<PAGE>
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 September 30, 1998 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 September 30, 1998: 26,203,220
This report, containing all exhibits, contains 35 pages.
The exhibit index in on page 20.
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
INDEX
Pages
-----
Part I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and September 30, 1998 (unaudited) 3
Consolidated Statements of Operations -
Three and Six Months Ended September 30, 1997
and 1998 (unaudited) 4
Consolidated Condensed Statements of Cash Flows -
Six Months Ended September 30, 1997 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Part II. OTHER INFORMATION 19-20
-----------------
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 21
Page 2 of 35
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
Assets March 31, 1998 September 30, 1998
- ---------------------------------------------------------- -------------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 1,926 $ 1,276
Accounts receivable, net of allowances of
$150 in each period 484 410
Prepaid expenses and other current assets 257 140
-------- --------
2,667 1,826
Fixed assets, net 667 530
Other assets, net 1,931 1,596
-------- --------
$ 5,265 $ 3,952
======== ========
Liabilities and Shareholders' Equity
- -------------------------------------------
Current Liabilities:
Short-term borrowing $ 285 $ 285
Current portion of long-term debt 263 203
Notes payable 200 75
Accounts payable 352 254
Accrued expenses 968 814
Deferred revenue 539 394
-------- --------
2,607 2,025
Long-term debt, less current portion 77 57
-------- --------
Deferred tax liability 17 --
-------- --------
Shareholders' Equity:
Preferred stock, no par value:
Authorized: 1,000 shares
Issued and outstanding: none -- --
Common stock, no par value:
Authorized: 60,000 shares
Issued and outstanding:
23,759 shares at March 31, 1998
and 26,203 shares at September 30, 1998 41,834 43,928
Accumulated deficit (39,346) (42,161)
Cumulative translation adjustment 76 103
-------- --------
2,564 1,870
-------- --------
$ 5,265 $ 3,952
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3 of 35
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SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
September 30, September 30,
1997 1998 1997 1998
--------- --------- -------- --------
Revenue:
Products $ 487 $ 157 $ 729 $ 382
Services 497 203 968 571
------- ------- ------- -------
Total revenue 984 360 1,697 953
------- ------- ------- -------
Cost of revenue:
Products 212 109 1,530 179
Services 155 117 261 346
------- ------- ------- -------
Total cost of revenue 367 226 1,791 525
------- ------- ------- -------
Gross margin 617 134 (94) 428
------- ------- ------- -------
Operating expenses:
Engineering, research and development 1,152 771 1,777 1,407
Selling and marketing 932 506 2,273 1,174
General and administrative 277 231 580 643
Impairment loss on prepaid royalty -- -- 1,217 --
------- ------- ------- -------
Total operating expenses 2,361 1,508 5,847 3,224
------- ------- ------- -------
Operating loss (1,744) (1,374) (5,941) (2,796)
------- ------- ------- -------
Other income (expense):
Interest income 34 32 105 45
Interest expense (8) (14) (12) (29)
Other, net (96) 104 40 (35)
------- ------- ------- -------
Total other income (70) 122 133 (19)
------- ------- ------- -------
Loss before provision for
income taxes (1,814) (1,252) (5,808) (2,815)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Net loss $(1,814) $(1,252) $(5,808) $(2,815)
======= ======= ======= =======
Net loss per basic share and diluted
share $(0.11) $(0.05) $(0.35) $(0.11)
======= ====== ====== ======
Weighted-average common shares
outstanding (basic and diluted) 16,773 26,199 16,375 25,290
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 35
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SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended
September 30,
1997 1998
------- -------
Cash Flows from Operating Activities:
Net loss $(5,808) $(2,815)
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 1,259 109
Depreciation and amortization 522 376
Changes in assets and liabilities, net:
Accounts receivable (136) 74
Prepaid expenses and other current assets 180 117
Accounts payable 477 (98)
Accrued expenses (480) (154)
Deferred revenue (85) (145)
Other, net 77 27
------- -------
Net cash used in operating activities (2,777) (2,509)
------- -------
Cash Flows from Investing Activities:
Acquisition of fixed assets (21) (17)
Capitalization of software development costs and
purchase of software licenses (1,038) (23)
------- -------
Net cash used in investing activities (1,059) (40)
------- -------
Cash Flows from Financing Activities:
Principal payments of long-term debt (121) (97)
Principal payments on notes payable -- (125)
Advances on credit line 301 --
Proceeds from issuance of common stock 3,888 2,094
------- -------
Net cash provided by financing activities 4,068 1,872
------- -------
Effect of exchange rate changes on cash (32) 27
------- -------
Net increase (decrease) in cash and
cash equivalents 200 (650)
Cash and cash equivalents at beginning
of period 2,064 1,926
------- -------
Cash and cash equivalents at end
of period $ 2,264 $ 1,276
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5 of 35
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SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998- UNAUDITED
(IN THOUSANDS)
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 PricewaterhouseCoopers LLP on the Company's fiscal 1998
consolidated financial statements dated June 12, 1998 included 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 1999 and beyond.
NOTE 2: EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" (FAS 128). As required by the statement, all prior period
earnings per share (EPS) amounts presented have been restated to conform with
the provisions of FAS 128. Under FAS 128, the Company presents two EPS amounts.
Basic EPS is calculated based on income or 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 when the Company reported a loss because to do so would have been
antidilutive for the periods presented.
The following is a reconciliation of the computation for basic and diluted
EPS:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(1,814) $(1,252) $(5,808) $(2,815)
======= ======= ======= =======
Weighted-average common shares
outstanding (basic) 16,773 26,199 16,375 25,290
Weighted-average common stock equivalents:
Stock options -- -- -- --
Warrants -- -- -- --
------- ------- ------- -------
Weighted-average common shares
outstanding (diluted) 16,773 26,199 16,375 25,290
======= ======= ======= =======
</TABLE>
Page 6 of 35
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1998- UNAUDITED
(IN THOUSANDS)
NOTE 3: COMPREHENSIVE INCOME (LOSS)
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." This Statement requires that all items
recognized under accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. This Statement also requires
that an entity classify items of other comprehensive earnings by their nature in
an annual financial statement. For example, other comprehensive earnings may
include foreign currency translation adjustments and unrealized gains and losses
on marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. The Company's
total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(1,814) $(1,252) $(5,808) $(2,815)
Other comprehensive (loss) gain 36 (95) (32) 27
------- ------- ------- -------
Total comprehensive loss $(1,778) $(1,347) $(5,840) $(2,788)
======= ======= ======= =======
</TABLE>
NOTE 4: STATEMENT OF CASH FLOWS INFORMATION
Six Months Ended
September 30,
1997 1998
---- ----
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $12 $29
Income Taxes -- --
NOTE 5: BALANCE SHEET COMPONENTS
March 31, September 30,
1998 1998
---- ----
Other Assets:
Software development costs $ 2,098 $ 799
Software licenses 3,134 1,241
------- ------
5,232 2,040
Less accumulated amortization (3,898) (889)
------- ------
1,334 1,151
Prepaid royalties, net 67 --
Goodwill 245 220
Other 285 225
------- ------
$ 1,931 $1,596
======= ======
Accrued Expenses:
Payroll and related costs $ 477 $ 399
Taxes payable 147 145
Accrued professional fees 229 204
Other 115 66
------- ------
$ 968 $ 814
======= ======
Page 7 of 35
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1998- UNAUDITED
(IN THOUSANDS)
NOTE 6: BANK LINES OF CREDIT
The Company had a $298 equipment line with its bank. As of September 30,
1998, $149 remains to be repaid on that line. The line bears interest at prime
plus two percent, 10.5% at September 30, 1998. The line is collateralized by
substantially all of the assets of the Company. The terms of the credit
agreement require minimum amounts of net worth, maximum ratios of indebtedness
to net worth and minimum quarterly after tax profits. The Company is currently
not in compliance with certain of these covenants.
In June 1997, the Company entered into an additional line of credit with
its bank. The revolving line of credit had provided for borrowings limited to
certain percentages of eligible accounts receivable. As of September 30, 1998,
$285 had been borrowed under the line of credit. The revolving line of credit
expired by its terms in early June 1998. The parties are currently in the
process of negotiating the terms and timing for repayment of amounts borrowed on
the line of credit and the equipment line. There can be no assurance that the
Company will be able to successfully re-negotiate the terms and timing for
repayment, in which event the lender may accelerate the Company's payment
obligations and exercise other rights and remedies as a secured creditor under
the credit agreements and by law, including, but not limited to, foreclosure on
substantially all the Company's assets which were pledged as collateral under
the lines of credit. The amounts outstanding under its line of credit and
equipment line of credit are classified as current in the September 30, 1998
balance sheet.
NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position 97-2, "Software Revenue Recognition"
("SOP 97-2") and 98-4 "Deferral of the Effective Date of a Provision of SOP 97-
2, Software Revenue Recognition" ("SOP 98-4"), which the Company is required to
adopt for transactions entered into in the fiscal year beginning April 1, 1998.
SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. The Company believes that the adoption of
SOP 97-2 and SOP 98-4 will not have a significant impact on its current
licensing or revenue recognition practices. However, should the Company adopt
new or change its existing licensing practices, the Company's revenue
recognition practices may be subject to change to comply with the accounting
guidance provided in SOP 97-2 and SOP 98-4.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures About Segments of an Enterprise and Related
Information." This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has not yet determined the
impact, if any, of adopting this new standard. The disclosures prescribed by
FAS 131 will be effective for the Company's consolidated financial statements
for the year ending March 31, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. The Company has not yet
determined the impact, if any, of adopting this statement. The disclosures
prescribed by SOP 98-1 will be effective for the year ending March 31, 2000
consolidated financial statements.
Page 8 of 35
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1998 - UNAUDITED
(IN THOUSANDS)
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards
for derivative instruments, embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The Company currently does not invest in derivative instruments.
NOTE 8: YEAR 2000 ISSUES
The "Year 2000 Issue" arises because most computer systems and programs
were designed to handle only a two-digit year, as opposed to a four digit year.
When the year 2000 begins, these computers may interpret "00" as the year 1900
and could either stop processing date-related computations or could process them
incorrectly. As customers and potential customers of the Company begin to
devote incremental resources to this issue, resources previously allocated to
other information systems requirements may be redirected to address the Year
2000 issue. To the extent that the Company's products are not selected as part
of customers' overall Year 2000 solution, redirection of these customer
resources could have a material adverse effect on the Company's results of
operations and financial condition. In addition, the Year 2000 Issue creates
risk for the Company from unforeseen problems in its internal computer systems
and from third parties with which the Company interacts. Such failures of the
Company's and/or third parties' computer systems could have a material impact on
the Company's ability to conduct its business and to process and account for the
transfer of funds electronically.
Page 9 of 35
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS)
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
Revenue for the second quarter of fiscal year 1999, which ended September
30, 1998, was $360, a decrease from $984 in the second quarter a year ago.
Revenue for the six month period ended September 30, 1998 decreased to $953 from
$1,697 over the six month period ended September 30, 1997. The decrease in
revenues was due primarily to a multi-license order from a leading design
services company being recorded during the prior year second quarter and a
decrease in product and service revenue, primarily resulting from a reduction in
capital investment by customers and increased competition. Revenue from
services includes the activity of Quality I.C. Corporation, which was acquired
by the Company on March 31, 1998. The Company intends to focus increasingly on
the services market going forward in order to provide customers with a service-
driven integrated circuit design solution. International sales, primarily Japan
and the Far East accounted for 64% of total revenue in the second quarter of
fiscal 1999 compared to 24% in the second quarter 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 quarter ended September 30, 1998, 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 and service contracts, 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 products for the second quarter of fiscal year 1999 was $109,
compared to $212 in the second quarter of fiscal 1998. Cost of products for the
six months ended September 30, 1998 was $179, compared to $1,530 for the six
months ended September 30, 1997. Cost of sales of products is primarily the
amortization of software development costs and amortization of prepaid royalty
payments to third parties. Based on the Company's plans for the future, the
Company wrote-off $1,036 of unamortized software development costs in the six
months ended September 30, 1997.
Cost of services for the second quarter of fiscal year 1999 was $117
compared to $155 in the second quarter of fiscal 1998. Cost of services for the
six months ended September 30, 1998 was $346 compared to $261 for the six months
ended September 30, 1997. Cost of services is primarily the cost of providing
design services, technical support and technical documentation. Cost of
services includes the design services costs of Quality I.C. Corporation, which
was acquired by the Company on March 31, 1998.
Page 10 of 35
<PAGE>
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES
Engineering, research and development expenses for the second quarter of
fiscal year 1999 were $771 compared to $1,152 in the second quarter a year ago.
Comparing the second quarter of fiscal 1999 and the second quarter of fiscal
1998, engineering, research and development expenses were 214% and 117% of total
revenue, respectively. Engineering, research and development expenses for the
six months ended September 30, 1998 were $1,407 compared to $1,777 for the six
months ended September 30, 1997. Comparing these periods, engineering, research
and development expenses were 148% and 105% of total revenue, respectively. The
decrease in engineering, research and development expenses is due to cost-
cutting measures instituted by management, including a reduction in personnel.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the second quarter of fiscal year 1999
decreased to $506 from $932 in the second quarter a year ago. In the second
quarter of fiscal 1999 and the second quarter of fiscal 1998, selling and
marketing expenses were 141% and 95% of total revenue, respectively. Selling
and marketing expenses for the six months ended September 30, 1998 decreased to
$1,174 from $2,273 for the six months ended September 30, 1997. Comparing the
six month periods, selling and marketing expenses were 123% and 134% of total
revenue, respectively. The decrease in actual dollars is due to the effects of
the Company's cost-cutting measures, including a reduction in salaries and
occupancy costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased to $231 for the second
quarter of fiscal year 1999 from $277 in the second quarter a year ago. In the
second quarter of fiscal 1999 and the second quarter of fiscal 1998, general and
administrative expenses were 64% and 28% of total revenue, respectively. The
decrease for the second quarter of fiscal 1999 is due to a decrease in
professional fees. General and administrative expenses for the six months ended
September 30, 1998 increased to $643 from $580 for the six months ended
September 30, 1997. Comparing the six month periods, general and administrative
expenses were 67% and 34% of total revenue, respectively. The six month increase
is due to the activity of Quality I.C. Corporation, which was acquired by the
Company on March 31, 1998.
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 had 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 September 30, 1997 financial statements to expense the
full amount of unamortized prepaid royalty of $1,217, the future value of which
was considered impaired.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary unused sources of funds at September 30, 1998
consisted of cash and cash equivalents of $1,276. As of September 30, 1998, the
Company's cash and cash equivalents were not sufficient to discharge the
Company's current liabilities. On June 8, 1998, the Company's $2,000 line of
credit with its bank expired and the $285 outstanding under the line of credit
became due and payable. In addition, the Company is currently not in compliance
with certain financial covenants in the line of credit and in its equipment line
with the same lender. There can be no assurance that the Company will be able to
obtain a waiver for its noncompliance with such covenants. If the Company is in
default under such lines of credit and if such defaults are not waived, the
lender may accelerate the Company's payment obligations and exercise other
rights and remedies as a secured creditor under the credit agreements and by
law, including, but not limited to, foreclosure on substantially all the
Company's assets which were pledged as collateral under the lines of credit. The
exercise of rights and remedies under the lines of credit could prevent or delay
the
Page 11 of 35
<PAGE>
continued development and marketing of the Company's products and services,
could require substantial curtailment of the Company's operations and could
result in the Company's bankruptcy.
The Company believes that its cash and cash generated from operations will
not be sufficient to finance its operations through the remainder of fiscal
1999. 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. However, if the Company's Common Stock is delisted
from trading on the Nasdaq National Market, the Company's ability to obtain
additional financing through the issuance of its Common Stock or securities
convertible into its Common Stock could be adversely affected. See "Compliance
with Nasdaq Listing Requirements; Disclosure Relating to Low-Priced Stock." The
Company may issue a series of Preferred Stock with rights, preferences, or
privileges senior to those of the Company's Common Stock. The Company has no
commitments or arrangement 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 Company is currently negotiating with its
creditors for the terms and timing for repayment of amounts due such creditors.
The unavailability or timing of any financing could prevent or delay the
continued development and marketing of the Company's products and services,
could require substantial curtailment of the Company's operations and could
result in the Company's bankruptcy.
