-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C+AVXJmVHHnQE8JbVUawrLqTMDaH4c6wTLA1XS0SQq9ZEtKfWPFyCt/V0x4SLcZF glgz+s/kuWwn1QqhunOS2g== 0000891618-98-000582.txt : 19980212 0000891618-98-000582.hdr.sgml : 19980212 ACCESSION NUMBER: 0000891618-98-000582 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980211 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON VALLEY RESEARCH INC CENTRAL INDEX KEY: 0000708367 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942743735 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13836 FILM NUMBER: 98532343 BUSINESS ADDRESS: STREET 1: 6360 SAN IGNACIO AVE CITY: SAN JOSE STATE: CA ZIP: 95119 BUSINESS PHONE: 4083610333 MAIL ADDRESS: STREET 1: 6360 SAN INGACIO AVE CITY: SAN JOSE STATE: CA ZIP: 95119 FORMER COMPANY: FORMER CONFORMED NAME: SILVAR LISCO DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FOR PERIOD ENDED DECEMBER 31, 1997 1 U.S. 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 December 31, 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 NO. 0-13836 SILICON VALLEY RESEARCH, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 94-2743735 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6360 San Ignacio Avenue San Jose, CA 95119-1231 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (408) 361-0333 - -------------------------------------------------------------------------------- Registrant's telephone number, including area code - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) 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. Common Shares Outstanding at December 31, 1997: 20,601,673 2 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES INDEX
Pages ----- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1997 and December 31, 1997 (unaudited) 3 Consolidated Statements of Operations - Three and Nine Months Ended December 31, 1996 and 1997 (unaudited) 4 Consolidated Statements of Cash Flows - Nine Months Ended December 31, 1996 and 1997 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 Item 3. Quantitative and Qualitative Disclosure about Market Risk 13 Part II. OTHER INFORMATION 14 Item 1 Legal Proceedings Item 2 Changes in Securities and Use of Proceeds Item 3 Defaults Upon Senior Securities Item 4 Submission of Matters to a Vote of Securities Holders Item 5 Other Information Item 6 Exhibits and Reports on Form 8-K Signatures 15
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
March 31, 1997 December 31, 1997 -------------- ----------------- (Unaudited) Assets Current Assets: Cash and cash equivalents $ 2,064 $ 3,159 Accounts receivable, net of allowances of $150 in each period 1,129 549 Prepaid expenses and other current assets 453 249 -------- -------- 3,646 3,957 Fixed assets, net 879 641 Other assets, net 3,952 2,136 -------- -------- $ 8,477 $ 6,734 ======== ======== Liabilities and Shareholders' Equity Current Liabilities: Short-term borrowings $ -- $ 285 Current portion of long-term debt 189 211 Accounts payable 515 234 Accrued expenses 1,443 988 Deferred revenue 1,018 698 -------- -------- 3,165 2,416 Long-term debt, less current portion 254 179 -------- -------- 3,419 2,595 -------- -------- Contingencies (Note 6) Shareholders' Equity: Preferred stock, no par value: Authorized: 1,000 shares Issued and outstanding: none -- -- Common stock, no par value: Authorized: 40,000 shares Issued and outstanding: 12,227 shares at March 31, 1997 and 20,602 shares at December 31, 1997 32,375 39,093 Accumulated deficit (27,308) (35,001) Cumulative translation adjustment (9) 47 -------- -------- 5,058 4,139 -------- -------- $ 8,477 $ 6,734 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended December 31, December 31, ----------------------------- ----------------------------- 1996 1997 1996 1997 -------- -------- -------- -------- Revenue: License fees and other $ 616 $ 131 $ 2,380 $ 860 Maintenance fees 649 421 2,050 1,389 -------- -------- -------- -------- Total revenue 1,265 552 4,430 2,249 -------- -------- -------- -------- Cost of revenue: License fees and other 522 255 819 1,785 Maintenance fees 144 151 380 412 -------- -------- -------- -------- Total cost of revenue 666 406 1,199 2,197 -------- -------- -------- -------- Gross profit 599 146 3,231 52 -------- -------- -------- -------- Operating expenses: Engineering, research and development 1,193 934 2,705 2,711 Selling and marketing 1,498 728 4,714 3,001 General and administrative 2,845 253 3,948 833 Impairment loss on prepaid royalty (Note 6) -- -- -- 1,217 -------- -------- -------- -------- Total operating expenses 5,536 1,915 11,367 7,762 -------- -------- -------- -------- Operating loss (4,937) (1,769) (8,136) (7,710) -------- -------- -------- -------- Other income (expense): Interest income 52 16 251 121 Interest expense (8) (13) (24) (25) Other, net -- (119) 2 (79) -------- -------- -------- -------- Total other income (expense) 44 (116) 229 17 -------- -------- -------- -------- Loss before provision for income taxes (4,893) (1,885) (7,907) (7,693) Provision for income taxes -- -- -- -- -------- -------- -------- -------- Net loss $ (4,893) $ (1,885) $ (7,907) $ (7,693) ======== ======== ======== ======== Net loss per basic share and diluted share $ (0.42) $ (0.11) $ (0.69) $ (0.47) ======== ======== ======== ======== Shares used in per share calculation 11,520 16,868 11,473 16,537 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 5 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended December 31, ----------------------------- 1996 1997 -------- -------- Cash Flows from Operating Activities: Net loss $ (7,907) $ (7,693) Adjustments to reconcile net loss to net cash used in operating activities: Provision for impairment of prepaid marketing royalty -- 1,217 Amortization of software development costs 433 1,358 Depreciation and amortization 636 732 Provision for doubtful accounts 546 -- Changes in assets and liabilities, net: Accounts receivable 2,357 580 Prepaid expenses and other current assets (252) 204 Accounts payable (95) (281) Accrued expenses 1,477 (455) Deferred revenue (583) (320) Other, net (1,463) 213 -------- -------- Net cash used in operating activities (4,851) (4,445) -------- -------- Cash Flows from Investing Activities: Acquisition of fixed assets (577) (45) Capitalization of software development costs and purchase of software licenses (1,787) (1,421) -------- -------- Net cash used in investing activities (2,364) (1,466) -------- -------- Cash Flows from Financing Activities: Principal payments of long-term debt (35) (108) Advances on credit lines -- 340 Proceeds from issuance of common stock 369 6,718 -------- -------- Net cash provided by financing activities 334 6,950 -------- -------- Effect of exchange rate changes on cash 22 56 -------- -------- Net increase (decrease) in cash and cash equivalents (6,859) 1,095 Cash and cash equivalents at beginning of period 10,238 2,064 -------- -------- Cash and cash equivalents at end of period $ 3,379 $ 3,159 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997- UNAUDITED (IN THOUSANDS, EXCEPT FOR SHARE PRICE) NOTE 1: BASIS OF PRESENTATION AND FINANCIAL STATEMENT INFORMATION The accompanying consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial statements. Therefore, they do not include all the disclosures which were presented in the Company's Annual Report on Form 10-K. These financial statements do not include all disclosures required by generally accepted accounting principles and accordingly, should be read in conjunction with the consolidated financial statements and notes included as part of the Company's latest Annual Report on Form 10-K. In the opinion of management, the consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows for the interim period. The results of operations presented are not necessarily indicative of the results to be expected for the full year or for any other period. The report of Price Waterhouse LLP on the Company's fiscal 1997 consolidated financial statements was amended on September 17, 1997 to add an explanatory paragraph regarding the Company's ability to continue as a going concern. There can be no assurance that the Company will not continue to incur significant operating losses or that required additional financing will be available to meet the Company's business plans in fiscal 1998 and beyond. In February 1997, the Company restated its unaudited consolidated financial statements for the quarters ended June 30, 1996 and September 30, 1996 to reverse certain transactions and related expenses which were recognized other than in accordance with the Company's accounting policies. The financial statements for the three and nine months ended December 31, 1996 include the effect of the restatement referred to above. NOTE 2: EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128), which the Company adopted for the third quarter of fiscal 1998. As required by the statement, all prior period earnings per share (EPS) amounts presented have been restated to conform with the provisions of SFAS 128. Under SFAS 128, the Company presents two EPS amounts. Basic EPS is calculated based on loss to common shareholders and the weighted-average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the periods presented. NOTE 3: STATEMENT OF CASH FLOWS INFORMATION
Nine Months Ended December 31 ------------------- 1996 1997 ---- ---- Supplemental Cash Flow Information: Cash paid during the period for: Interest $24 $25 Income taxes 13 --
6 7 SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1997- UNAUDITED (IN THOUSANDS, EXCEPT FOR SHARE PRICE) NOTE 4: BALANCE SHEET COMPONENTS
March 31, December 31, 1997 1997 ------------ ------------ Other Assets: Software development costs $ 2,163 $ 1,799 Software licenses 2,388 3,138 ------------ ------------ 4,551 4,937 Less accumulated amortization (2,425) (3,198) ------------ ------------ 2,126 1,739 Prepaid royalties, net 1,592 192 Other 234 205 ------------ ------------ $ 3,952 $ 2,136 ============ ============ Accrued Expenses: Payroll and related costs $ 434 $ 432 Taxes payable 108 106 Other 901 450 ------------ ------------ $ 1,443 $ 988 ============ ============
NOTE 5: BANK LINE OF CREDIT In June 1997, the Company entered into an additional line of credit with its bank. The revolving line of credit will provide for borrowings up to $2,000 with available borrowings limited to certain percentages of eligible accounts receivable. Interest at prime plus one percent will be due monthly with principal due in one year. As of December 31, 1997, $285 has been borrowed under the line of credit. NOTE 6: CONTINGENCIES The Company is subject to various types of litigation during its normal course of business. In January 1997, Gambit Automated Design, Inc. ("Gambit"), a competitor of the Company, filed a complaint alleging misappropriation of trade secrets, breach of contract, inducing breach of contract, breach of fiduciary duty, unfair competition and unjust enrichment against the Company and a former employee of Gambit who is a current employee of the Company. Gambit sought injunctive relief, compensation and punitive damages, restitution and attorneys' fees and costs. The parties have reached an agreement in principle to resolve this litigation. Such agreement is awaiting final documentation and does not call for the payment of any monies by the Company. In June 1996, the Company entered into an agreement whereby the Company was granted the exclusive marketing rights to Bell Labs' CLOVER line of deep submicron verification products worldwide, with the exception of Japan and Taiwan, where the Company would co-market with Bell Labs' existing distributors. Pursuant to the four year agreement, the Company made prepaid royalty payments of $1,750. The agreement also provided for future prepaid royalty payments of: $1,250 in fiscal 1998 and $1,000 in fiscal 1999. Despite active marketing efforts, the product had limited success due to product issues and to strong competitive factors. The Company recognized an impairment loss on the balance of unamortized prepaid royalties totaling $1,217 during the nine months ended December 31, 1997. In July and August 1997, both parties sent notices of termination, alleging breach of the agreement by the other party. In December 1997, the dispute was resolved when the parties entered into a Settlement Agreement and Mutual Release. NOTE 7: CAPITAL STOCK-PRIVATE PLACEMENT On December 30, 1997, the Company completed a private placement of Units comprising 3,812 shares of Common Stock and warrants to purchase an additional 3,812 shares of Common Stock at $0.53 per share, with proceeds to the Company of $2,820. The shares of Common Stock are unregistered. The Company will file a registration statement with the Securities and Exchange Commission on or before February 28, 1998 to register these shares pursuant to the terms of the private placement agreement. One director and one officer/director participated in the private placement. