($259) ($3,125)
================== ===============
Net loss per share ($0.02) ($0.26)
================== ===============
Shares used in per
share calculation 12,686 12,168
================== ===============
See accompanying notes.
3
<PAGE>
OPTi Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------- -------------------
(Unaudited) (See Note 1)
(000's omitted)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $57,911 $56,372
Accounts receivable, net 15,617 17,950
Inventories 6,670 4,946
Other current assets 11,249 11,401
------------------- -------------------
Total current assets 91,447 90,669
Property and equipment, net 15,306 16,240
Other assets 8,480 8,592
------------------- -------------------
Total assets $115,233 $115,501
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $10,186 $9,718
Other current liabilities 4,390 4,763
------------------- -------------------
Total current liabilities 14,576 14,481
Long term liabilities
Long-term obligations under capital lease 4,412 4,649
Other long-term liabilities --- ---
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value:
Authorized shares -- 5,000
No shares issued or outstanding --- ---
Common stock, no par value:
Authorized shares -- 50,000
Issued and outstanding shares -- 12,706 in 1997
12,661 in 1996 57,016 56,883
Retained earnings 39,229 39,488
------------------- -------------------
Total shareholders' equity 96,245 96,371
------------------- -------------------
Total liabilities and shareholders' equity $115,233 $115,501
=================== ===================
</TABLE>
Note 1 - The consolidated balance sheet at December 31, 1996 has been derived
from the audited financial statements.
See accompanying notes.
4
<PAGE>
OPTi Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months Ended March 31,
1997 1996
--------------------------------------------
(000's omitted)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ($259) ($3,125)
Adjustments:
Depreciation and amortization 1,419 1,082
Changes in assets and liabilities:
Accounts receivable 2,333 6,343
Inventories (1,724) (7,982)
Other current assets/other assets 264 (7,195)
Accounts payable 468 346
Other current liabilities (373) (2,206)
--------------- ----------------
Net cash provided by (used in)
operating activities 2,128 (12,737)
INVESTING ACTIVITIES:
Purchase of furniture and fixtures (485) (1,988)
FINANCING ACTIVITIES:
Net proceeds from sale of common stock 133 800
Payment of long-term liabilities (237) (289)
--------------- ----------------
Net cash provided by (used in)
financing activities (104) 511
--------------- ----------------
Net increase (decrease) in
cash and cash equivalents 1,539 (14,214)
Cash and cash equivalents,
beginning of period 56,372 61,362
--------------- ----------------
Cash and cash equivalents,
end of period $57,911 $47,148
=============== ================
</TABLE>
See accompanying notes.
5
<PAGE>
OPTi INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
1. BASIS OF PRESENTATION
- -------------------------
The information at March 31, 1997 and 1996 and for the periods then ended, is
unaudited, but includes all adjustments (consisting of normal recurring
accruals) which the Company's management believes to be necessary for the fair
presentation of the financial position, results of operations and cash flows for
the periods presented. Interim results are not necessarily indicative of
results for a full year. The accompanying financial statements should be read
in conjunction with the Company's audited financial statements for the year
ended December 31, 1996.
2. NET LOSS PER SHARE
- ----------------------
Net loss per share is based upon the weighted average number of common
stock outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
------------------
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is not expected to result in any
change in primary earnings per share for the first quarter ended March 31, 1997
and March 31, 1996. The impact of Statement 128 on the calculation of fully
diluted earnings per share for these quarters is also not expected to be
material.
3. INVESTMENT IN DEBT AND EQUITY SECURITIES
- -------------------------------------------
The Company considers highly liquid investments with maturities of three
months or less from the acquisition date of the instrument to be cash
equivalents. At March 31, 1997, the Company had no material investments in
debt or equity securities.
4. INVENTORIES
- ---------------
Inventories consist of finished goods and work in process.