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 1999, the Company has received net cash of $2,094
from the private placement of equity securities and the exercise of warrants and
options to purchase Common Stock ("financing activities"). During the six
months ended September 30, 1998, cash and cash equivalents decreased $650 from
$1,926 to $1,276. This decrease resulted from cash provided by the financing
activities of $1,872 less cash used by operations of $2,509 and $40 of cash used
for investing activities.
The Company incurred a loss for the first six months of fiscal 1999 and
expects operating losses to continue, at least in the near term. The
achievement of profitability is primarily dependent upon the continued
development and commercial acceptance of the Company's products and services,
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 fiscal 1999 and
potentially thereafter.
OTHER FACTORS AFFECTING FUTURE RESULTS
NEED FOR ADDITIONAL FUNDS; NO ASSURANCE OF AVAILABLE FINANCING. The Company's
primary unused sources of funds at September 30, 1998 consisted of cash and cash
equivalents of $1,276. As of September 30, 1998, the Company's cash and cash
equivalents were not sufficient to discharge the Company's current liabilities.
On June 8, 1998, the Company's $2,000 line of credit with its bank expired and
the $285 outstanding under the line of credit became due and payable. In
addition, the Company is currently not in compliance with certain financial
covenants in the line of credit and in its equipment line with the same lender.
There can be no assurance that the Company will be able to obtain a waiver for
its noncompliance with such covenants. If the Company is in default under such
lines of credit and if such defaults are not waived, the lender may accelerate
the Company's payment obligations and exercise other rights and remedies as a
secured creditor under the credit agreements and by law, including, but not
limited to, foreclosure on substantially all the Company's assets which were
pledged as collateral under the lines of credit. The exercise of rights and
remedies under the lines of credit could prevent or delay the continued
development and marketing of the Company's products and services, could require
substantial curtailment of the Company's operations and could result in the
Company's bankruptcy.
The Company believes that its cash and cash generated from operations will
not be sufficient to finance its operations through the remainder of fiscal
1999. 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. However, if the Company's
Common Stock is delisted from trading on the Nasdaq National Market, the
Company's ability to obtain additional financing through the issuance of its
Common Stock or securities
Page 12 of 35
<PAGE>
convertible into its Common Stock could be adversely affected. See "Compliance
with Nasdaq Listing Requirements; Disclosure Relating to Low-Priced Stock." The
Company may issue a series of Preferred Stock with rights, preferences, or
privileges senior to those of the Company's Common Stock. The Company has no
commitments or arrangement 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 Company is currently negotiating with its
creditors for the terms and timing for repayment of amounts due such creditors.
The unavailability or timing of any financing could prevent or delay the
continued development and marketing of the Company's products and services,
could require substantial curtailment of the Company's operations and could
result in the Company's bankruptcy.
RECENT AND EXPECTED LOSSES; ACCUMULATED DEFICIT. The Company incurred a net
loss of $1,252 for the quarter ended September 30, 1998 and had an accumulated
deficit of $42,161 as of September 30, 1998. The Company expects to incur
losses for the remainder of its current fiscal year. There can be no assurance
that the Company will not incur additional losses for a longer period, will
generate positive cash flow from its operations, or that the Company will attain
or thereafter sustain profitability in any future period. To the extent the
Company continues to incur losses or grows in the future, its operating and
investing activities may use cash and, consequently, such losses or growth will
require the Company to obtain additional sources of financing in the future or
to reduce operating expenses.
GOING CONCERN ASSUMPTIONS. The Company's independent accountants' report on its
financial statements as of and for the years ended March 31, 1997 and 1998
contained an explanatory paragraph indicating that the Company's historical
operating losses and limited capital resources raise substantial doubt about its
ability to continue as a going concern. The Company will require substantial
additional funds in the near future, and there can be no assurance that any
independent accountant's report on the Company's future financial statements
will not include a similar explanatory paragraph if the Company is unable to
raise sufficient funds or generate sufficient cash from operations to cover the
cost of its operations.
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. 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 and SC.
Improvements were made to the Company's placement technology providing greater
completion utilization rates. Enhancements to the Company's ECO flow will
minimize the number of "design turns" needed to complete a design. Additional
engineering effort was invested in the refinement of the Company's delay
modeling and analysis capabilities. This includes the integration of 3D
modeling and extraction software, which the Company is offering through an OEM
agreement with OEA International, Inc. 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.
Page 13 of 35
<PAGE>
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. The
maintenance criteria requires a minimum bid price of $1.00 per share (the
"Minimum Bid Price"), $4,000 in net tangible assets (total assets less total
liabilities and goodwill) (the "Required Net Tangible Assets") 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) (the "Required Public Float").
By letter dated July 24, 1998, The Nasdaq Stock Market, Inc. ("Nasdaq")
notified the Company that it would be delisted from the National Market because
of its failure to maintain the Required Net Tangible Assets. On July 29, 1998,
the Company requested and subsequently received approval for an oral hearing to
appeal Nasdaq's decision. In this hearing, Nasdaq would also address the issue
of the Company's noncompliance with the Minimum Bid Price. The hearing was held
on October 8, 1998 and as of November 12, 1998, Nasdaq has not rendered its
decision. As of November 11, 1998, the closing bid price of a share of the
Company's common stock was $0.1875 and the Company's common stock had failed to
maintain the Minimum Bid Price. The Company also failed to meet the Required
Net Tangible Assets and Required Public Float as of that date.
Failure to meet these maintenance criteria and an adverse decision by
Nasdaq will result in the delisting of the Company's common stock from the
National Market. Trading, if any, in the Company's common stock would
thereafter be conducted in the non-Nasdaq over-the-counter market.
If the Company's common stock were delisted from trading on the National
Market, an investor may find it more difficult to dispose of, or to obtain
accurate quotation as to the market value of, the Company's common stock. If
the trading price of the common stock was less that $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
Page 14 of 35
<PAGE>
transactions 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 the Company's stockholders to sell the common
stock in the secondary market. In addition, the Company's ability to obtain
additional financing through the issuance of common stock or securities
convertible into common stock could be adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's common
stock has been volatile. Future announcements concerning the Company or its
competitors, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, proprietary rights
or other litigation, changes in earnings estimates by analysts or other factors
could cause the market price of the common stock to fluctuate substantially. In
addition, the stock market has from time to time experienced significant price
and volume fluctuation that have particularly affected the market prices for the
common stocks of technology companies and that have often been unrelated to the
operating performance of particular companies. The broad market fluctuations
may also adversely affect the market price of the Company's common stock. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has occurred against the issuing
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in substantial
costs and divert management attention and resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Any adverse determination in such litigation could also subject the
Company to significant liabilities.
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
Page 15 of 35
<PAGE>
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 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 and Taiwan,
accounted for approximately 43%, 25%, 32% and 48% of the Company's total revenue
in fiscal 1996, 1997, 1998 and the first six months of 1999, respectively.
Revenues from international sales have declined as 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 EDA software market. The Company expects that international sales will
continue to account for a significant portion of its revenue. 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.
DEPENDENCE ON CERTAIN CUSTOMERS. A small number of customers account for a
significant percentage of the Company's total revenue. In fiscal 1996, HAL
Computer Systems, Inc., a subsidiary of Fujitsu Ltd. ("HAL"), accounted for 16%
and Motorola, Inc. and Yamaha Corporation each accounted for 11% of the
Company's total revenue. In fiscal 1997, HAL accounted for 14%, Lucent
Technologies accounted for 19% and Motorola, Inc. accounted for 13% of the
Company's total revenue. In fiscal 1998, Motorola, Inc. accounted for 13% and
Aspec Technology accounted for 20% of the Company's total revenue. There can be
no assurance that sales to these entities, individually or as a group, will
reach or exceed historical levels in any future period. Any substantial
decrease in sales to one or more of these customers could have a material
adverse effect on the Company's business, operating results or 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. James O. Benouis joined the Company in
March 1998 as its President and Chief Operating Officer. On August 4, 1998, Mr.
Benouis was appointed Chief Executive Officer of the Company. 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. See - "Dependence on Key Personnel"
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon a number of key technical and management employees, in particular,
upon Robert R. Anderson, the Company's Chairman, and James O. Benouis, the
Company's President and Chief Executive Officer. The Company does not currently
have "key man" life insurance on Mr. Anderson, Mr. Benouis or any other members
of its senior management. The loss of services of Mr. Anderson, Mr. Benouis or
any other members of its senior management could have a material adverse effect
on the Company. See - "Management Transition." The Company's success will
depend, in large part, on its ability to attract and retain highly-skilled
technical, managerial, sales and marketing personnel. Competition for such
personnel is intense. There can be no assurance that the Company will be
successful in retaining its key technical and management personnel and in
attracting and retaining the personnel it requires to grow.