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements which reflect the Company's current view with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed in the Other Factors Affecting Future Results section of this Item 2, elsewhere in this Form 10-Q and as set forth in the Company's form 10-K on file with the SEC that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "intends," "future," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. RESULTS OF OPERATIONS REVENUE Total revenue for the third quarter of fiscal year 1998, which ended December 31, 1997, was $552, a decrease from $1,265 in the third quarter a year ago. The 56% decrease in revenues was due to lower license and maintenance revenue during the third quarter, primarily resulting from a reduction in capital investment by semiconductor manufacturers and increased competition. Total revenue for the nine month period ended December 31, 1997 decreased to $2,249 from $4,430 over the nine month period ended December 31, 1996. The 49% decrease is primarily due to weakened demand based on a delay in capital investment by semiconductor manufacturers caused, in part, by the current financial crisis in Asia, increased competition and the timing of renewals of maintenance contracts. International sales, primarily in Japan and the Far East, accounted for 31% of total revenue for the nine month period ended December 31, 1997 compared to 22% in the same period a year ago. The Company's expense levels are based, in part, on its expectations as to future revenue levels, which are difficult to predict. A substantial portion of the Company's revenues in each quarter results from shipments during the last month of that quarter, and for that reason among others, the Company's revenues are subject to significant quarterly fluctuations. If revenue levels are below expectations, as in the nine months ended December 31, 1997, operating results may be materially and adversely affected. In addition, the Company's quarterly and annual results may fluctuate as a result of many factors, including the size and timing of software license fees, timing of co-development projects with customers, timing of operating expenditures, increased competition, new product announcements and releases by the Company and its competitors, gain or loss of significant customers or distributors, expense levels, renewal of maintenance contracts, pricing changes by the Company or its competitors, personnel changes, foreign currency exchange rates, and economic conditions generally and in the electronics industry specifically. COST OF REVENUE Cost of license fees and other revenue for the third quarter of fiscal year 1998 was $255, compared to $522 in the third quarter of fiscal 1997. Cost of license fees for the nine months ended December 31, 1997 was $1,785, compared to $819 in the nine months ended December 31, 1996. Cost of license fees is primarily the amortization of software development costs and amortization of prepaid royalty payments to third parties. As a result of the significant reduction in revenue and due to the Company's expanded product development program, the Company wrote-off $1,036 of unamortized software development costs in the nine months ended December 31, 1997. Cost of maintenance fees for the third quarter of fiscal year 1998 was $151 compared to $144 in the third quarter of fiscal 1997. Cost of maintenance fees for the nine months ended December 31, 1997 was $412 compared to $380 in the nine months ended December 31, 1996. Cost of maintenance fees is primarily the cost of providing technical support and technical documentation. 8 9 ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES Engineering, research and development expenses for the third quarter of fiscal year 1998 were $934 compared to $1,193 in the third quarter a year ago. Comparing the third quarter of fiscal 1998 and the third quarter of fiscal 1997, engineering, research and development expenses were 169% and 94% of total revenue, respectively. Engineering, research and development expenses for the nine months ended December 31, 1997 were $2,711 compared to $2,705 for the nine months ended December 31, 1996. Comparing these periods, engineering, research and development expenses were 121% and 61% of total revenue, respectively. Engineering, research and development expenses were lower in the third quarter of fiscal 1998 due to the capitalization of software development costs per the Company's policy of capitalizing costs relating to significant enhancements of the Company's products which occured during the quarter ended December 31, 1997. SELLING AND MARKETING EXPENSES Selling and marketing expenses for the third quarter of fiscal year 1998 decreased to $728 from $1,498 in the third quarter a year ago. In the third quarter of fiscal 1998 and the third quarter of fiscal 1997, selling and marketing expenses were 132% and 118% of total revenue, respectively. Selling and marketing expenses for the nine months ended December 31, 1997 decreased to $3,001 from $4,714 in the nine months ended December 31, 1996. Comparing the nine month periods, selling and marketing expenses were 133% and 106% of total revenue, respectively. The dollar decrease is due to the effects of the Company's cost-cutting measures and lower commissions resulting from reduced revenue during the nine months ended December 31, 1997. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased to $253 for the third quarter of fiscal year 1998 from $2,845 in the third quarter a year ago. In the third quarter of fiscal 1998 and the third quarter of fiscal 1997, general and administrative expenses were 46% and 225% of total revenue, respectively. General and administrative expenses for the nine months ended December 31, 1997 decreased to $833 from $3,948 in the nine months ended December 31, 1996. Comparing the nine month periods, general and administrative expenses were 37% and 89% of total revenue, respectively. The third fiscal quarter of the prior year included approximately $2,400 of significant nonrecurring charges associated with severance arrangements, litigation accruals, legal fees and accounting fees. In addition, general and administrative expenses have decreased due to streamlining the organization, lower relocation expenses, lower consulting and legal expenses and cost-cutting measures instituted by management. IMPAIRMENT LOSS ON PREPAID ROYALTY In June 1996, the Company entered into an agreement whereby the Company was granted the exclusive marketing rights to Bell Labs' CLOVER line of deep submicron verification products worldwide, with the exception of Japan and Taiwan. Pursuant to the four year agreement, the Company has made prepaid royalty payments of $1,750. Despite active marketing efforts, the product had limited success due to product issues and to strong competitive factors. Accordingly, the Company ceased sales of the product line in July 1997. Provision was made in the accompanying financial statements for the nine months ended December 31, 1997 to expense the full amount of unamortized prepaid royalty of $1,217, the future value of which was considered impaired. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through sales of equity securities and to a lesser extent, cash generated from operations. To date in fiscal 1998, the Company has received net cash of $6,718 from the private placement of equity securities ("financing activities"). During the nine months ended December 31, 1997, cash and cash equivalents increased $1,095 from $2,064 to $3,159. This increase resulted from cash provided by financing activities of $6,950 less cash used by operations of $4,445 and $1,466 of cash used for investing activities. 9 10 The Company incurred a significant loss in the first nine months of fiscal 1998 and expects operating losses to continue, at least in the near term, as it expands its product development and marketing capabilities. The achievement of profitability is primarily dependent upon the continued development and commercial acceptance of the Company's products, the successful management of the business and management's ability to strategically focus the Company. There can be no assurance as to whether or when achievement of profitable operations will occur. In addition, the Company is experiencing negative cash flow from operations and it is expected that it will continue to experience negative cash flow at least through 1998. The Company's primary unused sources of funds at December 31, 1997 consisted of cash and cash equivalents of $3,159 and an available line of credit of $1,715 from its bank, limited to certain percentages of eligible accounts receivable. The Company believes its cash and cash generated from operations and available borrowings may not be sufficient to finance its operations through 1998. Management is exploring financing alternatives to supplement the Company's cash position. Potential sources of additional financing include private equity financings, mergers, strategic investments, strategic partnerships or various forms of debt financings. The Company has no commitments or arrangements to obtain any additional funding and there can be no assurance that the required financing of the Company will be available on acceptable terms, if at all. The unavailability or timing of any financing could prevent or delay the continued development and marketing of the products of the Company and could require substantial curtailment of operations of the Company. The report of Price Waterhouse LLP on the Company's fiscal 1997 consolidated financial statements was amended on September 17, 1997 to add an explanatory paragraph regarding the Company's ability to continue as a going concern. There can be no assurance that the Company will not continue to incur significant operating losses or that required additional financing will be available to meet the Company's business plans in fiscal 1998 and beyond. OTHER FACTORS AFFECTING FUTURE RESULTS DEPENDENCE ON SINGLE PRODUCT LINE. Revenues from sales of the SVR GARDS family of products have historically represented a substantial majority of the Company's revenues. Although the Company has introduced its SVR SonIC family of products, the Company expects that revenues from the sale of SVR GARDS products will continue to account for at least a significant portion of the Company's revenues for the foreseeable future. The life cycles of the Company's products are difficult to predict due to the effect of new product introductions or product enhancements by the Company or its competitors, market acceptance of new and enhanced versions of the Company's products and competition in the Company's marketplace. Declines in the demand for the SVR GARDS family of products, whether as a result of competition, technological change, price reductions or otherwise, could have a material adverse effect on the Company's business, operating results and financial condition. NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT DEFECTS. The EDA industry is characterized by extremely rapid technological change, frequent new product introductions and enhancements, evolving industry standards and rapidly changing customer requirements. The development of more complex ICs embodying new technologies will require increasingly sophisticated design tools. The Company's future results of operations will depend, in part, upon its ability to enhance its current products and to develop and introduce new products on a timely and cost-effective basis that will keep pace with technological developments and evolving industry standards and methodologies, as well as address the increasingly sophisticated needs of the Company's customers. The Company has in the past, and may in the future, experience delays in new product development and product enhancements. The Company has recently released significant upgrades to GARDS to provide a new Power Router, to SonIC to provide a new placer and new routing capabilities, and to SC to provide a rewritten Global Router and fast new placement. There can be no assurance that these new products will gain market acceptance or that the Company will be successful in developing and marketing product enhancements or other new products that respond to technological change, evolving industry standards and changing customer requirements, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products or product enhancements, or that its new products and product enhancements will adequately meet the requirements of the marketplace and achieve any significant degree of market acceptance. 10 11 In addition, all of the Company's current products operate in, and planned future products will operate in, the Unix operating system. In the event that another operating system, such as Windows NT, were to achieve broad acceptance in the EDA industry, the Company would be required to port its products to such an operating system, which would be costly and time consuming and could have a material adverse effect on the Company's business, operating results or financial condition. Failure of the Company, for technological or other reasons, to develop and introduce new products and product enhancements in a timely and cost-effective manner would have a material and adverse effect on the Company's business, operating results and financial condition. In addition, the introduction, or even announcement of products by the Company or one or more of its competitors embodying new technologies or changes in industry standards or customer requirements could render the Company's existing products obsolete or unmarketable. There can be no assurance that the introduction or announcement of new product offerings by the Company, or one or more of its competitors, will not cause customers to defer purchases of existing Company products. Such deferment of purchases could have a material adverse effect on the Company's business, operating results or financial condition. Software products as complex as those offered by the Company may contain defects or failures when introduced or when new versions are released. The Company has in the past discovered software defects in certain of its products and may experience delays or lost revenue to correct such defects in the future. Although the Company has not experienced material adverse effects resulting from any such defects to date, there can be no assurance that, despite testing by the Company, errors will not be found in new products or releases after commencement of commercial shipments, resulting in loss of market share or failure to achieve market acceptance. Any such occurrence could have a material effect upon the Company's business, operating results or financial condition. COMPLIANCE WITH NASDAQ LISTING REQUIREMENTS; DISCLOSURE RELATING TO LOW-PRICED STOCK. The Company's Common Stock is quoted on the Nasdaq National Market (the "National Market"). However, in order to continue to be included in the National Market, a company must meet certain maintenance criteria. Continued inclusion requires, among other things, a minimum bid price of $1.00 per share or, in the alternative, a public market