<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 17, 1997
SILICON VALLEY RESEARCH, INC.
(Exact name of registrant as specified in charter)
California 0-13836 94-2743735
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
or incorporation) Identification No.)
6360 San Ignacio Avenue, San Jose, California 95119-1231
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (408) 361-0333
------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
The report of Price Waterhouse LLP on SVR's fiscal 1997 consolidated
financial statements was amended on September 17, 1997 to add an explanatory
paragraph regarding SVR's ability to continue as a going concern and to disclose
the cancellation of a significant contract subsequent to March 31, 1997.
The amended report and consolidated financial statements as of and for
the years ended March 31, 1997 and 1996 are attached as Exhibit 99.1 and are
incorporated herein by reference.
ITEM 7C. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
99.1 Consolidated Financial Statements and Financial Statement
Schedule for Silicon Valley Research, Inc. as of and for the years
ended March 31, 1997 and 1996.
</TABLE>
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SILICON VALLEY RESEARCH, INC.
Date: September 18, 1997 By: /s/Laurence G. Colegate, Jr.
-----------------------------
Laurence G. Colegate, Jr.
Chief Financial Officer and Senior Vice
President of Finance and Administration
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
<S> <C> <C>
99.1 Consolidated Financial Statements and Financial
Statement Schedule for Silicon Valley Research,
Inc. as of and for the years ended March 31, 1997
and 1996 5
</TABLE>
4
<PAGE> 1
EXHIBIT 99.1
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Index to Financial Statements and Financial Statement Schedules
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants 2
Report of Previous Independent Accountants 3
Report of Management 4
Consolidated Balance Sheet as of March 31, 1996 and 1997 5
Consolidated Statement of Operations for the years ended March 31,
1995, 1996 and 1997 6
Consolidated Statement of Changes in Shareholders' Equity for the years
ended March 31, 1995, 1996 and 1997 7
Consolidated Statement of Cash Flows for the years ended March 31,
1995, 1996 and 1997 8
Notes to Consolidated Financial Statements 9-18
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts 19
</TABLE>
All other financial statement schedules have been omitted since they are either
not required, not applicable or the information is otherwise included in the
consolidated financial statements or notes thereto.
1
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Silicon Valley Research, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Silicon Valley Research, Inc. and its subsidiaries at March 31, 1996 and March
31, 1997, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred significant recent losses from operations
and may need to obtain additional financing to meet its business plans for
fiscal 1998 and beyond that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
San Jose, California
May 27, 1997, except for the second paragraph of Note 1
and the third paragraph of Note 6 which are as of September 17, 1997
2
<PAGE> 3
REPORT OF PREVIOUS INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Silicon Valley Research, Inc.
We have audited the consolidated statements of operations, shareholder's equity
and cash flows of Silicon Valley Research, Inc. for the year ended March 31,
1995 and financial statement schedule for the year ended March 31, 1995 listed
on the index of the Exhibit to the Form 8-K. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated results of the operations and the cash flows
of Silicon Valley Research, Inc. for the year ended March 31, 1995 in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As discussed in Note 6 to the consolidated financial statements, the Company is
a defendant in a lawsuit alleging unfair competition and breach of contract and
seeking attorneys' fees, punitive damages, and enforcement of the contract. The
ultimate outcome of the litigation cannot presently be determined. Accordingly,
no provision for any liability that may result upon adjudication has been made
in the accompanying consolidated financial statements.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
May 23, 1995
3
<PAGE> 4
REPORT OF MANAGEMENT
To Our Shareholders:
The consolidated financial statements have been prepared by the Company, and we
are responsible for their content. They are prepared in conformity with
generally accepted accounting principles, and in this regard we have undertaken
to make informed judgments and estimates, where necessary, of the expected
effects of events and transactions. The other financial information in this
annual report on Form 10-K is consistent with that in the consolidated financial
statements.
The Company maintains and depends upon a system of internal accounting controls
designed to provide reasonable assurance that our assets are safeguarded, that
transactions are executed in accordance with management's intent and the law,
and that the accounting records fairly and accurately reflect the transactions
of the Company.
The Company engaged Price Waterhouse LLP as independent accountants to provide
an objective, independent audit of our consolidated financial statements.
The Board of Directors oversees the Company's consolidated financial statements
through its Audit Committee, which is composed of members of the Board of
Directors. The Committee meets whenever necessary to monitor and review, with
management and the independent accountants, the Company's consolidated financial
statements and accounting controls. The independent accountants have access to
the Audit Committee, without management present, to discuss internal accounting
controls, auditing, and financial reporting matters.
Robert R. Anderson Laurence G. Colegate, Jr.