Page 16 of 35
<PAGE>
CONCENTRATION OF STOCK OWNERSHIP. The present directors, executive officers and
5% shareholders of the Company and their affiliates beneficially own
approximately 72.6% of the outstanding common stock. As a result, these
shareholders may be able to exercise significant influence over all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company.
EFFECT OF CERTAIN CHARTER PROTECTIONS; BLANK CHECK PREFERRED STOCK. The
Company's Board of Directors has the authority to issue up to 1,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, without any further vote or action by the
Company's shareholders. The rights of the holders of the common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company.
INFLATION. To date, inflation has not had a significant impact on the results
of the Company's operations.
RECENT ACCOUNTING PRONOUNCEMENTS. In October 1997 and March 1998, the American
Institute of Certified Public Accountants issued Statements of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") and 98-4 "Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"),
which the Company is required to adopt for transactions entered into in the
fiscal year beginning April 1, 1998. SOP 97-2 and SOP 98-4 provide guidance on
recognizing revenue on software transactions and supersede SOP 91-1. The Company
believes that the adoption of SOP 97-2 and SOP 98-4 will not have a significant
impact on its current licensing or revenue recognition practices. However,
should the Company adopt new or change its existing licensing practices, the
Company's revenue recognition practices may be subject to change to comply with
the accounting guidance provided in SOP 97-2 and SOP 98-4.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures About Segments of an Enterprise and Related
Information." This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has not yet determined the
impact, if any, of adopting this new standard. The disclosures prescribed by
FAS 131 will be effective for the Company's consolidated financial statements
for the year ending March 31, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. The Company has not yet
determined the impact, if any, of adopting this statement. The disclosures
prescribed by SOP 98-1 will be effective for the year ending March 31, 2000
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards
for derivative instruments, embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The Company currently does not invest in derivative instruments.
YEAR 2000 ISSUE. The "Year 2000 Issue" arises because most computer systems and
programs were designed to handle only a two-digit year, as opposed to a four
digit year. When the year 2000 begins, these computers may interpret "00" as
the year 1900 and could either stop processing date-related computations or
could process them incorrectly. As customers and potential customers of the
Company begin to devote incremental resources to this issue, resources
previously allocated to other information systems requirements may be redirected
to address the Year 2000 issue. To the extent that the Company's products are
not
Page 17 of 35
<PAGE>
selected as part of customers' overall Year 2000 solution, redirection of these
customer resources could have a material adverse effect on the Company's results
of operations and financial condition. In addition, the Year 2000 Issue creates
risk for the Company from unforeseen problems in its internal computer systems
and from third parties with which the Company interacts. Such failures of the
Company's and/or third parties' computer systems could have a material impact on
the Company's ability to conduct its business and to process and account for the
transfer of funds electronically.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
Page 18 of 35
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: Not Applicable
Item 2. Changes in Securities and Use of Proceeds: Not Applicable
Item 3. Defaults Upon Senior Securities:
On June 8, 1998, the Company's $2,000,000 line of credit with its bank
expired and the $285,000 outstanding under the line of credit became
due and payable. In addition, the Company is currently not in
compliance with certain financial covenants in the line of credit and
in its equipment line with a current unpaid balance of $149,000 with
the same lender. There can be no assurance that the Company will be
able to obtain a waiver for its noncompliance with such covenants. If
the Company is in default under such lines of credit and if such
defaults are not waived, the lender may accelerate the Company's
payment obligations and exercise other rights and remedies as a
secured creditor under the credit agreements and by law, including,
but not limited to, foreclosure on substantially all the Company's
assets which were pledged as collateral under the lines of credit.
The exercise of rights and remedies under the lines of credit could
prevent or delay the continued development and marketing of the
Company's products and services, could require substantial curtailment
of the Company's operations and could result in the Company's
bankruptcy.
Item 4. Submission of Matters to a Vote of Securities Holders:
(A) On September 2, 1998, the Annual Meeting of the Shareholders of
the Registrant was held. A total of 19,500,976 shares, or
approximately 75% of the shares outstanding, were represented at
this meeting.
(B) At the annual meeting, the shareholders elected Robert R.
Anderson, Roy L. Rogers and Thomas A. Sherby as Directors with
19,391,903 votes in favor and 109,073 withheld; and James O.
Benouis as Director with 19,376,253 votes in favor and 124,723
votes withheld.
(C) The amendment to the Company's Amended and Restated Articles of
Incorporation to increase the number of shares of common stock
authorized from 40,000,000 to 60,000,000 was approved by
19,248,859 in favor, 243,395 opposed and 8,722 abstained.
(D) The amendment to the Company's 1988 Stock Option Plan to increase
the number of shares authorized to be issued thereunder from
3,745,976 to 5,745,976 was approved by 12,845,942 in favor,
300,442 opposed, 24,622 abstained and 6,329,970 broker non-votes.
(E) The amendments to the Company's 1990 Directors' Stock Option Plan
were approved by 12,910,745 in favor, 330,029 opposed, 26,250
abstained and 6,233,952 broker non-votes.
(F) The amendment to the Company's Amended and Restated Articles of
Incorporation to effect within six months of the annual meeting a
one-for-three reverse stock split was approved by 18,910,977 in
favor, 455,821 opposed, 38,160 abstained and 96,018 broker non-
votes.
Page 19 of 35
<PAGE>
Item 5. Other Information:
Nasdaq Letters
--------------
By letter dated July 24, 1998, Nasdaq notified the Company that it
would be delisted from the National Market because of its failure to
maintain the Required Net Tangible Assets. On July 29, 1998, the
Company requested and subsequently received approval for an oral
hearing to appeal Nasdaq's decision. In this hearing, Nasdaq would
also address the issue of the Company's noncompliance with the Minimum
Bid Price. The hearing was held on October 8, 1998 and as of November
12, 1998 Nasdaq has not rendered its decision. As of November 11,
1998, the closing bid price of a share of the Company's common stock
was $0.1875 and the Company's common stock had failed to maintain the
Minimum Bid Price. The Company also failed to meet the Required Net
Tangible Assets and Required Public Float as of that date.
Shareholder Proposals
---------------------
Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange
Act of 1934, as amended, the Company's proxy for its 1999 Annual
Meeting of Shareholders may confer discretionary authority to vote on
any proposal submitted by a shareholder if written notice of such
proposal is not received at the Company's executive office on or
before June 16, 1999.
Item 6. Exhibits and Reports on Form 8-K:
(A) EXHIBITS:
EXHIBIT
Number DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.01 Registrant's 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")).
3.02 Registrant's amendment to Amended and Restated Articles of
Incorporation filed October 16, 1998.
3.03 Registrant's bylaws, as amended to date (incorporated by reference to
Exhibit 4.01 of the 1984 Registration Statement).
3.05 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).
10.01* Registrant's 1990 Directors' Stock Option Plan, as amended to date.
10.03* Registrant's 1988 Stock Option Plan, as amended to date.
27.00 Financial Data Schedule
*Management Contract or Compensatory Plan or Arrangement
(B) REPORTS ON FORM 8-K:
No Reports on Form 8-K were filed during the quarter covered by this report.
Page 20 of 35
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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: November 13, 1998 /s/ James O. Benouis
----------------- --------------------
James O. Benouis
President and
Chief Executive Officer
/s/ Laurence G. Colegate, Jr.
-----------------------------
Laurence G. Colegate, Jr.
Senior Vice President,
Finance and Administration
(Chief Financial and Accounting
Officer)
Page 21 of 35
<PAGE>
EXHIBIT 3.02
CERTIFICATE OF AMENDMENT OF THE
ARTICLES OF INCORPORATION OF
SILICON VALLEY RESEARCH, INC.
The undersigned, James O. Benouis and Laurence G. Colegate, Jr., hereby
certify that:
1. They are the duly elected and acting Chief Executive Officer and Senior
Vice President of Finance and Administration/Chief Financial Officer,
respectively, of Silicon Valley Research, Inc. a California corporation.