(in thousands) March 31, 1997 December 31, 1996
-------------- -----------------
Finished Goods $4,850 $2,422
Work in process 1,820 2,524
------ ---------
$6,670 $4,946
------- ------
6
<PAGE>
5. LITIGATION
- -------------
In September and October 1995, the Company was served with multiple shareholder
class action lawsuits filed in the United States District Court for the Northern
California District of California. The lawsuits, which name the Company and
several of its officers and directors as defendants, allege violations of the
federal securities laws in connection with the announcement by OPTi Inc. of its
financial results for the quarter ended September 30, 1995. In March of 1997,
the United States District Court for the Northern California District of
California entered an order granting the defendants a motion to dismiss the
Securities Class Action suit brought against the Company. The motion to dismiss
was granted with prejudice and without leave to amend. The plaintiffs in the
case have filed a notice of appeal of the judgment.
The Company believes that the ultimate resolution of this matter will not have a
material adverse effect on its financial position, results of operations, or
cash flow.
In January 1997, a patent infringement claim was brought against the Company by
Crystal Semiconductor (`a subsidiary of Cirrus Logic). The claim alleges that
the Company and Tritech Microelectronics International infringed upon patents
held by Crystal. These patents relate to the "Codec" module incorporated in
various audio controller devices. The Company believes that the allegations of
the complaints are without merit, and the Company intends to vigorously defend
itself. The Company believes that the ultimate resolution of this matter will
not have a material adverse effect on its financial position, results of
operations, or cash flows.
6. USE OF ESTIMATES
- -------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Information set forth herein constitutes and includes forward looking
information. The accuracy of such information is subject to a variety of risks
and uncertainties, including product mix, the Company's ability to obtain or
maintain design wins, market conditions in the personal computer and
semiconductor industries, product development schedules and other matters.
For the quarter ended March 31, 1997, the Company reported net sales of
$23,621,000, as compared to net sales of $36,315,000 for the quarter ended
March 31, 1996. This decrease in net sales is due primarily to reductions in
sales for the Company's pentium-class desktop core logic products, partially
offset by increased sales of the Company's mobile core logic products and audio
controller products. During the March quarter of 1997, desktop core logic
sales for the Company were less than 10% of overall revenues. The March 1996
quarter was the last quarter in which desktop core logic sales exceeded the
sales levels of either the Company's notebook core logic products or audio
controller products, as desktop core logic sales accounted for approximately 55%
of the Company's revenues during that quarter.
Cost of sales decreased to $17,417,000 which resulted in a gross margin of
26.3%, from $34,087,000, which resulted in a gross margin of 6.1% for the
quarter ended March 31, 1996. This increase in gross margin is primarily due
to write-offs of certain inventories in the quarter ended March 31, 1996. In
addition, gross margins benefited from product mix changes, costs improvements
achieved with more advanced wafer technologies, and reduced wafer pricing. The
Company experienced pricing pressure for its audio chipsets during the March
1997 quarter. Due to the price erosion on its audio products, the Company
anticipates that its gross margin level for the second quarter of 1997 will
decline from the first quarter level.
Research and development costs remained relatively flat at $3,188,000 for the
quarter ended March 31, 1997, as compared with $3,189,000 for the quarter ended
March 31, 1996.
Selling, general, and administrative costs were $3,971,000 in the quarter
ended March 31, 1997 as compared with $4,437,000 in the quarter ended March 31,
1996. This decrease is primarily attributable to lower sales related expenses
as a result of decreased sales.
Interest and other income, net was $559,000 and $663,000 for the quarters
ended March 31, 1997 and 1996, respectively. This decrease is partly
attributable to tax related refunds reported as other income by the Company in
the quarter ended March 31, 1996.
The Company's effective tax rate was a benefit of 34.5% and 34% for the first
quarter of 1997 and 1996, respectively. The deferred tax assets recorded as a
result of the benefit tax rate are dependent on generating sufficient taxable
income to realize these assets. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
Due to current softness in demand for audio products, the Company currently
expects that it will incur lower than anticipated net sales, resulting in a
higher loss per share in the second quarter of 1997 as compared with the first
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1,539,000 to $57,911,000 at March 31,
1997 from $56,372,000 at December 31, 1996. Working capital for the same
period increased to $76,871,000 from $76,188,000 at December 31, 1996. During
the first three months of 1997, operating activities provided cash of $2.1
million. Cash provided by operations was primarily due to decreases in accounts
receivables, partially offset by increases in inventories. In addition,
investing activities related to capital equipment used $0.5 million.