float of a least $3,000 and net tangible assets of at least $4,000. Effective February 23, 1998, the maintenance criteria will be increased, requiring a minimum bid price of $1.00 per share, and $4,000 in net tangible assets (total assets less total liabilities and goodwill) and $5,000 market value of the public float (excluding shares held directly or indirectly by any officer or director of the Company and by any person holding beneficially more than 10% of the Company's outstanding shares). As of December 31, 1997, the closing sales price of a share of the Company's Common Stock was $0.6563. By letter dated November 17, 1997, The Nasdaq Stock Market, Inc. ("Nasdaq") informed the Company that the Company's Common Stock had failed to maintain a closing bid price greater than or equal to $1.00 during the last ten consecutive trading dates. The letter stated that the Company will be provided ninety calendar days in which to regain compliance with the minimum bid price or an alternative requirement (Market value of a public float of at least $3,000 and net tangible assets of at least $4,000). If at any time during the ninety day period, the Common Stock reports a closing bid price of $1.00 or greater for ten consecutive trading days, the Company will have complied with the minimum bid price requirement. If the Company is unable to demonstrate compliance on or before the end of the period, it must submit proposals for achieving compliance. Should the Company fail to submit the necessary information in such time frame, or if the submission is deemed not to warrant continued listing, Nasdaq will immediately issue a formal notice of deficiency which will specify the delisting date of the Company's securities. On the basis of all information available, Nasdaq staff will determine whether or not the Company may continue to be listed on the Nasdaq National Market. Failure to meet these maintenance criteria in the past and future may result in the delisting of the Company's Common Stock from the National Market and the quotation of the Company's Common Stock on the Nasdaq SmallCap Market (the "SmallCap Market"), if the requirements for inclusion on the SmallCap Market are met. As a result of quotation on the SmallCap Market, an investor may find it more difficult to dispose of the Company's Common Stock. Effective February 1998, a company must have $4,000 in net tangible assets or $50,000 market capitalization or $750 net income in two of the last three years, a minimum bid price of $4.00 per share and a public float of $5,000 for inclusion in the SmallCap Market, subject to certain exception. Failure to meet the SmallCap Market inclusion criteria, or the failure to meet the SmallCap Market maintenance criteria if the initial SmallCap Market inclusion criteria are met, may result in the delisting of the Company's Common Stock from Nasdaq. Trading, if any, in the Company's Common Stock would thereafter be conducted in the 11 12 non-Nasdaq over-the-counter market. As a result of such delisting, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's Common Stock. In addition, if the Company's Common Stock were delisted from trading on Nasdaq and the trading price of the Common Stock was less than $5.00 per share, trading in the Common Stock would also be subject to certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The additional burden imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market liquidity of the Common Stock and limit the ability of sellers to sell the Common Stock in the secondary market. By letter dated December 2, 1997, Nasdaq informed the Company that based upon a review of the Company's most recently filed financial statements and market data, the Company may not meet the new requirements with respect to net tangible assets and minimum bid price for continued listing on The National Market, which will become effective on February 23, 1998. POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Numerous factors may materially and unpredictably affect operating results of the Company, including the uncertainties of the size and timing of software license fees, timing of co-development projects with customers, timing of operating expenditures, increased competition, new product announcements and releases by the Company and its competitors, gain or loss of significant customers or distributors, expense levels, renewal of maintenance contracts, pricing changes by the Company or its competitors, personnel changes, foreign currency exchange rates, and economic conditions generally and in the electronics industry specifically. Any unfavorable change in these or other factors could have a material adverse effect on the Company's operating results for a particular quarter. Many of the Company's customers order on an as-needed basis and often delay delivery of firm purchase orders until their project commencement dates are determined, and, as a result, the Company operates with no significant backlog. Quarterly revenue and operating results will therefore depend on the volume and timing of orders received during the quarter, which are difficult to forecast accurately. Historically, the Company has often recognized a substantial portion of its license revenues in the last month of the quarter, with these revenues frequently concentrated in the last two weeks of the quarter. Operating results would be disproportionately affected by a reduction in revenue because only a small portion of the Company's expenses vary with its revenue. Operating results in any period should not be considered indicative of the results to be expected for any future period, and there can be no assurance that the Company's revenues will increase or that the Company will achieve profitability. LENGTHY SALES CYCLE. The licensing and sales of the Company's software products generally involves a significant commitment of capital by prospective customers, with the attendant delays frequently associated with large capital expenditures and lengthy acceptance procedures. For these and other reasons, the sales cycle associated with the licensing of the Company's products is typically lengthy and subject to a number of significant risks over which the Company has little or no control. Because the timing of customer orders is hard to predict, the Company believes that its quarterly operating results are likely to vary significantly in the future. Actual results of the Company could vary materially as a result of a variety of factors, including, without limitation, the high average selling price and long sales cycle for the Company's products, the relatively small number of orders per quarter, dependence on sales to a limited number of large customers, timing of receipt of orders, successful product introduction and acceptance of the Company's products and increased competition. DEPENDENCE UPON SEMICONDUCTOR AND ELECTRONICS INDUSTRIES; GENERAL ECONOMIC AND MARKET CONDITIONS. The Company is dependent upon the semiconductor and more generally, the electronics industries. Each of these industries is characterized by rapid technological change, short product life cycles, fluctuations in manufacturing capacity and pricing and gross margin pressures. Each of these industries is highly cyclical and has periodically experienced significant downturns, often in connection with, or in anticipation of, declines in general economic conditions during which the number of new IC design projects often decreases. Purchases of new licenses from the Company are largely dependent upon the commencement of new design projects, and factors negatively affecting any of these industries could have a 12 13 material adverse effect on the Company's business, operating results or financial condition. The Company's business, operating results and financial condition may in the future reflect substantial fluctuations from period to period as a consequence of patterns and general economic conditions in either the semiconductor or electronics industry. INTERNATIONAL SALES. International sales, primarily in Japan, Korea and Taiwan, accounted for approximately 52%, 43%, 25% and 31% of the Company's total revenue in fiscal 1995, 1996, 1997 and the first nine months of fiscal 1998, respectively. Declining revenues from international sales were a result of the reduction in capital expenditures by semiconductor manufacturers, particularly in Asia as a result of the current financial crisis in that region, and increased competition in the electronic design automation (EDA) software market. The Company expects that international sales will continue to account for a significant portion of its revenue and plans to continue to expand its international sales and distribution channels. This revenue involves a number of inherent risks, including economic downturn in the electronics industry in Asia, traditionally slower adoption of the Company's products internationally, general strikes or other disruptions in working conditions, generally longer receivables collection periods, unexpected changes in or impositions of legislative or regulatory requirements, reduced protection for intellectual property rights in some countries, potentially adverse taxes, delays resulting from difficulty in obtaining export licenses for certain technology and other trade barriers. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's results of operations. Sales orders received by foreign sales subsidiaries are primarily denominated in currencies other than the U.S. dollar. In order to reduce the risk of loss between the time the Company's products are purchased by subsidiaries and the time payment is made, the subsidiaries enter into foreign exchange contracts when economically feasible. COMPETITION. The EDA software market in which the Company competes is intensely competitive and subject to rapid technological change. The Company currently faces competition from EDA vendors, including Cadence Design Systems, Inc. ("Cadence"), which currently holds the dominant share of the market for IC physical design software, Avant! Corporation and Mentor Graphics. These EDA vendors have significantly greater financial, technical and marketing resources, greater name recognition and, in some cases, a larger installed customer base than the Company. These companies also have established relationships with current and potential customers of the Company and can devote substantial resources aimed at preventing the Company from enhancing relationships with existing customers or establishing relationships with potential customers. The Company believes that competitive factors in the EDA software market include product performance, price, support of industry standards, ease of use, delivery schedule, product enhancements, and customer technical support and service. The Company believes that, with respect to ease of use, the Company's products may not be perceived as competing favorably. Competition from EDA companies that choose to enter the IC physical design market could present particularly formidable competition due to their large installed customer base and their ability to offer a complete integrated IC design solution, which the Company does not offer. The Company expects additional competition from other established and emerging companies. In addition, the EDA industry has become increasingly concentrated in recent years as a result of consolidations, acquisitions and strategic alliances. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. There can be no assurance the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on its business, operating results and financial condition. MANAGEMENT TRANSITION. The Company is experiencing a period of management transition that has placed, and may continue to place, a significant strain on its resources, including its personnel. Robert R. Anderson resumed the role of Chief Executive Officer in December 1996 and has assembled a new senior management team. The Company's ability to manage growth successfully will require its new management personnel to work together effectively and will require the Company to improve its operations, management and financial systems and controls. If the Company management is unable to manage this transition effectively, the Company's business, competitive position, results of operations and financial condition will be materially and adversely affected. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. 13 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings (in thousands): In June 1996, the Company entered into an agreement whereby the Company was granted the exclusive marketing rights to Bell Labs' CLOVER line of deep submicron verification products worldwide, with the exception of Japan and Taiwan, where the Company would co-market with Bell Labs' existing distributors. Pursuant to the four year agreement, the Company made prepaid royalty payments of $1,750. The agreement also provided for future prepaid royalty payments of: $1,250 in fiscal 1998 and $1,000 in fiscal 1999. In July and August 1997, both parties sent notices of termination, alleging breach of the agreement by the other party. In December 1997, the dispute was resolved when the parties entered into a Settlement Agreement and Mutual Release. In January 1997, Gambit Automated Design, Inc. ("Gambit"), a competitor of the Company, filed a complaint alleging misappropriation of trade secrets, breach of contract, inducing breach of contract, breach of fiduciary duty, unfair competition and unjust enrichment against the Company and a former employee of Gambit who is a current employee of the Company. Gambit sought injunctive relief, compensation and punitive damages, restitution and attorneys' fees and costs. The parties have reached an agreement in principle to resolve this litigation. Such agreement is awaiting final documentation and does not call for the payment of any monies by the Company. Item 2. Changes in Securities and Use of Proceeds: Not Applicable Item 3. Defaults Upon Senior Securities: Not Applicable Item 4. Submission of Matters to a Vote of Securities Holders: Not Applicable Item 5. Other Information: Not Applicable Item 6. Exhibits and Reports on Form 8-K: EXHIBITS: EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- --------------------- 3.1 Registrant's Amended and Restated Articles of Incorporation as amended to date (incorporated by reference to Exhibit 3.01 of Registrant's Registration Statement on Form S-1 ( File No. 2-89943) filed March 14, 1984, as amended (the "1984 Registration Statement")). 