2. Article Third of the Corporation's Amended and Restated Articles of
Incorporation which presently reads as follows:
Third: This corporation is authorized to issue two classes of shares
designated respectively "Common Stock" and "Preferred Stock", and
referred to herein either as Common Stock or Common shares and
Preferred Stock or Preferred shares, respectively. The number of
shares of Common Stock is 40,000,000, without par value and the number
of shares of Preferred Stock is 1,000,000 without par value.
is amended to read as follows:
This corporation is authorized to issue two classes of shares
designated respectively "Common Stock" and "Preferred Stock", and
referred to herein either as Common Stock or Common shares and
Preferred Stock or Preferred shares, respectively. The number of
shares of Common Stock is 60,000,000, without par value and the number
of shares of Preferred Stock is 1,000,000 without par value.
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors of this corporation.
4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of the shareholders of this corporation in
accordance with section 902 of the California Corporations Code. The total
number of outstanding shares of this corporation
<PAGE>
entitled to vote with respect to the foregoing amendments was 26,190,113 shares
of common stock. There are no outstanding shares of Preferred Stock. The number
of shares voting in favor of the amendment equaled or exceeded the vote
required, such required vote being more than 50% of the outstanding shares of
common stock.
The undersigned declare under penalty of perjury that the matters set forth in
the foregoing certificate are true of his own knowledge.
Executed at San Jose, California on the 7 day of October 1998.
/s/James O. Benouis
---------------------
James O. Benouis, Chief Executive Officer
/s/Laurence G. Colegate, Jr.
------------------------------
Laurence G. Colegate, Jr., Senior Vice
President of Finance and Administration
and Chief Financial Officer
<PAGE>
EXHIBIT 10.01
SILICON VALLEY RESEARCH, INC.
AMENDED 1990 DIRECTORS' STOCK OPTION PLAN
AS AMENDED BY THE BOARD THROUGH APRIL 21, 1998
1. PURPOSE.
The Silvar-Lisco 1990 Directors' Stock Option Plan was initially established
effective May 14, 1990 (the "Initial Plan"), and is hereby amended and restated
in its entirety as the Silicon Valley Research, Inc. Amended 1990 Directors'
Stock Option Plan (the "Plan") effective as of January 23, 1995 (the "Effective
Date"). The purpose of the Plan is to create additional incentive for the non-
employee directors of Silicon Valley Research, Inc., a California corporation,
and any successor corporation thereto (collectively referred to as the
"Company") to promote the financial success and progress of the Company and any
present or future Parent and/or Subsidiary of the Company.
2. TYPES OF OPTIONS AND SHARES.
Options granted under this Plan (the "Options") shall be nonqualified stock
options; that is, options which are not treated as incentive stock options
within the meaning of section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code"). The shares of stock that may be purchased upon exercise
of Options granted under this Plan are shares of the common stock of the Company
("Shares").
3. NUMBER OF SHARES.
The maximum number of Shares that may be issued pursuant to Options granted
under this Plan is 225,000 Shares, subject to adjustment as provided in this
Plan. If any Option is terminated for any reason without being exercised in
whole or in part, the Shares thereby released from such Option shall be
available for purchase under other Options subsequently granted under this Plan.
At all times during the term of this Plan, the Company shall reserve and keep
available such number of Shares as shall be required to satisfy the requirements
of outstanding Options under this Plan.
4. ADMINISTRATION.
The Plan shall be administered by the Board of Directors of the Company (the
"Board") and/or by a duly appointed committee of the Board having such powers as
shall be specified by the Board. Any subsequent references herein to the Board
shall also mean the committee if such committee has been appointed and, unless
the powers of the committee have been specifically limited, the committee shall
have all of the powers of the Board granted herein, including, without
limitation, the power to terminate or amend the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law. The Board
shall have no authority, discretion, or power to select the non-employee
directors of the Company who will receive options under the Plan, to set the
exercise price of the options granted under the Plan, to determine the number of
shares of common stock to be granted under option or the time at which such
options are to be granted, to establish the duration of option grants, or alter
any other terms or conditions specified in the Plan, except in the sense of
administering the Plan subject to the provisions of the Plan. All questions of
interpretation of the Plan or of any options granted under the Plan (an
"Option") shall be determined by the Board, and such determinations shall be
final and binding upon all persons having an interest in the Plan and/or any
Option. Any officer of the Company shall have the authority to act on behalf of
the Company with respect to any matter, right, obligation, or election which is
the responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
5. ELIGIBILITY.
Options shall be granted only to a person, who, at the time of grant, is an
Investor Director or an Outside Director, as defined in Section 15 (an
"Optionee").
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<PAGE>
6. TERMS AND CONDITIONS OF OPTIONS.
Options granted pursuant to the Plan shall be evidenced by written
agreements specifying the number of shares of stock covered thereby, in
substantially the form attached hereto as Exhibit A (the "Option Agreement"),
---------
which written agreement may incorporate all or any of the terms of the Plan by
reference and shall comply with and be subject to the following terms and
conditions:
(a) Automatic Grant of Options. Subject to execution by an Optionee of an
--------------------------
appropriate Option Agreement, Options shall be granted automatically and
without further action of the Board, as follows:
(i) On the Effective Date, each person currently serving as an
Outside Director shall be granted an Option to purchase Fifteen Thousand
(15,000) Shares, less the number of Shares subject to Options granted to such
Outside Director pursuant to the Initial Plan.
(ii) Each Investor Director who is newly elected or appointed to the
Board after the Effective Date shall be granted, on the day immediately
following such initial election or appointment, an Option to purchase Ten
Thousand (10,000) Shares.
(iii) Each Outside Director who is newly elected or appointed to the
Board after the Effective Date and prior to the date of the Annual Meeting of
the Company's shareholders held in 1996 (the "1996 Annual Meeting Date") shall
be granted, on the day immediately following such initial election or
appointment, an Option to purchase Fifteen Thousand (15,000) Shares.
(iv) On the 1996 Annual Meeting Date, each Outside Director then
holding office who received a grant pursuant to Section 6(a)(i) or 6(a)(iii)
prior to such date shall be granted an Option to purchase Five Thousand (5,000)
Shares.
(v) Each Outside Director who is newly elected or appointed to the
Board on or after the 1996 Annual Meeting Date shall be granted, on the day
immediately following such initial election or appointment, an Option to
purchase Twenty Thousand (20,000) Shares.
(vi) On April 1, 1995 and each anniversary thereof which occurs
prior to the 1998 Annual Meeting Date (as defined below), each Investor Director
shall be granted an Option to purchase One Thousand (1,000) Shares.
(vii) On April 1, 1995 and each anniversary thereof which occurs
prior to the 1996 Annual Meeting Date, each Outside Director shall be granted an
Option to purchase One Thousand Five Hundred (1,500) Shares.
(viii) On the 1996 Annual Meeting Date, each Outside Director then
holding office who received a grant pursuant to Section 6(a)(vii) prior to such
date shall be granted an Option to purchase One Thousand Five Hundred (1,500)
Shares.
(ix) On April 1, 1997 and each anniversary thereof which occurs
prior to the 1998 Annual Meeting Date (as defined below), each Outside Director
shall be granted an Option to purchase Three Thousand (3,000) Shares.
(x) On February 11, 1997, each Outside Director serving as a member
of the Audit Committee of the Board shall be granted an Option to purchase Ten
Thousand (10,000) Shares, less the number of Shares subject to any other options
granted to such Outside Director on such date. Shares subject to Options granted
pursuant to this Section 6(a)(x) shall be fully vested on and after the date of
grant, and the term of an Option granted pursuant to this Section 6(a)(x) shall
not be affected by the Outside Director's termination of service.
(xi) On the date of the Annual Meeting of the Company's
shareholders held in 1998 (the "1998 Annual Meeting Date"), each Outside
Director then holding office who received a grant pursuant to Section 6(a)(i),
6(a)(iii) or 6(a)(v) prior to such date shall be granted an Option to purchase
Twenty-Five Thousand (25,000) Shares.
2
<PAGE>
(xii) On the 1998 Annual Meeting Date, each Investor Director then
holding office who received a grant pursuant to Section 6(a)(ii) prior to such
date shall be granted an Option to purchase Thirty-Five Thousand (35,000)
Shares.