At March 31, 1997 the Company's principal sources of liquidity included cash and
cash equivalents of approximately $57.9 million and working capital of
approximately $76.9 million. The Company believes that its existing sources of
liquidity as well as its $10 million line of credit will satisfy the Company's
projected working capital and other cash requirements through at least the end
of 1997.
8
<PAGE>
Part II. Other Information
--------------------------
ITEM 1. LEGAL PROCEEDINGS.
See notes section of this report on page 7 of this report.
ITEM 2. CHANGES IN SECURITIES.
Not applicable and has been omitted.
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
Not applicable and has been omitted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
Not applicable and has been omitted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.20 1996 Stock Option Plan
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1997.
9
<PAGE>
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.
OPTi Inc.
Date: 5/14/97 By: \s\ David Zacarias
-------------------
David Zacarias
Signing on behalf of the Registrant and as
Chief Financial Officer
10
<PAGE>
EXHIBIT 10.20
OPTI INC.
1996 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. OPTi Inc., a California corporation (the
-------------------
"Company"), owns 1,060,000 shares of Series A Preferred Stock and 333,333 shares
of Series B Preferred Stock of Tripath Technology Inc., a California corporation
("Tripath"), which shares are convertible at the option of the Company into
shares of Common Stock of Tripath. The purpose of this Stock Option Plan is to
offer to certain employees of the Company and its subsidiaries the opportunity
to acquire a proprietary interest in Tripath by the grant of options to purchase
shares of Tripath Common Stock. Through the Plan, the Company seeks to attract,
motivate, and retain those highly competent persons upon whose efforts the
success of the Company depends.
2. DEFINITIONS. As used herein, the following definitions shall apply:
-----------
(a) "ADMINISTRATOR" means the Board or its Compensation Committee
-------------
appointed pursuant to Section 3 of the Plan.
(b) "APPLICABLE LAWS" means the legal requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code and the applicable laws of any
foreign country or jurisdiction where Options or Stock Purchase Rights will be
or are being granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
-----
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
----
(e) "COMMITTEE" means a Committee appointed by the Board of
---------
Directors in accordance with Section 3 of the Plan.
(f) "COMMON STOCK" means the Common Stock of Tripath issued or
------------
issuable upon conversion of the Tripath Series A Preferred Stock held by the
Company, and any other securities or assets into which such Common Stock has
been converted or for which it may have been exchanged prior to exercise of
the option, whether or not such conversion or exchange was caused by the
Company..
(g) "COMPANY" means OPTi Inc., a California corporation.
-------
(h) "CONTINUOUS STATUS AS AN EMPLOYEE" means that the employment
--------------------------------
relationship with the Company, any Parent, or Subsidiary, is not interrupted or
terminated. Continuous Status as an Employee shall not be considered
interrupted in the case of (i) any leave of absence approved by the Company or
(ii) transfers between locations of the Company or between the Company, its
Parent, any Subsidiary, or any successor. A leave of absence approved by the
<PAGE>
Company shall include sick leave, military leave, or any other personal leave
approved by an authorized representative of the Company.
(i) "EMPLOYEE" means any person, including Officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
------------
amended.
(k) "FAIR MARKET VALUE" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the time of determination, as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common
Stock on the last market trading day prior to the day of determination, or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "NONSTATUTORY STOCK OPTION" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(m) "OFFICER" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(n) "OPTION" means a stock option granted pursuant to the Plan.
------
(o) "OPTIONED STOCK" means the Common Stock subject to an Option.
--------------
(p) "OPTIONEE" means an Employee who receives an Option.
--------
(q) "PARENT" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(r) "PLAN" means this OPTi, Inc. 1996 Stock Option Plan.
----
-2-
<PAGE>
(s) "SHARE" means a share of the Common Stock, as adjusted in
-----
accordance with Section 9 below.
(t) "SUBSIDIARY" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. ADMINISTRATION OF THE PLAN. The Board shall have full power and
--------------------------
authority to designate participants and to interpret the provisions and
supervise the administration of the Plan. All decisions and selections made by
the Board pursuant to the provisions of the Plan shall be made by a majority of
its members. The Board may, in its discretion, delegate to the Compensation
Committee of the Board (the "Committee") the full authority to administer the
Plan. The Committee shall serve at the pleasure of the Board, and shall
exercise all powers of the Board granted herein, other than the power of to
amend the Plan.