Chairman of the Board Senior Vice President,
and Chief Executive Officer Finance and Administration
San Jose, California
June 18, 1997
4
<PAGE> 5
SILICON VALLEY RESEARCH, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1996 1997
(in thousands) -------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,238 $ 2,064
Accounts receivable, net of allowances of
$25 in 1996 and $150 in 1997 4,650 1,129
Prepaid expenses and other current assets 286 453
-------- --------
15,174 3,646
Fixed assets, net 537 879
Other assets, net 1,381 3,952
-------- --------
$ 17,092 $ 8,477
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 321 $ 515
Accrued expenses 1,329 1,443
Deferred maintenance revenue 1,537 1,018
Current portion of long-term debt 139 189
-------- --------
3,326 3,165
-------- --------
Long-term debt, less current portion 38 254
-------- --------
Commitments and contingencies (Note 6)
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
authorized; 1,000 shares
issued and outstanding; none -- --
Common stock, no par value;
authorized; 25,000 shares
issued and outstanding; 11,308 shares
in 1996 and 12,227 shares in 1997 31,171 32,375
Accumulated deficit (17,423) (27,308)
Cumulative translation adjustment (20) (9)
-------- --------
13,728 5,058
-------- --------
$ 17,092 $ 8,477
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
SILICON VALLEY RESEARCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1996 1997
(in thousands, except per share data) ------- -------- --------
<S> <C> <C> <C>
REVENUE
License fees and other $ 5,126 $ 7,750 $ 2,884
Maintenance fees 3,125 3,197 2,620
------- -------- --------
Total revenue 8,251 10,947 5,504
------- -------- --------
COST OF REVENUE
License fees and other 131 388 1,308
Maintenance fees 383 357 546
------- -------- --------
Total cost of revenue 514 745 1,854
------- -------- --------
GROSS PROFIT 7,737 10,202 3,650
------- -------- --------
OPERATING EXPENSES
Engineering, research and development 2,172 3,330 3,609
Selling and marketing 4,338 5,145 5,914
General and administrative 807 1,197 4,232
------- -------- --------
Total operating expenses 7,317 9,672 13,755
------- -------- --------
Operating income (loss) 420 530 (10,105)
------- -------- --------
OTHER INCOME (EXPENSE)
Interest income 11 102 276
Interest expense (89) (98) (55)
Other, net 50 40 1
------- -------- --------
Total other income (expense) (28) 44 222
------- -------- --------
Income (loss) before provision for income taxes 392 574 (9,883)
Provision for income taxes 181 5 2
------- -------- --------
NET INCOME (LOSS) $ 211 $ 569 $ (9,885)
======= ======== ========
Net income (loss) per share $ 0.03 $ 0.05 $ (0.86)
======= ======== ========
Shares used in per share calculations 8,353 10,423 11,479
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE> 7
SILICON VALLEY RESEARCH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Stock Accumulated Translation
(In thousands) Shares Amount Deficit Adjustments Total
- -------------- ------ ------ ------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCES, MARCH 31, 1994 7,533 $ 18,187 $ (18,203) $ 121 $ 105
Common stock issued under
stock option and stock
purchase plans 182 307 307
Sale of 3% of Japanese
subsidiary, net of minority
interest and issuance costs 272 272
Proceeds from issuance
of warrants for common stock 77 77
Warrants for common stock
issued in conjunction with debt
and severance agreements 31 31
Foreign currency translation
adjustment (21) (21)
Net income 211 211
------ -------- --------- ------ --------
BALANCES, MARCH 31, 1995 7,715 18,874 (17,992) 100 982
Common stock issued under
stock option and stock
purchase plans 259 528 528
Proceeds from issuance
of common stock, net of
issuance costs 3,172 11,583 11,583
Common stock issued on exercise
of warrants 162 186 186
Foreign currency translation
adjustment (120) (120)
Net income 569 569
------ -------- --------- ------ --------
BALANCES, MARCH 31, 1996 11,308 31,171 (17,423) (20) 13,728
Common stock issued under
stock option and stock
purchase plans 144 339 339
Common stock issued on
settlement of litigation(Note 6) 628 800 800
Common stock issued on
exercise of warrants 147 65 65
Foreign currency translation
adjustment 11 11
Net loss (9,885) (9,885)
------ -------- --------- ------ --------
BALANCES, MARCH 31, 1997 12,227 $ 32,375 $ (27,308) $ (9) $ 5,058
====== ======== ========= ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE> 8
SILICON VALLEY RESEARCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31, 1995 1996 1997
(in thousands) ------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 211 $ 569 $ (9,885)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization:
Fixed assets 110 394 517
Software development costs 66 315 593
Software licenses 83 152 427
Changes in assets and liabilities, net :
Accounts receivable (513) (3,145) 3,364
Prepaid expenses and other current assets 43 (326) (173)
Accounts payable (2) 202 201
Accrued expenses 193 (130) 141
Deferred maintenance revenue 585 182 (442)
Other, net 20 (38) (1,474)
------- -------- --------
Net cash provided by (used in) operating activities 796 (1,825) (6,731)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (288) (452) (653)
Capitalization of software development costs and
purchase of software licenses (544) (672) (1,936)
------- -------- --------
Net cash used in investing activities (832) (1,124) (2,589)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (1,393) (1,393) (164)
Proceeds from sale/leaseback -- 843 --
Proceeds from sale of minority interest in subsidiary 250 -- --
Proceeds from subordinated debt offering 775 -- --
Proceeds from issuance of common stock 307 12,111 1,139
Proceeds from issuance of warrants 77 186 65
Net proceeds from notes payable 777 175 --
------- -------- --------
Net cash provided by financing activities 793 11,922 1,040
------- -------- --------
Effect of exchange rate changes on cash (32) 17 106
------- -------- --------
Net increase (decrease) in cash and cash equivalents 725 8,990 (8,174)
Cash and cash equivalents at beginning of year 523 1,248 10,238
------- -------- --------
Cash and cash equivalents at end of year $ 1,248 $ 10,238 $ 2,064
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
8
<PAGE> 9
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company designs, develops, and markets a series of advanced computer-aided
design software products for use by electronic engineers in the design and
engineering of integrated circuits and operates in one industry segment.