(xiii) Each Outside Director or Investor Director who is newly
elected or appointed to the Board on or after the 1998 Annual Meeting Date shall
be granted, on the day immediately following such initial election or
appointment, an Option to purchase Forty-Five Thousand (45,000) Shares.
(xiv) On the 1998 Annual Meeting Date, each Outside Director then
holding office who received a grant pursuant to Section 6(a)(ix) prior to such
date shall be granted an Option to purchase Six Thousand (6,000) Shares.
(xv) On the 1998 Annual Meeting Date, each Investor Director then
holding office who received a grant pursuant to Section 6(a)(vi) prior to such
date shall be granted an Option to purchase Eight Thousand (8,000) Shares.
(xvi) On April 1, 1998 and each anniversary thereof, each Outside
Director and Investor Director shall be granted an Option to purchase Nine
Thousand (9,000) Shares.
(xvii) Notwithstanding the foregoing, any Optionee may elect not to
receive an Option granted pursuant to this Section 6(a) by delivering written
notice of such election to the Board no later than six (6) months prior to the
date upon which such Option would otherwise be granted.
(xviii) Notwithstanding any other provision of the Plan to the
contrary, no Option shall be granted to any individual on a day when he or she
is no longer serving as an Investor Director or an Outside Director.
(b) EXERCISE PRICE. The exercise price per Share subject to an Option
shall be the Fair Market Value of a Share on the date the Option is granted.
(c) PAYMENT.
(i) FORMS OF PAYMENT AUTHORIZED. Except as otherwise provided
below, payment of the aggregate exercise price for the number of Shares being
purchased pursuant to any Option shall be made (i) in cash, by check, or cash
equivalent, (ii) by tender to the Company of whole Shares owned by the Optionee
having a Fair Market Value not less than the aggregate exercise price, (iii) by
the assignment in a form acceptable to the Company of the proceeds of a sale of
some or all of the shares being acquired upon the exercise of an Option pursuant
to a program or procedure approved by the Company (including, without
limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve
System) (a "Same-Day Sale"), or (iv) by any combination thereof.
(ii) TENDER OF STOCK. Notwithstanding the foregoing, an Option may
not be exercised by tender to the Company of Shares to the extent such tender of
stock would constitute a violation of the provisions of any law, regulation or
agreement restricting the redemption of the Company's stock. Unless otherwise
provided by the Board, an Option may not be exercised by tender to the Company
of Shares unless such Shares either have been owned by the Optionee for more
than six (6) months or were not acquired, directly or indirectly, from the
Company.
(iii) SAME-DAY SALE. The Company reserves, at any and all times, the
right, in the Company's sole and absolute discretion, to establish, decline to
approve or terminate any program or procedures for the exercise of Options by
means of a Same-Day Sale.
(d) WITHHOLDING TAXES. Prior to issuance of the Shares upon exercise of an
Option, the Optionee shall pay or make adequate provision for any applicable
foreign, federal or state withholding obligations of the Company.
3
<PAGE>
7. AUTHORITY TO VARY TERMS.
Subject to the limitations set forth in Section 4, the Board shall have the
authority from time to time to vary the terms of the Option Agreement either in
connection with the grant of an individual Option or in connection with the
authorization of a new standard form or forms; provided, however, that the terms
and conditions of such revised or amended standard form or forms of stock option
agreement shall be in accordance with the terms of the Plan. Such authority
shall include, but not by way of limitation, the authority to grant Options
which are immediately exercisable subject to the Company's right to repurchase
any unvested Shares acquired by the Optionee on exercise of an Option in the
event such Optionee's service as a director of the Company is terminated for any
reason.
8. NON-TRANSFERABILITY OF OPTIONS.
During the lifetime of the Optionee, an Option shall be exercisable only by
the Optionee or by the Optionee's guardian or legal representative. No Option
may be sold, pledged, assigned, hypothecated, transferred or disposed of in any
manner other than by will or by the laws of descent and distribution.
9. ADJUSTMENT OF OPTION SHARES.
In the event that the number of outstanding shares of Common Stock of the
Company is changed by a stock dividend, stock split, reverse stock split,
combination, reclassification or similar change in the capital structure of the
Company without consideration, the number of Shares available under this Plan,
the number of shares to be granted to Optionees pursuant to Section 6 and the
number of Shares subject to outstanding Options and the exercise price per share
of such options shall be proportionately adjusted; provided, however, that no
certificate or scrip representing fractional shares shall be issued upon
exercise of any Option and any resulting fractions of a Share shall be ignored.
10. NO OBLIGATION TO RETAIN.
Nothing in this Plan or any Option granted under this Plan shall confer on
any Optionee any right to continue as a director of the Company.
11. EFFECT OF A TRANSFER OF CONTROL ON OPTIONS.
In the event of a Transfer of Control, as defined in Section 15, any
unexercisable or unvested portion of the outstanding Options shall be
immediately exercisable and vested in full as of the date ten (10) days prior to
the date of the Transfer of Control, and the Company shall provide each Optionee
holding an outstanding Option with at least ten (10) days advance written notice
of the pending Transfer of Control prior to the consummation thereof. In
addition, the Board, in its sole discretion, may arrange with the surviving,
continuing, successor, or purchasing corporation or parent corporation thereof,
as the case may be (the "Acquiring Corporation"), for the Acquiring Corporation
to either assume the Company's rights and obligations under outstanding Options
or substitute substantially equivalent options for the Acquiring Corporation's
stock for outstanding Options. The exercise or vesting of any Option that was
permissible solely by reason of this Section 11 shall be conditioned upon the
consummation of the Transfer of Control. Any Options which are neither assumed
or substituted for by the Acquiring Corporation in connection with the Transfer
of Control nor exercised as of the date of the Transfer of Control shall
terminate and cease to be outstanding effective as of the date of the Transfer
of Control. If the corporation the stock of which is subject to the outstanding
Options immediately prior to a Transfer of Control described in Section 15(f)(i)
is the surviving or continuing corporation, the outstanding Options shall be
deemed to have been assumed by the Acquiring Corporation for purposes of this
Section 11.
12. AMENDMENT OR TERMINATION OF PLAN.
The Board, including any duly appointed committee of the Board, may
terminate or amend the Plan at any time; provided, however, that without the
approval of the shareholders of the Company, there shall be (a) no increase in
the total number of Shares covered by the Plan (except by
4
<PAGE>
operation of the provisions of Section 9 above), and (b) no expansion in the
class of persons eligible to receive Options; and provided, further, that the
provisions of the Plan addressing eligibility to participate in the Plan and the
amount, price and timing of grants of Options shall not be amended more than
once every six (6) months, other than to comport to changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder. In addition to the foregoing, the approval of the Company's
shareholders shall be sought for any amendment to the Plan for which the Board
deems shareholder approval necessary in order to comply with Rule 16b-3 under
the Securities Exchange Act of 1934, as amended. In any case, no amendment of
this Plan may adversely affect any then outstanding Option or any unexercised
portion thereof without the written consent of the Optionee, unless such
amendment or termination is necessary to comply with any applicable law or
government regulation.
13. TERM OF PLAN.
Options may be granted pursuant to this Plan from time to time within the
period from May 14, 1990 through May 14, 2010.
14. CONTINUATION OF INITIAL PLAN AS TO OUTSTANDING OPTIONS.
Any other provision of the Plan to the contrary notwithstanding, the terms
of the Initial Plan shall remain in effect and apply to all Options granted
pursuant to the Initial Plan.
15. CERTAIN DEFINITIONS.
As used in this Plan, the following terms shall have the following meanings:
(a) "Fair Market Value" means the fair market value of the Shares as
determined by the Board in good faith; provided, however, that where there is a
public market for the Company's Common Stock, the Fair Market Value per Share
shall be the average of the last reported bid and asked price of the Company's
Common Stock on the last trading day prior to the date of grant, as reported in
the Wall Street Journal (or if not so reported, as otherwise reported by the
National Association of Securities Dealers Automated Quotation (NASDAQ) system)
or, in the event the Company's Common Stock is listed on a stock exchange, the
Fair Market Value per Share shall be the closing price on such exchange on the
last trading day prior to the date of grant of the Option, as reported in the
Wall Street Journal.
(b) "Investor Director" means a director of the Company who (i) owns 1% or
more of the total combined voting power of all classes of stock of the Company,
and (ii) is not an employee of the Company or any Parent or Subsidiary.