4. SHARES SUBJECT TO THE PLAN. The maximum number of shares of Common
--------------------------
Stock which may be offered pursuant to the Plan is 260,000 shares. Any shares
subject to an option which for any reason is surrendered, expires, or is
terminated unexercised as to such shares may again be subject to an option under
the Plan.
5. GRANT OF OPTIONS. The Board shall, from time to time, determine and
----------------
designate those persons who are to receive options under the Plan, the number of
shares to be covered by such options and the terms thereof.
6. TERMS AND CONDITIONS. Each option granted under the Plan shall be
--------------------
evidenced by an agreement, in a form approved by the Board, which shall be
subject to the following express terms and conditions and to such other terms
and conditions as may be set forth in the stock option agreements. The Plan
shall not confer upon any Optionee any right with respect to continuation of
employment or consulting relationship with the Company, nor shall it interfere
in any way with his or her right or the Company's right to terminate his or her
employment or consulting relationship at any time, with or without cause.
(a) OPTION PERIOD. Each option agreement shall specify the period for
-------------
which the option thereunder is granted (which in no event shall exceed ten years
and one day from the date of grant) and shall provide that the option shall
expire at the end of such period.
(b) OPTION PRICE. The purchase price of each share of Common Stock
------------
subject to each option granted pursuant to the Plan shall be determined by the
Board at the time the option is granted.
(c) EXERCISE PERIOD. The Board may provide in the option agreement
---------------
that an option may be exercised in whole immediately or is to be exercisable in
increments.
(d) PROCEDURE FOR EXERCISE. Options shall be exercised by the
----------------------
delivery of written notice to the Company setting forth the number of shares
with respect to which the option is to be
-3-
<PAGE>
exercised. Such notice shall be accompanied by cash or certified check, bank
draft, or postal or express money order payable to the order of the Company, for
an amount equal to the option price of such shares, and specifying the address
to which the certificates for such shares are to be mailed. As promptly as
practicable after receipt of such written notification and payment, the Company
shall request that Tripath deliver to the optionee certificates for the number
of shares with respect to which such option has been so exercised, issued in the
optionee's name; provided, however, that such delivery shall be deemed effected
for all purposes when a stock transfer agent of Tripath shall have deposited
such certificates in the United States mail, addressed to the optionee, at the
address specified pursuant to this paragraph 6(d); and further provided, that
the Company shall not be liable for any failure of Tripath to transfer
certificates for such shares into the optionee's name.
(e) EFFECT OF DEATH OR OTHER TERMINATION OF EMPLOYMENT. If an
--------------------------------------------------
optionee's employment with the Company or its subsidiaries shall be terminated
for any reason, (1) the unvested portion of any option granted to optionee
under the Plan shall terminate as of the date of optionee's termination, and
(2) any vested portion of the option shall remain in effect in accordance with
its terms.
(f) ASSIGNABILITY. An option shall not be assignable or otherwise
-------------
transferable except by will or by the laws of descent and distribution. No
transfer of an option by an optionee by will or by the laws of descent and
distribution shall be effective to bind the Company unless the Company shall
have been furnished with written notice of the same and an authenticated copy of
the will and/or such other evidence as the Board may deem necessary to establish
the validity of the transfer and the acceptance of the transferee or transferees
of the terms and conditions of such option.
(g) NO RIGHTS AS SHAREHOLDER. No optionee shall have any rights as a
------------------------
shareholder with respect to shares covered by an option until the date of
issuance of a stock certificate for such shares, registered in such optionee's
name; no adjustment for dividends (other than stock dividends), or otherwise,
shall be made if the record date therefor is prior to the date of issuance of
such certificate.