3.2 Registrant's amendment to Amended and Restated Articles of Incorporation filed September 19, 1997 (incorporated by reference to Exhibit 3.02 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 3.3 Registrant's bylaws, as amended to date (incorporated by reference to Exhibit 4.01 of the 1984 Registration Statement). 3.5 Amendment to Bylaws dated November 12, 1996 (incorporated by reference to Exhibit 3.04 of Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). 4.1 Form of Unit Purchase Agreement among the Company and several investors dated as of December 19, 1997, as amended. 4.2 Form of Warrant to Purchase Common Stock dated as of December 30, 1997. 27. Financial Data Schedule REPORTS ON FORM 8-K: No Form 8-K's were filed during the quarter covered by this report. 14 15 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. SILICON VALLEY RESEARCH, INC. Date: February 11, 1998 /s/ Robert R. Anderson ----------------- ------------------------------------- Robert R. Anderson Chief Executive Officer and Chairman of the Board /s/ Laurence G. Colegate, Jr. Laurence G. Colegate, Jr. Senior Vice President, Finance and Administration (Chief Financial and Accounting Officer) 15 16 EXHIBIT INDEX 3.1 Registrant's Amended and Restated Articles of Incorporation as amended to date (incorporated by reference to Exhibit 3.01 of Registrant's Registration Statement on Form S-1 ( File No. 2-89943) filed March 14, 1984, as amended (the "1984 Registration Statement")). 3.2 Registrant's amendment to Amended and Restated Articles of Incorporation filed September 19, 1997 (incorporated by reference to Exhibit 3.02 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 3.3 Registrant's bylaws, as amended to date (incorporated by reference to Exhibit 4.01 of the 1984 Registration Statement). 3.5 Amendment to Bylaws dated November 12, 1996 (incorporated by reference to Exhibit 3.04 of Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996). 4.1 Form of Unit Purchase Agreement among the Company and several investors dated as of December 19, 1997, as amended. 4.2 Form of Warrant to Purchase Common Stock dated as of December 30, 1997. 27. Financial Data Schedule EX-4.1 2 FORM OF UNIT PURCHASE AGREEMENT 1 EXHIBIT 4.1 UNIT PURCHASE AGREEMENT This Unit Purchase Agreement (the "Agreement") is made and entered into as of December 19, 1997, by and among Silicon Valley Research, Inc., a California corporation (the "Company"), and those parties listed on the signature pages hereof as "Investors" (who are referred to individually as an "Investor" and collectively as the "Investors"). WHEREAS, the Company requires additional cash to fund its current operations and for working capital and, therefore, is offering to sell the Units (as defined below) to investors who qualify as purchasers in a private placement transaction under federal and state securities laws; and WHEREAS, each of such investors will have the right to subscribe for any or all of the Maximum Amount (as defined below) of the Units at the Unit Purchase Price (as defined below), subject to pro ration as described herein. In consideration of the above recitals and the mutual covenants made herein, the parties hereby agree as follows: 1. Sale of Units; Closing; Delivery. (a) Purchase and Sale of Units. Subject to the terms and conditions hereof, the Company will issue and sell to each Investor, and each Investor will purchase from the Company, on the Closing Date (as defined below) the number of Units subscribed for by such Investor as set forth on such Investor's signature page hereof (the "Subscription Amount"), subject to reduction as specified in Section 1(b) hereof. A "Unit" shall be composed of a share of common stock ("Share"), no par value, of the Company ("Common Stock"), and a warrant (the "Warrant") to purchase a share of Common Stock ("Warrant Share"). The purchase price per Unit (the "Unit Purchase Price") shall be determined at the close of business on December 17, 1997 (the "Pricing Date"), and shall be based upon the sum of (i) a purchase price per Share (the "Share Purchase Price") equal to the average of the closing bid prices of the Common Stock on the Nasdaq National Market (the "NNM") for the five consecutive trading days ending on the Pricing Date and (ii) a purchase price per Warrant of $0.125. The exercise price per Warrant Share (the "Exercise Price") shall be 85% of the Share Purchase Price; provided, however, that if the difference between the Share Purchase Price and the Exercise Price is greater than $0.125, then the Exercise Price shall be the sum of the Share Purchase Price less $0.125. A form of the Warrant is attached as Exhibit A. (b) Pro Ration of Units. The Company shall sell 2 up to a maximum of 3,811,974 Units (the "Maximum Amount"). In the event that the aggregate of the Subscription Amounts of all Investors (the "Aggregate Subscription Amount") shall exceed the Maximum Amount, Units shall be allocated, pro rata, among the Investors based on the relation that an Investor's Subscription Amount bears to the Aggregate Subscription Amount. (c) Closing Notice. As soon as practicable following the close of the NNM on the Pricing Date, but in no event later than 3:00 p.m. Pacific Time on such Date, the Company shall give each Investor written notice of the total payment due from such Investor at the Closing (as defined below) based upon the number of Units allocated to such Investor hereunder at the Unit Purchase Price as determined pursuant to Section 1(a). In addition, such notice shall specify the Exercise Price per Warrant as determined pursuant to Section 1(a). Such notice shall also contain computations as to the allocation of Units among Investors based upon the Aggregate Subscription Amount pursuant to Section 1(b) hereof and as to the Unit Purchase Price. (d) Closing. The closing of the purchase and sale of the Units (the "Closing") shall take place on December 23, 1997 (the "Closing Date"); provided, however, that the Company shall have the option to extend the Closing Date for up to fifteen (15) days. The Company shall provide the Investors with written notice, prior to the close of business on December 19, 1997, of any such extension of the Closing Date. (e) Delivery. At the Closing, the Company will deliver to each Investor (or its agent, as hereinafter described) the Warrants and a stock certificate representing the Shares included in the Units to be purchased by such Investor, against payment of the purchase price therefor by check, payable to the order of the Company, or by wire transfer of immediately available funds to the bank account of the Company. For purposes of the Closing, the Company shall deliver the Shares and Warrants included in the Units purchased hereunder by each of the Investors to Hertzog, Calamari & Gleason, as agent of the Investors, unless the Company shall receive other written instructions from an Investor at least two (2) business days prior to the Closing. 2. Representations and Warranties of Investors. Each Investor represents and warrants, severally, to the Company that: (a) Authorization. This Agreement constitutes the valid and legally binding obligation of such Investor, enforceable in accordance with its terms, except as such 2 3 enforcement may be limited by bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally and equitable remedies, and except as indemnity provisions in the enforcement of Section 4 of this Agreement (relating to registration rights) may be limited by law, and such Investor (if an individual) is over eighteen (18) years of age, and such Investor has full legal capacity, power and authority to enter into and be bound by this Agreement. (b) Purchase for Own Account for Investment. Such Investor is purchasing the Units (including, for this purpose, the Shares and the Warrants) for investment purposes only and not with a view to, or for sale in connection with, a distribution of the Units within the meaning of the Securities Act of 1933, as amended (the "1933 Act"). Such Investor has no present intention of selling or otherwise disposing of all or any portion of the Units. (c) Access to Information. Such Investor has had an opportunity to ask questions of the Company's representatives concerning the Company, its present and prospective business, assets, liabilities and financial condition that such Investor reasonably considers important in making the decision to purchase the Units. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 of this Agreement or the rights of the Investors to rely thereon. (d) Understanding of Risks. Such Investor is fully aware of: (i) the highly speculative nature of the investment in the Units; (ii) the financial hazards involved; (iii) the lack of liquidity of the Shares and Warrant Shares and the restrictions on the transferability of the Shares and Warrant Shares (e.g., that such Investor may not be able to sell or dispose of the Shares and Warrant Shares); and (iv) the tax consequences of an investment in the Units. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 of this Agreement and the rights of the Investors to rely thereon. (e) Investor's Qualifications. Such Investor is an "accredited" investor as defined under Regulation D under the 1933 Act. Such Investor is aware of the general business and financial circumstances of the Company and, by reason of such Investor's business or financial experience, such Investor is capable of evaluating the merits and risks of this investment and is financially capable of bearing a total loss of this investment. (f) Compliance with Securities Laws. Such Investor understands and acknowledges that, in reliance upon 3 4 the representations and warranties made by such Investor herein, the Shares and Warrant Shares are not currently registered with the U.S. Securities and Exchange Commission (the "SEC") under the 1933 Act or being qualified under the California Corporate Securities Law of 1968, as amended (the "Law"), but instead are being issued under an exemption or exemptions from the registration and qualification requirements of the 1933 Act and the Law or other applicable state securities laws which impose certain restrictions on such Investor's ability to transfer the Shares and Warrant Shares. (g) Restrictions on Transfer. Such Investor understands that such Investor may not transfer any of the Shares or Warrant Shares unless such Shares or Warrant Shares are registered under the 1933 Act or unless, in the opinion of counsel to the Company, exemptions from such registration and qualification requirements are available. Such Investor understands that only the Company may file a registration statement with the SEC. Such Investor has also been advised that exemptions from registration and qualification may not be available or may not permit such Investor to transfer all or any of the Shares or Warrant Shares in the amounts or at the times proposed by such Investor. (h) Rule 144. In addition, such Investor has been advised that SEC Rule 144 ("Rule 144") promulgated under the 1933 Act, which permits certain limited sales of unregistered securities, is not presently available with respect to the Shares and Warrant Shares solely due to the holding periods required thereunder and, in any event, requires that the Shares and Warrant Shares be held for a minimum of one year, and in certain cases two years, after they have been purchased and paid for (within the meaning of Rule 144), before they may be resold under Rule 144. Such Investor understands that Rule 144 may indefinitely restrict transfer of the Shares and Warrant Shares if such Investor is an "affiliate" of the Company and "current public information" about the Company (as defined in Rule 144) is not publicly available. (i) Legends and Stop-Transfer Orders. Such Investor understands that certificates or other instruments representing any of the Shares and Warrant Shares acquired by such Investor may bear legends substantially similar to the following, in addition to any other legends required by federal or state laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE 4 5 SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS UNLESS SOLD PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT. In order to ensure and enforce compliance with the restrictions imposed by applicable law and those referred to in the foregoing legend, or elsewhere herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, with respect to any certificate or other instrument representing the Shares and Warrant Shares, or if the Company transfers its own securities, it may make appropriate notations to the same effect in the Company's records. Any legend endorsed on a certificate pursuant to this Subsection (i) and the related stop transfer instructions with respect to such securities shall be removed, and the Company shall issue a certificate without such legend to the holder thereof, if such securities are registered under the Securities Act and a prospectus meeting the requirements of Section 10 of the Securities Act is available, if such legend may be properly removed under the terms of Rule 144 promulgated under the Securities Act or if such holder provides the Company with an opinion of counsel for such holder, reasonably satisfactory to legal counsel for the Company, to the effect that a sale, transfer or assignment of such securities may be made without registration. 