(c) "Outside Director" means a director of the Company who is neither (i)
an employee of the Company or any Parent or Subsidiary, nor (ii) an Investor
Director.
(d) "Parent" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if, at the time of the granting of
the Option, each of such corporations other than the Company owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
(e) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of
granting of the Option, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
(f) "Transfer of Control" means any of the following which occurs with
respect to the Company:
(i) the direct or indirect sale or exchange by the shareholders of
the Company of all or substantially all of the stock of the Company where the
shareholders of the Company before
5
<PAGE>
such sale or exchange do not retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock of the Company;
(ii) a merger in which the shareholders of the Company before such
merger do not retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the Company;
(iii) the sale, exchange, or transfer of all or substantially all of
the Company's assets (other than a sale, exchange, or transfer to one or more
corporations where the shareholders of the Company before such sale, exchange or
transfer retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the corporation(s) to which the assets were
transferred); or
(iv) a liquidation or dissolution of the Company.
6
<PAGE>
EXHIBIT 10.03
SILICON VALLEY RESEARCH, INC.
AMENDED 1988 STOCK OPTION PLAN
AS AMENDED BY THE BOARD THROUGH APRIL 21, 1998
1. Purpose. This 1988 Stock Option Plan ("Plan") is established to
-------
attract, retain and provide equity incentives to selected persons to promote the
financial success of SILICON VALLEY RESEARCH, INC. (the "Company").
2. Types of Options and Shares. Options granted under this Plan (the
---------------------------
"Options") may be either: (a) incentive stock options ("ISO's") within the
meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code"), or (b)
non-qualified stock options ("NQSO's"), as designated at the time of grant. The
shares of stock that may be purchased upon exercise of Options granted under
this Plan (the "Shares") are shares of the Common Stock of the Company.
3. Number of Shares. The maximum number of Shares that may be issued
----------------
pursuant to Options granted under this Plan is 5,745,976 Shares, subject to
adjustment as provided in this Plan. If any Option expires or is terminated
without being exercised in whole or in part, or any Shares issued pursuant to an
Option are repurchased by the Company pursuant to a right or repurchase or a
right of first refusal retained by the Company, the unexercised Shares from such
Option and the shares so repurchased shall be available for future grant and
purchase under this Plan. At all times during the term of this Plan, the
Company shall reserve and keep available such number of Shares as shall be
required to satisfy the requirements of outstanding Options under this Plan.
4. Eligibility. Options may be granted to employees, officers, directors
-----------
who are also employees, consultants, independent contractors and advisers of the
Company or any Parent, Subsidiary or Affiliate of the Company (as defined in
Section 16). ISO's may be granted only to employees (including officers and
employees who are also directors) of the Company or a Parent or Subsidiary or
Affiliate of the Company. The Committee (as defined in Section 14) in its sole
discretion shall select the recipients of Options ("Optionees"). An Optionee may
be granted more than one Option under this Plan. Subject to adjustment as
provided in Section 10, at any such time as the Company or any Parent,
Subsidiary or Affiliate of the Company is a "publicly held corporation" within
the meaning of section 162(m) of the Code and the regulations promulgated
thereunder ("Section 162(m)"), no person shall be granted within any fiscal year
of the Company Options which in the aggregate cover more than 250,000 Shares
(the "Per Optionee Limit").
5. Terms and Conditions of Options. The Committee shall determine
-------------------------------
whether each Option is to be an ISO or an NQSO, the number of Shares subject to
the Option, the exercise price of the Option, the period during which the Option
may be exercised, and all other terms and conditions of the Option, subject to
the following:
(a) Form of Option Grant. Each Option granted under this Plan shall
--------------------
be evidenced by a written Stock Option Grant (the "Grant") in such form (which
need not be the same for each Optionee) as the Committee shall from time to time
approve.
(b) Date of Grant. The date of grant of an Option shall be the date
-------------
on which the Committee makes the determination to grant such Option unless
otherwise specified by the Committee.
(c) Exercise Price. The exercise price of an Option shall be not
--------------
less than 100% of the fair market value of the Shares at the time the Option is
granted, as determined by the Committee in good faith. The exercise price of any
Option granted to a person owning more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary of the
Company ("Ten Percent Shareholder") shall not be less than 110% of the fair
market value of the Shares at the time the Option is granted, as determined by
the Committee in
<PAGE>
good faith. As long as a public market exists for the Shares, the fair market
value shall be the average of the last reported bid and asked prices for Common
Stock of the Company on the last trading day prior to the date of determination
or, in the event the Common Stock of the Company is listed on a stock exchange
or on the NASDAQ National Market System, the fair market value shall be the
closing or last price on such exchange or quotation system on the last trading
day prior to the date of determination.
(d) Exercise Period. Options shall be exercisable within the times
---------------
or upon the events determined by the Committee as set forth in the Grant;
provided, however, that no Option shall be exercisable after the expiration of
ten years from the date the Option is granted, and provided further that no
Option granted to a Ten Percent Shareholder shall be exercisable after the
expiration of five years from the date the Option is granted.
(e) Limitations on ISO's. The aggregate fair market value
--------------------
(determined as of the time an Option is granted) of stock with respect to which
ISO's are exercisable for the first time by an Optionee during any calendar year
(under this Plan or under any other incentive stock option plan of the Company
or any Parent or Subsidiary of the Company) shall not exceed $100,000. If the
fair market value of stock with respect to which ISO's are exercisable for the
first time by an Optionee during any calendar year exceeds $100,000, the Options
for the first $100,000 worth of stock to become exercisable shall be ISO's and
the Options for the amount in excess of $100,000 shall be NQSO's.
(f) Options Non-Transferable. Options granted under this Plan shall
------------------------
not be transferable by the Optionee otherwise than by will or by the laws of
descent and distribution, and shall be exercisable during the lifetime of the
Optionee only by the Optionee. During the Optionee's lifetime, no Option or
interest therein may be transferred, assigned, pledged or hypothecated by the
Optionee, whether by operation of law or otherwise, or may be made subject to
execution, attachment or similar process.
6. Exercise of Options.
-------------------
(a) Notice. Options may be exercised only by delivery to the Company
------
of a written exercise agreement in a form approved by the Committee (which need
not be the same for each Optionee), stating the number of Shares being
purchased, the restrictions imposed on the Shares, if any, and such
representations and agreements regarding the Optionee's investment intent and
access to information, if any, as may be required by the Company to comply with
applicable securities laws, together with payment in full of the exercise price
for the number of Shares being purchased plus any withholding required pursuant
to subparagraph (c) below.
(b) Payment. Payment for the Shares may be made: (i) in cash (by
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check); (ii) where permitted by applicable law and approved by the Committee in
its sole discretion, by tender of a full recourse promissory note having such
terms as may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Section 483 and 7872 of the Code;
or (iii) where permitted by applicable law and approved in advance by the
Committee in its sole discretion, through a "same day sale" commitment from the
Optionee and a broker-dealer that is a member in good standing of the National
Association of Securities Dealers (an "NASD Dealer") whereby the Optionee
irrevocably elects to exercise this Option 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. Optionees who are not employees of the Company shall
not be eligible to purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares.
(c) Withholding Taxes. Prior to issuance of the Shares upon exercise
-----------------
of an Option, the Optionee shall pay or make adequate provision for federal,
state or local withholding obligations of the Company, if applicable.
2
<PAGE>
(d) Limitations on Exercise. Notwithstanding the exercise periods
-----------------------
set forth in the Grant, exercise of an Option shall always be subject to the
following limitations:
(i) If an Optionee ceases to be employed by the Company or any
Parent, Subsidiary or Affiliate of the Company for any reason except death or
disability, the Optionee may exercise such Optionee's Option to the extent (and
only to the extent) that it would have been exercisable upon the date of
termination, within three months after the date of termination (or such shorter
time period as may be specified in the Grant), but in any event no later than
the expiration date of the Option.
(ii) If an Optionee's employment with the Company or any
Parent, Subsidiary or Affiliate of the Company is terminated because of the
death of the Optionee or disability of Optionee within the meaning of Section
22(e)(3) of the Code, such Optionee's Option may be exercised to the extent (and
only to the extent) that it would have been exercisable by the Optionee on the
date of termination, by the Optionee (or the Optionee's legal representative)
within twelve months after the date of termination (or such shorter time period
as may be specified in the Grant), but in any event no later than the expiration
date of the Option.