The Company has incurred significant recent losses from operations and
additional financing may be required for the Company to meet its business plan
for fiscal 1998 and beyond. The Company has recently introduced updated versions
of its existing products and has plans to continue developing enhanced software
products. There can be no assurance that the Company will not incur additional
losses until its recently introduced and existing products generate significant
revenues. The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. Management plans to pursue additional
financing. If the Company is unable to obtain such financing, it will be
required to reduce discretionary spending in order to maintain its operations at
a reduced level. Management believes that it will be able to reduce
discretionary spending if required. The accompanying financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
REVENUE RECOGNITION
Revenues comprise license fees for the Company's software products (except in
Japan where revenues comprise sales of the Company's software products) and fees
for services complementing its products, including annual maintenance and
support, training and consulting.
Revenue from licenses is generally recognized when a customer purchase order has
been received, a license agreement has been executed, the software has been
shipped, remaining obligations are insignificant, and collection of the
resulting account receivable is probable. Provisions for insignificant vendor
obligations are recorded at the time products are shipped.
Software maintenance revenue, including maintenance revenue bundled with the
initial product license revenue, is deferred and recognized ratably over the
maintenance period. The maintenance revenue bundled with the initial product
license revenue is unbundled based on prices for which maintenance is sold
separately to customers. Training and consulting revenues are recognized as
these services are performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reported period. Actual
results could differ materially from those estimates.
INVESTMENT IN SUBSIDIARIES AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries in Japan and Taiwan after elimination of all significant
intercompany accounts and transactions. Minority interest in net assets and
income (loss) for the years then ended are not significant.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the statement of cash flows and balance sheet
include cash on hand and investments with original or remaining maturities at
the date of purchase of 90 days or less.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consists principally of accounts receivable. The
composition of the Company's accounts receivable with respect to the
semiconductor industry is characterized by generally short collection terms. The
Company's accounts receivable are derived from revenues earned from customers
located primarily in the United States and Far East. Generally, the Company
performs ongoing evaluation of its customers financial condition and does not
require collateral, allowances for potential credit losses are maintained and
such losses have been within management's expectations. At March 31, 1996 and
1997, four and five customers accounted for 59% and 63%, respectively, of the
Company's total receivables. At March 31, 1996 and 1997, two Japanese customers
accounted for 24% and 30%, respectively, of the Company's total receivables.
M@HB'Historical',B'$000,000',QR,VL,L$B,H)B,GM;
M@HB'Pro Forma(A)',B'$00,000',QR,VL,L$B,H)B,GM;
9
<PAGE> 10
ENGINEERING, RESEARCH AND DEVELOPMENT COSTS
Engineering, research and development costs consist principally of research and
development expenditures in connection with new products, improvements to
existing products, maintenance, and documentation, all of which are charged to
expense as incurred.
The Company capitalizes software development costs incurred after establishing
technological feasibility of the product (using the working model concept
method) until the product is available for general release.
Capitalized software development costs are amortized and included in cost of
license fees and other revenues using the greater of the amount computed using
the ratio that current gross revenues for a product bear to the total of current
and anticipated future gross revenues for that product or on a straight-line
basis over the expected economic life of the product, generally estimated to be
30 months.