(h) SALE OF TRIPATH STOCK. Notwithstanding anything herein or in the
---------------------
Option Agreement to the contrary, if the Company sells all of the shares of
Tripath Stock which it then owns, or if Tripath shall be acquired through a
merger or other change of control transaction, then the option shall become null
and void. If the Company sells less than all of its Tripath Stock but more than
the number of its Tripath shares not subject to outstanding options under the
Plan, then options shall become null and void proportionately to the extent that
the amount sold exceeds the number of shares of Common Stock owned by the
Company that are not subject to outstanding options. In the event that options
become null and void as a result of such sale or change of control transaction,
the Company shall pay to the optionee, as to the vested portion of any option,
the difference between (i) the price per share paid to the Company upon such
sale and (ii) the option exercise price. At the Company's discretion, such
payment shall be in the same form as is made to the Company or otherwise as
determined by the Board. Such payments to optionees shall be made in annual
installments based upon the number of shares then vested under the terms of
their respective
-4-
<PAGE>
options, or otherwise as determined by the Board. In addition to the foregoing,
in the event of any such transaction, the Company shall establish a replacement
cash fund or alternative consideration with respect to the unvested portion of
each option, to which the optionee shall become entitled only upon vesting of
such options. The foregoing sets forth the complete and entire rights of the
optionees as a result of any such transaction. Determinations made by the
Committee as to any matter set forth under this Section 6(h) shall be binding
and conclusive.
(i) INVESTMENT REPRESENTATION. Each option agreement shall contain an
-------------------------
agreement that, upon demand by the Board for such a representation, the optionee
(or any person acting under paragraph 6(e)) shall deliver to the Board at the
time of any exercise of an option a written representation that the shares to be
acquired upon such exercise are to be acquired for investment and not for resale
or with a view to the distribution thereof. Upon such demand, delivery of such
representation prior to the delivery of any shares issued upon exercise of an
option and prior to the expiration of the option period shall be a condition
precedent to the right of the optionee or such other person to purchase any
shares.
7. AMENDMENTS OR TERMINATION. The Board of Directors may amend, alter,
-------------------------
or discontinue the Plan.
8. TAX CONSEQUENCES. Some of the federal and California tax consequences
----------------
relating to options granted pursuant to this Plan are set forth below . THIS
SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT
TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS
OPTION OR DISPOSING OF THE SHARES.
(a) EXERCISE OF NONSTATUTORY STOCK OPTION. The Optionee may incur
-------------------------------------
regular federal income tax liability upon exercise. The Optionee will be
treated as having received compensation income (taxable at ordinary income
tax rates) equal to the excess, if any, of the Fair Market Value of the Shares
on the date of exercise over the Exercise Price. If Optionee is an Employee
the Company will be required to withhold from Optionee's compensation or
collect from Optionee and pay to the applicable taxing authorities an amount
in cash equal to a percentage of this compensation income at the time of
exercise, and may refuse to honor the exercise and refuse to deliver Shares if
such withholding amounts are not delivered at the time of exercise.
(b) DISPOSITION OF SHARES. If the Optionee holds Shares for at least
---------------------
one year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
-------------------------------------------
ASSET SALE.
----------
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan
-5-
<PAGE>
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of any consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Administrator, whose determination in that respect shall be final, binding and
conclusive.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify the
Optionee at least fifteen (15) days prior to such proposed action. To the
extent it has not been previously exercised, the Option will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OF THE COMPANY. In the event of a merger of the Company
---------------------
with or into another corporation, under which the Company shall not survive as
an independent entity, the Option may be assumed or an equivalent option may
be substituted by such successor corporation or a parent or subsidiary of such
successor corporation. If, in such event, the Option is not assumed or
substituted, the Option shall terminate as of the date of the closing of the
merger. In such event, alternative value shall be provided to the holders of
the options in the manner provided under Section 6(h) hereof.
10. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and
------------------------------------------
exercise of options thereunder, and the obligation of the Company to sell and
deliver shares under such options, shall be subject to all applicable federal
and state laws, rules and regulations and to such approvals by any governmental
or regulatory agency or national securities exchange as may be required. The
Company shall not be required to issue or deliver any certificates for shares of
Common Stock prior to the completion of any registration or qualification of
such shares under any federal or state law, or any ruling or regulation of any
government body or national securities exchange which the Company shall, in its
sole discretion, determine to be necessary or advisable.
11. EFFECTIVENESS AND EXPIRATION OF PLAN. The Plan shall be effective on
------------------------------------
the date the Board of Directors of the Company adopts the Plan. The Plan shall
expire ten years and one day after the effective date of the Plan and thereafter
no option shall be granted pursuant to the Plan.
-6-
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