(iii) Options shall cease to vest during any leave of absence,
except in the case of sick leave, military leave or other leave of absence
approved by the Committee provided that such leave is for a period of not more
than ninety days or re-employment upon the expiration of such leave is
guaranteed by contract or statute.
(iv) The Committee shall have discretion to determine whether
the Optionee has ceased to be employed by the Company or any Parent, Subsidiary
or Affiliate of the Company and the effective date on which such employment
terminated.
(v) The Committee may specify a reasonable minimum number of
Shares that may be purchased on any exercise of an Option, provided that such
minimum number will not prevent the Optionee from exercising the full number of
Shares as to which the Option is then exercisable.
(vi) An Option shall not be exercisable unless such exercise is
in compliance with the Securities Act of 1933, as amended (the "1933 Act"), all
applicable state securities laws and the requirements of any stock exchange or
national market system upon which the Shares may then be listed, as they are in
effect on the date of exercise. The Company shall be under no obligation to
register the Shares with the Securities and Exchange Commission ("SEC") or to
effect compliance with the registration or qualification requirements of any
state securities laws or stock exchange, and the Company shall have no liability
for any inability or failure to do so.
7. Modification, Extension and Renewal of Options. The Committee shall
----------------------------------------------
have the power to modify, extend or renew outstanding Options and to authorize
the grant of new Options in substitution therefor, provided that any such action
may not, without the written consent of the Optionee, impair any rights under
any Option previously granted. The Committee shall have the power to reduce the
exercise price of outstanding options; provided, however, that the exercise
price per share may not be reduced below the fair market value of a share of
Common Stock of the Company (as determined in accordance with Section 5(c) of
this Plan) on the date the action is taken to reduce the exercise price.
8. Privileges of Stock Ownership. No Optionee shall have any of the
-----------------------------
rights of a shareholder with respect to any Shares subject to an Option until
such Option is properly exercised and then only beginning on the date of
issuance of a stock certificate therefor. No adjustment shall be made for
dividends or distributions or other rights for which the record date is prior to
the date
3
<PAGE>
such certificate is issued, except as provided in this Plan. The Company shall
provide a balance sheet and an income statement to each Optionee prior to such
Optionee's purchase of Shares under the Plan, and to each Optionee annually
during the period such Optionee has Options outstanding; provided, however, the
Company shall not be required to provide such balance sheet and income statement
to Optionees whose services in connection with the Company assure them access to
equivalent information.
9. No Obligation to Employ. Nothing in this Plan or any Option granted
-----------------------
under this Plan shall confer on any Optionee any right to continue in the employ
of the Company or any Parent, Subsidiary or Affiliate of the Company or limit in
any way the right of the Company or any Parent, Subsidiary or Affiliate of the
Company to terminate the Optionee's employment at any time, with or without
cause.
10. Adjustment of Option Shares. In the event that the number of
---------------------------
outstanding shares of Common Stock of the Company is changed by a stock
dividend, stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without consideration,
the number of Shares available under this Plan, the Per Optionee Limit, the
number of Shares subject to outstanding Options and the exercise price per share
of such Options shall be proportionately adjusted, subject to any required
actions by the Board of Directors (the "Board") or shareholders of the Company
and compliance with applicable securities laws; provided, however, that no
certificate or scrip representing fractional shares shall be issued upon
exercise of any Option and any resulting fractions of a Share shall be ignored.
11. Assumption of Options by Successors. In the event of a dissolution or
-----------------------------------
liquidation of the Company, a merger in which the Company is not the surviving
corporation, a transaction or series of transactions in which 50% or more of the
then outstanding voting stock is sold or otherwise transferred to a single
transferee or group of related transferees, or the sale of all or substantially
all of the assets of the Company, any or all outstanding Options may be assumed
or replaced by the successor corporation, which assumption or replacement shall
be binding on all Optionees. In the alternative, the successor corporation may
substitute equivalent Options or provide substantially similar consideration to
Optionees as was provided to shareholders (after taking into account the
existing provisions of the Options). The successor corporation may also issue,
in place of outstanding Shares of the Company held by the Optionee,
substantially similar shares or other property subject to repurchase
restrictions no less favorable to the Optionee. The aggregate fair market value
(determined at the time an Option is granted) of stock with respect to ISO's
that first become exercisable in the calendar year of such dissolution,
liquidation, merger, sale of stock, or sale of assets may not exceed $100,000.
If the fair market value of stock with respect to which ISO's are first
exercisable in such calendar year exceeds $100,000, the Options for the first
$100,000 worth of stock to become exercisable shall be ISO's and the Options for
the amount in excess of $100,000 shall be NQSO's.
12. Adoption and Shareholder Approval. This Plan shall become effective
---------------------------------
on the date that it is adopted by the Board. This Plan shall be approved by the
affirmative vote at a meeting of the holders of a majority of the outstanding
shares of the Company within twelve months before or after the date this Plan is
adopted by the Board. Shareholder approval shall be solicited in accordance with
the rules and regulations in effect under Section 14(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
13. Administration.
--------------
(a) General. The Plan shall be administered by the Board and/or by a
-------
duly appointed committee (the "Committee") having such powers as shall be
specified by the Board and, unless the powers of the Committee have been
specifically limited, the Committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to terminate or amend
the Plan at any time, subject to the terms of the Plan and any applicable
limitations
4
<PAGE>
imposed by law. As used in this Plan, references to the "Committee" shall mean
either such Committee or the Board if no committee has been established. The
interpretation by the Committee of any of the provisions of this Plan or any
Option granted under this Plan shall be final and binding upon the Company and
all persons having an interest in any Option or any Shares pursuant to an
Option.
(b) Disinterested Administration. With respect to the participation
----------------------------
in the Plan of employees who are also officers or directors of the Company
subject to Section 16 of the Exchange Act, the Plan shall be administered by the
Committee in compliance with the "disinterested administration" requirement of
Rule 16b-3, as promulgated under the Exchange Act and amended from time to time
or any successor rule or regulation.
(c) Compliance with Section 162(m) of the Code. In the event the
------------------------------------------
Company or any Parent, Subsidiary or Affiliate of the Company is a "publicly
held corporation" within the meaning of Section 162(m), the Company may
establish a committee of "outside directors" within the meaning of Section
162(m) to approve the grant of Options which might reasonably be anticipated to
result in the payment of employee remuneration that would otherwise exceed the
limit on employee remuneration deductible for income tax purposes pursuant to
Section 162(m).
14. Term of Plan. All Options shall be granted pursuant to this Plan, if
------------
at all, on or before May 16, 2008.
15. Amendment or Termination of Plan. The Committee may at any time
--------------------------------
terminate or amend this Plan in any respect, including (but not limited to)
amendment of any form of Grant, exercise agreement or instruction to be executed
pursuant to this Plan; provided, however, that the Committee shall not, without
the approval of the holders of a majority of the outstanding voting shares of
the Company:
(a) materially increase the number of Shares subject to this Plan
except by operation of the provisions of this Plan;
(b) materially change the designation of the class of persons
eligible to be granted Options;
(c) remove the administration of the Plan from the Board or
Committee; or
(d) materially increase the benefits accruing to participants under
this Plan.
16. Certain Definitions. As used in this Plan, the following terms shall
-------------------
have the following meanings:
(a) "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of the
grating of the Option, each of such corporations other than the Company owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
(b) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of
granting of the Option, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
(c) "Affiliate" means any corporation that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to cause the direction of the management and policies of
the corporation, whether through the ownership of voting securities, by contract
or otherwise.
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,276
<SECURITIES> 0
<RECEIVABLES> 560
<ALLOWANCES> 150
<INVENTORY> 0
<CURRENT-ASSETS> 1,826
<PP&E> 3,065
<DEPRECIATION> 2,535
<TOTAL-ASSETS> 3,952
<CURRENT-LIABILITIES> 2,025
<BONDS> 0
0
0
<COMMON> 43,928
<OTHER-SE> (42,058)
<TOTAL-LIABILITY-AND-EQUITY> 3,952
<SALES> 382
<TOTAL-REVENUES> 953
<CGS> 179
<TOTAL-COSTS> 3,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> (2,815)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,815)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,815)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