3. Representations and Warranties of the Company. The Company hereby represents and warrants to each Investor that, except as set forth on the Schedule of Exceptions attached hereto as Exhibit B: (a) Organization and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has all necessary corporate power and authority to own its assets and to carry on its business as now being conducted and presently proposed to be conducted. The Company is duly qualified to do business as a foreign 5 6 corporation and is in good standing in each jurisdiction in which its ownership or leasing of assets, or the conduct of its business, makes such qualification necessary. (b) Requisite Power and Authorization. The Company has all necessary corporate power and authority under the laws of the State of California and all other applicable provisions of law to execute and deliver this Agreement, to issue the Shares, the Warrants and the Warrant Shares and to carry out the provisions of this Agreement and the Warrants. All corporate action on the part of the Company required for the lawful execution and delivery of this Agreement, and issuance and delivery of the Shares, the Warrants and the Warrant Shares has been duly and effectively taken. Upon execution and delivery, this Agreement and the Warrants constitute valid and binding obligations of the Company enforceable in accordance with their respective terms, except as enforcement may be limited by insolvency and similar laws affecting the enforcement of creditors' rights generally and equitable remedies and except as the indemnity provisions of Section 4 of this Agreement (relating to registration rights) may be limited by law. The Shares and the Warrant Shares when issued in compliance with the provisions of this Agreement or the Warrants, as the case may be, will be duly authorized and validly issued, fully paid, non-assessable and issued in compliance with federal securities laws and all applicable state securities laws. No shareholder of the Company or other person has any preemptive right of subscription or purchase or contractual right of first refusal or similar right with respect to the Shares, Warrants or Warrant Shares. The Company has reserved such number of shares of its Common Stock necessary for issuance of the Warrant Shares. (c) SEC Documents. The Company has furnished to each Investor: the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997, and all documents that the Company was required to file, which it represents and warrants it did timely file, with the SEC under Sections 13 or 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), since March 31, 1997 (collectively, the "SEC Documents"). As of their respective filing dates, or such later date on which such reports were amended, the SEC Documents complied in all material respects with the requirements of the Exchange Act. The SEC Documents as of their respective dates, or such later date on which such reports were amended, did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. The financial statements included in the SEC Documents (the "Financial Statements") comply as to 6 7 form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. Except as may be indicated in the notes to the Financial Statements or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC, the Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the consolidated financial position of the Company and any subsidiaries at the dates thereof and the consolidated results of their operations and consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring adjustments). (d) Capital Stock. The authorized capital stock of the Company consists of 40,000,000 shares of Common Stock, without par value, and 1,000,000 shares of Preferred Stock, without par value. As of December 1, 1997, there were 16,789,699 shares of Common Stock issued and outstanding, and there are no issued and outstanding shares of Preferred Stock. (e) Compliance with Other Agreements. Neither the execution and delivery of, nor the consummation of any transaction or execution of any instrument contemplated by, this Agreement, nor the issuance of the Shares, the Warrants and the Warrant Shares, has constituted or resulted in, or will constitute or result in, a default under or breach or violation of any term or provision of the Company's Bylaws, Articles of Incorporation, or material contracts with third parties, state or federal laws, rules or regulations, writs, orders or judgments or decrees which are applicable to the Company or its properties. (f) No Material Adverse Change. Since September 30, 1997, there has not been: (i) any changes in the assets, liabilities, financial condition or operations of the Company from that reflected in the Company's Form 10Q for the quarter ended September 30, 1997, except changes in the ordinary course of business which have not been, either in any individual case or in the aggregate, materially adverse; (ii) any material change, except in the ordinary course of business, in the contingent obligations of the Company whether by way of guarantee, endorsement, indemnity, warranty or otherwise; (iii) any damage, destruction or loss, whether or not covered by insurance, materially and adversely 7 8 affecting the properties or business of the Company; (iv) any declaration or payment of any dividend or other distribution of the assets of the Company; (v) any labor organization activity; or (vi) any other event or condition of any character which has materially and adversely affected the Company's business, assets, liabilities, financial condition, operations or prospects. (g) Nasdaq. The Common Stock has been designated for inclusion in the NNM upon prior application. The issuance and sale of the Shares and the Warrants, when issued and sold in accordance with this Agreement, and the issuance and sale of the Warrant Shares when issued and sold in accordance with the Warrants, will not violate any applicable rule of The Nasdaq Stock Market ("Nasdaq"), including, without limitation, Nasdaq Marketplace Rule 4460(i) which requires shareholder approval prior to the issuance of designated securities. (h) Registration Statement. To the best of the Company's knowledge, there exist no facts or circumstances that would inhibit or delay the preparation and filing of a registration statement on Form S-3 with respect to the Registrable Securities (as defined below) in accordance with Section 4(b) hereof. (i) No Misrepresentation. No representation or warranty by the Company in this Agreement and no statements in the SEC Documents, as amended, or any other document, statement, certificate or schedule furnished or to be furnished by or on behalf of the Company pursuant to this Agreement, when taken together with the foregoing, contains or shall contain any untrue statement of material fact or omits or shall omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading. The Company has delivered true and complete copies of all documents requested by the Investors. (j) Anti-dilution Shares. Issuance of the Shares and the Warrants under this Agreement, and the issuance of the Warrant Shares under the Warrants, will not trigger any anti-dilution, preemptive or similar rights contained in any options, warrants or other agreements or commitments of the Company or otherwise result in the issuance of any additional shares of Common Stock. 8 9 4. Registration Rights. (a) Definitions. For purposes of this Section 4: (i) "Register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the 1933 Act, and the declaration or ordering of effectiveness of such registration statement. (ii) "Registrable Securities" means all shares of Common Stock of the Company issued under this Agreement, including all shares of Common Stock issued or issuable pursuant to the exercise of the Warrants, excluding in all cases, however, all Registrable Securities sold pursuant to Rule 144. (iii) "Holder" means any person owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities to whom rights under this Section 4 have been assigned in accordance with this Agreement. (b) Shelf Registration. (i) Within sixty (60) days following the Closing Date, the Company will file a registration statement or amend a currently effective registration statement (in either event, a "registration statement") under the 1933 Act for, and all such qualifications and compliances as may be so required and as would permit the sale and distribution of, all of the Holders' Registrable Securities, and thereafter shall use its best efforts to secure the effectiveness of such registration statement within ninety (90) days following the Closing Date. (ii) The Company will pay all expenses incurred in connection with any registration, qualification and compliance requested hereunder (excluding underwriters' or brokers' discounts and commissions), including, without limitation, all filing, registration and qualification, printers' and accounting fees and the reasonable fees and disbursements of one counsel for the selling Holder or Holders and counsel for the Company. (iii) The Company will use its best efforts to cause the registration statement to remain effective until the earlier of (A) the date ending three years after the effective date of the registration statement filed pursuant to this Section 4(b) or (B) the date on 9 10 which each Holder of Registrable Securities is able to sell all of such Holder's Registrable Securities in any single three (3) month period without registration under the 1933 Act pursuant to Rule 144, provided that if the Company determines that it may terminate the effectiveness of the registration statement under (B), the Company shall prior to such termination provide each Holder an opinion of counsel, based on factual representations of the Holder, that such Holder is able to sell all of the Registrable Securities held by such Holder and its affiliates in any single three (3) month period without registration under the 1933 Act pursuant to Rule 144. (c) Piggyback Registrations. (i) At such time(s) as a registration statement pursuant to Section 4(b) herein is unavailable to the Holders, the Company will be required to notify all Holders of Registrable Securities in writing at least thirty (30) days prior to the Company filing any registration statement after the ninetieth (90th) day following the Closing Date under the 1933 Act for purposes of effecting a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to any employee benefit plan or a corporate reorganization), and will afford each such Holder after the ninetieth (90th) day following the Closing Date an opportunity to include in such registration statement (and any related qualification under or compliance with "blue sky" or other state securities laws) all or any part of the Registrable Securities then held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by such Holder will, within thirty (30) days after receipt of the above-described notice from the Company, so notify the Company in writing, and in such notice will inform the Company of the number of Registrable Securities such Holder wishes to include in such registration statement. If a Holder decides not to include all of such Holder's Registrable Securities in any registration statement thereafter filed by the Company, such Holder will nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. 10 11 (ii) If the registration statement under which the Company gives notice under this Section 4(c) is for an underwritten offering, the Company will so advise the Holders of Registrable Securities. In such event, the right of any such Holder's Registrable Securities to be included in a registration pursuant to this Section 4(c) will be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting will enter into an underwriting agreement in customary form with the managing underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Agreement, if the managing underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting will be allocated (A) first, to the Company, (B) second, to any (1) Holders or (2) other persons who have piggyback registration rights granted by the Company that are at parity with the rights of the Holders under this Section 4(c) and, in each case, who request the inclusion of their securities in the registration statement, and (C) third, to any persons with piggyback rights subordinate to those of the Holders who request the inclusion of their securities in the registration statement; provided, however, that the number of Registrable Securities proposed to be registered by the Holders hereunder may not be reduced to less than twenty percent (20%) of the total value of the securities to be distributed through the underwriting. If not all securities of Holders or other persons described in clause (B) above can be included in a registration, the allocation among such Holders and other persons will be on a pro rata basis according to the relation that the number of securities which each such Holder or other person owns bears to the total number of shares outstanding. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least five (5) business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting will be excluded and withdrawn from the registration. For any Holder which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners, retired partners and shareholders, and any trusts for the benefit of any of the foregoing persons 11 12 will be deemed to be a single "Holder", and any pro rata reduction with respect to such "Holder" will be based upon the aggregate amount of shares owned by all entities and individuals included in such "Holder", as defined in this sentence. (iii) All reasonable expenses incurred in connection with a piggyback registration pursuant to this Section 4(c) (excluding underwriters' and brokers' discounts and commissions), including, without limitation, all federal and "blue sky" or other state securities registration and qualification fees, printers' and accounting fees, fees and disbursements of one counsel for the selling Holder or Holders and counsel for the Company will be borne by the Company. (d) Obligations of the Company. Whenever required to effect the registration of any Registrable Securities under this Agreement, the Company will, as expeditiously as reasonably possible: (i) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and deliver such registration statement, at the time of such filing, to each Holder. (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities covered by such registration statement. (iii) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them that are included in such registration. (iv) Use its best efforts to register and qualify the Registrable Securities covered by such registration statement under such other securities or "blue sky" laws of such jurisdictions as will be reasonably requested by the Holders, provided that the Company will not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such 12 13 states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder of Registrable Securities participating in such underwriting will also enter into and perform its obligations under such an agreement. (vi) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the 1933 Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and upon such notice the Company shall use its best efforts to promptly correct such misstatement or omission and deliver to each Holder copies of such corrected prospectus. The Company shall have the right, upon such notice, to suspend the delivery of prospectuses included in such registration statement from the date of notice until the date of such correction. The period during which the Company is required to keep any registration statement filed pursuant to Section 4(b) or 4(c) effective shall be extended for the amount of time required to amend such registration statement and deliver such prospectus relating thereto. (vii) Furnish, at the request of any Holder requesting registration of Registrable Securities, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to each of the Holders requesting registration, addressed to the underwriters and to the Holders requesting registration of Registrable Securities and (ii) a "comfort" letter, dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an 13 14 underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters and to the Holders requesting registration of Registrable Securities. (viii) Use its best efforts promptly to secure the designation and quotation of all Registrable Securities covered by a registration statement on the NNM (or such other principal market or exchange on which the Common Stock is listed, or, if not so listed, to secure trading of the Common Stock on the Nasdaq OTC Bulletin Board), including, without limitation, the filing of any notification, application or other information and the payment of any fees relating thereto. (e) Furnish Information. It will be a condition precedent to the obligations of the Company to take any action pursuant to Sections 4(b) and 4(c) hereof that the selling Holders will furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as will be required to effect the registration of their Registrable Securities. (f) Delay of Registration. No Holder will have any right to obtain or seek an injunction restraining or otherwise delaying any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 4. (g) Indemnification. In the event any Registrable Securities are included in a registration statement under Sections 4(b) or 4(c) hereof: (i) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, shareholders, officers and directors of each Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 1933 Act or the Exchange Act (each, an "Indemnified Person") against any losses, claims, damages or liabilities (joint or several) to which an Indemnified Person may become subject under the 1933 Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively, a "Violation"): (A) any untrue statement or alleged untrue 14 15 statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto: (B) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (C) any violation or alleged violation by the Company of the 1933 Act, the Exchange Act, any federal or state securities law or any rule or regulation promulgated under the 1933 Act, the Exchange Act or any federal or state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Indemnified Person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 4(g)(i) will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the prior written consent of the Company (which consent will not be unreasonably withheld), nor will the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Indemnified Person. (ii) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the 1933 Act or the Exchange Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, shareholders, directors, officers or shareholders or any person who controls such Holder within the meaning of the 1933 Act or the Exchange Act (each, an "Indemnified Party"), against any losses, claims, damages or liabilities (joint or several) to which an Indemnified Party may become subject under the 1933 Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities 15 16 (or actions in respect thereto) arise out of or are based upon any Violation that arises solely as a result of and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, partner, officer, director, shareholder or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action: provided, however, that the indemnity agreement contained in this Section 4(g)(ii) will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the prior written consent of the Holder, which consent will not be unreasonably withheld; and provided, further, that the total amounts payable in indemnity by a Holder under this Section 4(g)(ii) in respect of any Violation will not exceed the lesser of (A) the aggregate proceeds (net of discounts and commissions) received by such Holder upon the sale of the Shares or Warrant Shares and (B) that proportion of aggregate losses, claims, damages, liabilities or expenses indemnified against which equals the proportion which the number of Shares and Warrant Shares being sold by such Holder bears to the total number of Shares and Warrant Shares being sold under such registration statement by the Company and all Holders. (iii) Promptly after receipt by an Indemnified Person or an Indemnified Party (the "Indemnitee") under this Section 4(g) of notice of the commencement of any action (including any governmental action), such Indemnitee will, if a claim in respect thereof is to be made against any indemnifying party under this Section 4(g), deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party will have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly given notice, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an Indemnitee will have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if the indemnifying party fails to assume the defense of an action within a reasonable time or if representation of such Indemnitee by the counsel retained by the indemnifying party, in such counsel's reasonable opinion, would be inappropriate due to actual or potential differing 16 17 interests between such Indemnitee and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if the indemnifying party is materially prejudiced thereby, will relieve such indemnifying party of liability, but only to the extent that such indemnifying party is prejudiced with respect to a specific claim. (iv) The foregoing indemnity agreement with respect to any prospectus shall not inure to the benefit of any Holder or underwriter, or any person controlling such Holder or underwriter, from whom the person asserting any losses, claims, damages or liabilities purchased shares, if a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) provided by the Company was not sent or given by or on behalf of such Holder or underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the purchased shares to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. (v) If the indemnification provided for in Sections 4(g)(i) or 4(g)(ii) hereof shall be unavailable to hold harmless an Indemnitee in respect of any liability under the 1933 Act, then, and in each such case, the indemnifying party, in lieu of indemnifying such Indemnitee hereunder, shall contribute to the amount paid or payable by such Indemnitee as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the Indemnitee on the other in connection with the statement or omissions that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the Indemnitee shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the Indemnitee and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided that in no event shall any contribution under this subsection (v) by any Holder exceed the gross proceeds 17 18 from the offering received by such Holder. No person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (vi) The obligations of the Company and Holders under this Section 4(g) will survive the completion of any offering of Registrable Securities in a registration statement, and otherwise. (h) "Market Stand-Off" Agreement. In connection with a public offering of securities by the Company pursuant to Section 4(c), each Holder who participates in the registration statement filed under the 1933 Act for such offering will not, to the extent requested in good faith by an underwriter of securities of the Company, sell or otherwise transfer or dispose of any Registrable Securities included in such registration statement (other than to donees or partners of the Holder who agree to be similarly bound) for up to that period of time, not to exceed ninety (90) days, following the effective date of such registration statement of the Company filed under the 1933 Act as is requested by the managing underwriter(s) of such offering; provided that the officers and directors of the Company who own stock of the Company and any shareholder holding more than five percent (5%) of the outstanding voting securities of the Company also agree to such restrictions. In order to enforce the foregoing covenant, the Company may impose stop transfer instructions with respect to the Registrable Securities of each such Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. (i) Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Registrable Securities to the public without registration, while a public market exists for the Common Stock of the Company, the Company will: (i) Make and keep public information available, as those terms are understood and defined in Rule 144 under the 1933 Act, at all times while the Company is reporting under the 1934 Act; (ii) Use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act (at any time it is subject to such reporting requirements); and 18 19 (iii) So long as a Holder owns any Registrable Securities, furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144, and of the 1933 Act and the Exchange Act (at any time it is subject to the reporting requirements of the Exchange Act), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Holder to sell any such securities without registration (at any time the Company is subject to the reporting requirements of the Exchange Act). (j) Termination of the Company's Obligations. The Company will have no obligations pursuant to Section 4(c) hereof with respect to: (A) any request or requests for registration made by any Holder on a date more than six (6) years after the date of this Agreement or (B) Registrable Securities held by a Holder if in the opinion of counsel to the Company at the time of filing a registration statement such Holder may sell all of such Holder's Registrable Securities in any single three (3) month period without registration under the 1933 Act pursuant to Rule 144, provided that if the Company shall determine that it may terminate its obligations to any Holder under (B), the Company shall prior to such termination provide the Holder as to which it shall have determined to terminate its obligations under (B) an opinion of counsel, based on factual representations of the Holder, that such Holder is able to sell all of the Registrable Securities held by such Holder and its affiliates in any single three (3) month period without registration under the 1933 Act pursuant to Rule 144. 5. Covenants. (a) Reserved Shares. The Company shall, from and at all times after the Closing, maintain a reserve of authorized shares of Common Stock sufficient to cover the exercise in full of the outstanding Warrants until the expiration or earlier exercise of all Warrants. (b) Nasdaq Requirements. The Company shall use its best effort to meet all requirements necessary for the inclusion of the Common Stock in the NNM, including, without limitation, the quantitative maintenance criteria set forth in Nasdaq Marketplace Rule 4450 (Quantitative Maintenance Criteria) and Nasdaq Marketplace Rule 4460 (Quantitative Designation Criteria), as long as the Company shall have an obligation to maintain the effectiveness of the registration 19 20 statement filed pursuant to Section 4(b). (c) Exchange Act Filings. The Company shall continue to file with the SEC all reports and other filings required under the rules of the SEC and such documents shall comply in all material respects with the requirements of the Exchange Act or the 1933 Act, as applicable, as long as the Company continues to be subject to reporting requirements under Section 13 or 15(d) of the Exchange Act. 6. Conditions to Obligations of the Investors. The obligation of each Investor to purchase the Units at the Closing is subject to the fulfillment on or prior to the Closing Date of the following conditions, any of which may be waived by such Investor: (a) Representations and Warranties Correct; Performance of Obligations. The representations and warranties made by the Company in Section 3 hereof shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of said date, except for representations and warranties made as of a specific date which shall be true and correct as of such date; the Company's business and assets shall not have been adversely affected in any material way prior to the Closing Date; and the Company shall have performed all obligations and conditions herein required to be performed or observed by it under this Agreement on or prior to the Closing Date. (b) Consents and Waivers. The Company shall have obtained any and all consents (including all governmental or regulatory consents, approvals or authorizations required in connection with the valid execution and delivery of this Agreement), permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement. (c) Compliance Certificate. The Company shall have delivered to the Investors a certificate, executed by the Chairman of the Board and Chief Executive Officer of the Company, dated the Closing Date, certifying to the fulfillment of the conditions specified in subsection (a) of this Section 6. (d) Opinion of Company's Counsel. Investors shall have received from Gray Cary Ware & Freidenrich, counsel to the Company, an opinion addressed to the Investors, dated the Closing Date, which shall relate to the valid issuance of the Shares and the Warrant Shares and to the due authorization, execution and delivery of the Warrants. 20 21 (e) Aggregate Subscription Amount. The purchase price of all Units purchased under this Agreement shall not be less than $1,500,000. 7. Conditions to Obligations of the Company. The obligation of the Company to sell and issue the Units to each Investor at the Closing is subject to the fulfillment on or prior to the Closing Date of the following conditions, any of which may be waived by the Company: (a) Representations and Warranties. The representations and warranties made by such Investor in Section 2 hereof shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of said date. (b) Consents and Waivers. The conditions set forth in subsections (b) and (e) of Section 6 hereof shall have been fulfilled. 8. Miscellaneous. (a) Governing Law. This Agreement will be governed by and construed in accordance with the internal laws of the State of California applicable to contracts made among residents of, and wholly to be performed within, the State of California, without regard to principles of conflict of laws or choice of laws. (b) Further Instruments. From time to time, each party hereto will execute and deliver such instruments and documents as may be reasonably necessary to carry out the purposes and intent of this Agreement. (c) Successors; No Other Beneficiaries. This Agreement will be binding upon and will inure to the benefit of the executors, administrators, legal representatives, heirs, successors and assigns of the parties hereto; provided, however, that (i) rights of Investors hereunder may be transferred only in connection with (and to the transferee of) Common Stock of the Company purchased by an Investor hereunder, but the Company may prohibit such transfer of rights (but not the transfer of stock) if the transfer to a particular transferee would not, in the good faith judgment of the Company's Board of Directors, be in the Company's best interests, and (ii) any transferee of any shares of stock of the Company affected by this Agreement to whom rights are so transferred (a "Permitted Transferee") will be required, as a condition precedent to acquiring such shares, to agree in writing to be bound by all the terms and conditions of this 21 22 Agreement applicable to such Permitted Transferee's transferor, and (iii) upon and after such transfer the Permitted Transferee will be deemed to be an Investor for purposes of this Agreement. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. (d) Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. This Agreement will be effective following the parties signatory hereto upon such counterpart signature by all initial parties hereto. (e) Entire Agreement. This Agreement, including and incorporating the Schedule of Exceptions and all other Exhibits attached hereto and referred to herein, constitutes and contains the entire agreement and understanding of the parties regarding the subject matter of this Agreement and supersedes in its entirety any and all prior negotiations, correspondence, understandings and agreements among the parties respecting the subject matter hereof. (f) Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be addressed to the Chief Financial Officer of the Company at its principal corporate offices. Any notice required to be given or delivered to an Investor shall be addressed to the Investor at the address set forth on the signature page hereof or to such other address as such party may designate in writing from time to time to the Company. Unless otherwise provided, notice required or permitted to be given to a party pursuant to the provisions of this Agreement will be in writing and will be effective and deemed given under this Agreement on the earliest of (i) the date of personal delivery, or (ii) the date of transmission by facsimile, or (iii) the business day after deposit with a nationally-recognized courier or overnight service, including Federal Express or Express Mail, for United States deliveries or three (3) business days after such deposit for deliveries outside of the United States, or (iv) five (5) business days after deposit in the United States mail by registered or certified mail, postage prepaid, for United States deliveries. All notices for delivery outside the United States will be sent by facsimile, or by nationally recognized courier or overnight service, including Express Mail. Any notice given hereunder to more than one person will be deemed to have been given, for purposes of counting time periods hereunder, on the date given to the last party required to be 22 23 given such notice. (g) Finders' Fee. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each party agrees to indemnify and to hold the other parties hereto harmless from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which such party or any of its officers, partners, employees or representatives is responsible. (h) Amendments and Waivers. Except as otherwise specifically provided in this Agreement, no term of this Agreement may be amended and the observance of any term of the Agreement may not be waived (either generally or in a particular instance and either retroactively or prospectively) except (i) if prior to the Closing, with the written consent of the Company and each Investor and (ii) if after the Closing, with the consent of the Company and Investors holding at least seventy-five percent (75%) of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 8(h) will be binding upon the Company, each Investor, and their permitted transferees and assigns. (i) Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provisions will be excluded from this Agreement to the extent unenforceable and the balance of such provisions, and of this Agreement, will be interpreted as if such provision or part and hereof were so excluded and will be enforceable in accordance with its terms. (j) Aggregation of Stock. All shares of Common Stock held or acquired by affiliated entities or persons will be aggregated together for the purpose of determining the availability of any rights under this Agreement. 24 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. TO BE COMPLETED INVESTOR BY INVESTOR Units Subscribed: ____ ------------------------------------ (Print Name of Individual or Entity) By ---------------------------------- (Signature) Name: Title: Address: ___________________________ ____________________________________ ____________________________________ ____________________________________ TO BE COMPLETED COMPANY BY COMPANY SILICON VALLEY RESEARCH, INC. Units Issued:__________ Unit Purchase Price:___ Aggregate Purchase Price:________________ By ---------------------------------- (Signature) Name: Title: EX-4.2 3 FORM OF WARRANT TO PURCHASE COMMON STOCK 1 EXHIBIT 4.2 EXHIBIT A FORM OF WARRANT SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION THEREUNDER OR EXEMPTIONS FROM SUCH REGISTRATION REQUIREMENTS. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. SILICON VALLEY RESEARCH, INC. WARRANT TO PURCHASE COMMON STOCK VOID AFTER DECEMBER 29, 2002 1. Warrant to Purchase Common Stock. (a) Warrant to Purchase Shares. This warrant (the "Warrant") certifies that for good and valuable consideration duly received, ___________________ (the "Warrant Holder") is entitled, subject to the terms and conditions of this Warrant, to purchase from Silicon Valley Research, Inc., a California corporation (the "Company"), up to a total of ___ shares of Common Stock, no par value (the "Common Stock"), of the Company (the "Shares") at the price of $0.53 per share (the "Exercise Price") at any time or from time to time during the period commencing on the date hereof until 5:00 p.m. Pacific Time on December 29, 2002 (the "Expiration Date"). This Warrant must be exercised, if at all, on or before the Expiration Date. Unless the context otherwise requires, the term "Shares" shall mean and include the stock and other securities and property at any time receivable or issuable upon exercise of this Warrant. The term "Warrant" as used herein, shall include this Warrant and any warrants delivered in substitution or exchange therefor as provided herein. (b) Adjustment of Exercise Price and Number of Shares. The number and character of Shares issuable upon exercise of this Warrant (or any shares of stock or other 2 securities or property at the time receivable or issuable upon exercise of this Warrant) and the Exercise Price therefor are subject to adjustment upon occurrence of the following events: (A) Adjustment for Stock Splits, Stock Dividends, Recapitalizations, etc. The Exercise Price of this Warrant and the number of Shares issuable upon exercise of this Warrant shall each be proportionally adjusted to reflect any stock dividend, stock split, reverse stock split, combination of shares, reclassification, recapitalization or other similar event altering the number of outstanding shares of the Company's Common Stock. (B) Adjustment for Other Dividends and Distributions. In case the Company shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution with respect to the Shares payable in securities of the Company then, and in each such case, the Warrant Holder, on exercise of this Warrant at any time after the consummation, effective date or record date of such event, shall receive, in addition to the Shares (or such other stock or securities) issuable on such exercise prior to such date, the securities of the Company to which such Warrant Holder would have been entitled upon such date if such Warrant Holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in this Warrant). (c) Adjustment for Capital Reorganization, Consolidation, Merger. If any capital reorganization of the capital stock of the Company, or any consolidation or merger of the Company with or into another corporation, or the sale of all or substantially all of the Company's assets to another corporation shall be effected in such a way that holders of the Company's Common Stock will be entitled to receive stock, securities or assets with respect to or in exchange for the Company's Common Stock, and in each such case the Warrant Holder, upon the exercise of this Warrant, at any time after the consummation of such capital reorganization, consolidation, merger, or sale, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise of this Warrant prior to such consummation, the stock or other securities or property to which such Warrant Holder would have been entitled upon such consummation if such Warrant Holder had exercised this Warrant immediately prior to the consummation of such capital reorganization, consolidation, merger, or 2 3 sale, all subject to further adjustment as provided in this Section 1(c); and in each such case, the terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of this Warrant after such consummation. 2. Manner of Exercise. (a) Exercise Agreement. This Warrant may be exercised, in whole or in part, on any business day on or prior to the Expiration Date. To exercise this Warrant, the Warrant Holder must surrender to the Company this Warrant and deliver to the Company: (i) a duly executed exercise agreement in the form attached hereto as Exhibit A, or in such other form as may be approved by the Company from time to time (the "Warrant Exercise Agreement"); (ii) if applicable, a spousal consent in the form attached hereto as Exhibit B; and (iii) payment in full of the Exercise Price for the number of Shares to be purchased upon exercise hereof. If someone other than the Warrant Holder exercises this Warrant, then such person must submit documentation reasonably acceptable to the Company that such person has the right to exercise this Warrant. Upon a partial exercise, this Warrant shall be surrendered, and a new Warrant of the same tenor for purchase of the number of remaining Shares not previously purchased shall be issued by the Company to the Warrant Holder. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Shares issuable upon such exercise shall be treated for all purposes as the holder of record of such Shares as of the close of business on such date. (b) Limitations on Exercise. This Warrant may not be exercised as to fewer than 1,000 Shares unless it is exercised as to all Shares as to which this Warrant is then exercisable. (c) Payment. The Warrant Exercise Agreement shall be accompanied by full payment of the Exercise Price for the Shares being purchased in cash (by check), or where permitted by law: (A) by cancellation of indebtedness of the Company to the Warrant Holder; (B) by surrender of Shares of the Company's Common Stock that are clear of all liens, claims, encumbrances or security interests or were obtained by the Warrant Holder in the public market; 3 4 (C) provided that a public market for the Company's stock exists, (1) through a "same-day-sale" commitment from the Warrant Holder and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Warrant Holder irrevocably elects to exercise this Warrant and to sell a portion of the Shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company, or (2) through a "margin" commitment from the Warrant Holder and an NASD Dealer whereby the Warrant Holder irrevocably elects to exercise this Warrant and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; (D) by "Net Exercise," in which case the Company shall deliver to the Warrant Holder (without payment of any additional Exercise Price) that number of shares equal to the quotient obtained by dividing: 1) the value of the Shares purchased upon exercise at the time of exercise (such value to be determined by subtracting (i) the aggregate Exercise Price for such Shares as in effect immediately prior to exercise from (ii) the aggregate Fair Market Value (as defined in Section 11 below) for such Shares immediately prior to the exercise of this Warrant), by 2) the Fair Market Value of one (1) Share immediately prior to exercise; or (E) by any combination of the foregoing. (d) Tax Withholding. Prior to the issuance of the Shares upon exercise of this Warrant, the Warrant Holder must pay or provide for any applicable federal or state withholding obligations of the Company. (e) Issuance of Shares. Provided that the Exercise Agreement and payment have been received by the Company as provided above, the Company shall issue the Shares (adjusted as provided herein) registered in the name of the Warrant Holder, the Warrant Holder's authorized assignee, or the Warrant Holder's legal representative, and shall deliver 4 5 certificates representing the Shares with the appropriate legends affixed thereto. 3. Compliance with Laws and Regulations. The exercise of this Warrant and the issuance and transfer of Shares shall be subject to compliance by the Company and the Warrant Holder with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange and/or over-the-counter market on which the Company's Common Stock may be listed at the time of such issuance or transfer. 4. Transfer and Exchange. This Warrant and the rights hereunder may not be transferred, in whole or in part, without the Company's prior written consent, which consent shall not be unreasonably withheld, and may not be transferred unless such transfer complies with all applicable securities laws. If a transfer of all or part of this Warrant is permitted as provided in the preceding sentence, then this Warrant and all rights hereunder may be transferred, in whole or in part, on the books of the Company maintained for such purpose at the principal office of the Company, by the Warrant Holder hereof in person, or by a duly authorized attorney, upon surrender of this Warrant properly endorsed and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Upon any permitted partial transfer, the Company will issue and deliver to the Warrant Holder a new Warrant or Warrants with respect to the Warrants not so transferred. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees to be bound by the terms, conditions, representations and warranties hereof (and as a condition to any transfer of this Warrant the transferee shall execute an agreement confirming the same) and, when this Warrant shall have been so endorsed, the person in possession of this Warrant may be treated by the Company, and all other persons dealing with this Warrant, as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding; provided, however, that until a transfer of this Warrant is duly registered on the books of the Company, the Company may treat the Warrant Holder hereof as the owner of this Warrant for all purposes. 5. Privileges of Stock Ownership. The Warrant Holder shall not have any of the rights of a shareholder with respect to any Shares until the Warrant Holder exercises this Warrant and pays the Exercise Price. 6. Entire Agreement. The Warrant Exercise Agreement is incorporated herein by reference. This Warrant 5 6 and the Warrant Exercise Agreement constitute the entire agreement of the parties and supersede all prior undertakings and agreements with respect to the subject matter hereof. 7. Notices. Any notice required to be given or delivered to the Company under the terms of this Warrant shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to the Warrant Holder shall be in writing and addressed to the Warrant Holder at the address indicated below or to such other address as such party may designate in writing from time to time to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; five (5) days after deposit in the United States mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after transmission by fax or telecopier. 8. Successors and Assigns. This Warrant shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Warrant shall be binding upon the Warrant Holder and the Warrant Holder's heirs, executors, administrators, legal representatives, successors and assigns. 9. Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 10. Acceptance. The Warrant Holder has read and understands the terms and provisions of this Warrant, and accepts this Warrant subject to all the terms and conditions hereof. The Warrant Holder acknowledges that there may be adverse tax consequences upon exercise of this Warrant or disposition of the Shares and that the Warrant Holder should consult a tax adviser prior to such exercise or disposition. 11. Definition of Fair Market Value. As used herein, "Fair Market Value" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market or the Nasdaq SmallCap Market, its last reported sale price on the Nasdaq National Market or the Nasdaq SmallCap Market or, if no such 6 7 reported sale takes place on such date, the average of the closing bid and asked prices; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, the last reported sale price or, if no such reported sale takes place on such date, the average of the closing bid and asked prices on the principal national securities exchange on which the Common Stock is listed or admitted to trading; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market or the Nasdaq SmallCap Market, nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on such date, as reported by The Wall Street Journal, for the over-the-counter market; or (d) if none of the foregoing is applicable, by the Board of Directors of the Company in good faith. 7 8 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed in duplicate by its duly authorized representative and the Warrant Holder has executed this Warrant in duplicate as of December 30, 1997. SILICON VALLEY RESEARCH, WARRANT HOLDER INC. By: --------------------------- --------------------------------------- (Signature) - ------------------------------ --------------------------------------- (Please print name and title) (Please print name and title) Address: 6360 San Ignacio Avenue Address:_______________________________ San Jose, CA 95119 _______________________________________ _______________________________________ _______________________________________ [Signature page to Silicon Valley Research, Inc. Warrant to purchase Common Stock] 9 EXHIBIT A SILICON VALLEY RESEARCH, INC. WARRANT EXERCISE AGREEMENT SILICON VALLEY RESEARCH, INC. 6360 San Ignacio Avenue San Jose, California 95119-1231 The Warrant Holder hereby elects to purchase the number of shares (the "Shares") of the Common Stock of Silicon Valley Research, Inc. (the "Company") as set forth below, pursuant to that certain Warrant dated as of the date set forth below (the "Warrant"), the terms and conditions of which are hereby incorporated by reference (please print): Warrant Holder:____________________ Date of Exercise:_____________________ Social Security or Exercise Price Per Share:_____________ Federal Tax I.D. No.: _____________ Number of Shares Purchased:___________ Address:___________________________ Total Exercise Price:_________________ ___________________________________ ___________________________________ Warrant Date:______________________ The Warrant Holder hereby delivers to the Company the Total Exercise Price as follows (check and complete as appropriate): [ ] in cash in the amount of $________, receipt of which is acknowledged by the Company; [ ] by cancellation of indebtedness of the Company to the Warrant Holder in the amount of $____________; [ ] by delivery of ___________ fully paid, nonassessable and vested shares of the Common Stock of the Company either owned by the Warrant Holder or obtained by the Warrant Holder in the open public market valued at the current fair market value of $___________ per share; [ ] through a "same-day-sale" commitment from the Warrant Holder and the broker named below in the amount of $_________ and substantially in the form attached hereto as Attachment 1; [ ] through a "margin" commitment from the Warrant Holder and the broker named below in the amount of $_________ and substantially in the form attached hereto as Attachment 2; 10 Broker Name:_________________________ Brokerage Firm:________________________ or [ ] by "Net Exercise." Tax Consequences. THE COMPANY IS UNDER NO OBLIGATION TO REPORT THE EXERCISE OF YOUR WARRANT TO THE INTERNAL REVENUE SERVICE OR ANY STATE OR LOCAL INCOME TAX AUTHORITY. THE WARRANT HOLDER UNDERSTANDS THAT THE WARRANT HOLDER MAY SUFFER ADVERSE TAX CONSEQUENCES AS A RESULT OF THE WARRANT HOLDER'S PURCHASE OR DISPOSITION OF THE SHARES. THE WARRANT HOLDER REPRESENTS THAT THE WARRANT HOLDER HAS CONSULTED WITH ANY TAX CONSULTANT(S) THE WARRANT HOLDER DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND THAT THE WARRANT HOLDER IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE. ------------------------------ Signature of Warrant Holder A-2 11 ATTACHMENT 1 SAME-DAY-SALE COMMITMENT _____________, 19 __ SILICON VALLEY RESEARCH, INC. 6360 San Ignacio Avenue San Jose, California 95119-1231 The undersigned Warrant Holder ("Warrant Holder") desires to exercise that certain warrant described in the attached Warrant Exercise Agreement (the "Warrant") with respect to ________ shares of your Common Stock (the "Number of Shares"), and to sell immediately ________ of the Number of Shares (the "Same-Day-Sale Shares") through the undersigned broker (the "Broker") and for the Broker to pay directly to you from the proceeds from such sale $___________ (the "Exercise Price"). Accordingly, the Warrant Holder hereby represents as follows: (i) Warrant Holder hereby irrevocably exercises the Warrant with respect to the Number of Shares; and (ii) Warrant Holder hereby irrevocably elects to sell through Broker the Same-Day-Sale Shares and unconditionally authorizes you or your transfer agent to deliver certificates representing the Same-Day-Sale Shares to the Broker. The Broker hereby represents as follows: (i) the Broker is a member in good standing of the National Association of Securities Dealers; and (ii) the Broker irrevocably commits to pay to you, no more than one (1) business day after receiving certificates representing the Same-Day-Sale Shares, the Exercise Price by check or wire transfer to an account specified by you. WARRANT HOLDER: BROKER: - ----------------------------------- --------------------------------------- (Signature) (Name of Firm) - ----------------------------------- --------------------------------------- (Printed Name and Title) (Signature) --------------------------------------- (Printed Name) --------------------------------------- (Title) 12 ATTACHMENT 2 MARGIN COMMITMENT ____________, 19__ SILICON VALLEY RESEARCH, INC. 6360 San Ignacio Avenue San Jose, California 95119-1231 The undersigned Warrant Holder ("Warrant Holder") desires to exercise that certain warrant described in the attached Warrant Exercise Agreement (the "Warrant") with respect to _________ shares of your Common Stock (the "Number of Shares"), and to sell immediately ________ of the Number of Shares (the "Margin Shares") through the undersigned broker (the "Broker") and for the Broker to pay directly to you from the proceeds from such sale $___________ (the "Exercise Price"). Accordingly, the Warrant Holder hereby represents as follows: (i) Warrant Holder hereby irrevocably exercises the Warrant with respect to the Number of Shares; and (ii) Warrant Holder hereby irrevocably elects to sell through Broker the Margin Shares and unconditionally authorizes you or your transfer agent to deliver certificates representing the Margin Shares to the Broker. The Broker hereby represents as follows: (i) the Broker is a member in good standing of the National Association of Securities Dealers; and (ii) the Broker irrevocably commits to pay to you, no more than one (1) business day after receiving certificates representing the Margin Shares, the Exercise Price by check or wire transfer to an account specified by you. WARRANT HOLDER: BROKER: - ----------------------------------- --------------------------------------- (Signature) (Name of Firm) - ----------------------------------- --------------------------------------- (Printed Name and Title) (Signature) --------------------------------------- (Printed Name) --------------------------------------- (Title) 13 EXHIBIT B SPOUSE CONSENT The undersigned spouse of the Warrant Holder has read, understands, and hereby approves the Warrant Exercise Agreement between the Warrant Holder and the Company (the "Agreement"). In consideration of the Company's granting my spouse the right to purchase the Shares as set forth in the Agreement, the undersigned hereby agrees to be irrevocably bound by the Agreement and further agrees that any community property interest shall similarly be bound by the Agreement. The undersigned hereby appoints the Warrant Holder as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. Date:_____________________ _____________________________________ Purchaser's Spouse Address:______________________ ______________________________ ______________________________ EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1997 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS MAR-31-1998 DEC-31-1997 3,159 0 699 150 0 3,957 2,939 2,298 6,734 2,416 0 0 0 39,093 (35,001) 6,734 860 2,249 2,197 7,762 0 0 25 (7,693) 0 (7,693) 0 0 0 (7,693) (0.47) (0.47)
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