FIXED ASSETS
Fixed assets are recorded at cost. Equipment acquired under capital lease
obligations is recorded at the lower of fair market value or the present value
of the future minimum lease payments at the inception of the lease. Depreciation
of fixed assets is computed on the straight-line basis over estimated useful
lives of three to five years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the remaining lease term. Capitalized
leases are generally amortized over the shorter of the life of the lease or the
life of the asset. Software licenses are generally amortized on the
straight-line basis over 30 months.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options (using the treasury stock method).
Common equivalent shares from stock options are excluded from the computation if
their effect is antidilutive.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries is the local
currency. The assets and liabilities, capital accounts, and revenue and expense
accounts of the Company's foreign subsidiaries have been translated using the
exchange rates at the balance sheet date, historical exchange rates, and the
weighted average exchange rates for the period, respectively.
The net effect of the translation of the accounts of the Company's subsidiaries
has been included in shareholders' equity as cumulative translation adjustments.
Gains and losses that arise from exchange rate changes on transactions
denominated in a currency other than the local currency are included in results
of operations as incurred.
FOREIGN EXCHANGE CONTRACTS
Sales orders received by foreign sales subsidiaries are primarily denominated in
currencies other than the U.S. dollar. Intercompany payments for Company
products are made in U.S. dollars. In order to reduce the risk of loss due to
changes in exchange rates 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. Gains and losses
resulting from these contracts, which to date have been insignificant, are
recorded in general and administrative expense as the Company does not have any
firm commitments to third parties related to the Company's intercompany foreign
currency transactions. Foreign exchange contracts had notional amounts
outstanding of $281 and $117 at March 31, 1996 and 1997, respectively. The
foreign exchange contracts, which generally have maturities that do not exceed
six months, are contracts for delayed delivery of securities at a purchase date
and at a specified price. Risks arise equal to the notional amount of the
contracts from the possible inability of counter parties to meet the terms of
these contracts and from movements in currency values. The other parties to
these contracts consist of a limited number of major financial institutions. The
Company does
10
<PAGE> 11
not expect any significant losses as a result of default by other parties. The
cash requirements under these foreign exchange contracts are not significant.
INCOME TAXES
Income taxes are computed using the asset and liability method. Under the asset
and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax basis of assets
and liabilities and are measured using the currently enacted tax rates and laws.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"). "Accounting for Stock-Based Compensation," which establishes a
fair value method of accounting for stock based compensation plans, and requires
additional disclosures for those companies who elect not to adopt the new method
of accounting. The Company has elected to continue to measure compensation costs
using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and to comply with the pro forma disclosure
requirements of SFAS 123 (See Note 8). As such, adoption of SFAS 123 has had no
impact on the Company's financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128, which is effective for the Company's fiscal year ending March 31, 1998,
redefines earning per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic earnings
per share, and fully diluted earnings per share is replaced by diluted earnings
per share. The adoption of SFAS 128 is not expected to have a material impact on
the Company since earnings per share reported under Accounting Principles Board
Opinion No. 15 approximates diluted earnings per share, which will be reported
under SFAS 128.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 129 ("SFAS 129"), "Disclosure of Information about
Capital Structure". SFAS 129 requires disclosure of certain information related
to the Company's capital structure and is not anticipated to have a material
impact on the Company's financial position or results of operations.
NOTE 2 FIXED ASSETS
<TABLE>
<CAPTION>
March 31,
Fixed assets comprise: 1996 1997
---------- ----------
<S> <C> <C>
Computer equipment $ 1,805 $ 2,281
Office equipment 324 607
---------- ----------
2,129 2,888
Less accumulated depreciation and amortization (1,592) (2,009)
---------- ----------
$ 537 $ 879
========== ==========
<CAPTION>
Fixed assets acquired under capital leases included above are as follows:
<S> <C> <C>
Computer equipment $ 506 $ 489
Less accumulated amortization (350) (283)
---------- ----------
$ 156 $ 206
========== ==========
</TABLE>
11
<PAGE> 12
NOTE 3 OTHER ASSETS
<TABLE>
<CAPTION>
March 31,
Other assets comprise: 1996 1997
------- -------
<S> <C> <C>
Software development costs $ 1,133 $ 2,163
Software licenses 1,211 2,388
------- -------
2,344 4,551
Less accumulated amortization (1,330) (2,425)
------- -------
1,014 2,126
Loan to officer 100 --
Prepaid royalties -- 1,592
Other 267 234
------- -------
$ 1,381 $ 3,952
======= =======
</TABLE>
Software development costs capitalized during 1995, 1996 and 1997 were $487,
$646, and $1,045, respectively. Other consists primarily of deposits on
facilities and equipment leases.
NOTE 4 ACCRUED EXPENSES
<TABLE>
<CAPTION>
March 31,
Accrued expenses comprise: 1996 1997
------ ------
<S> <C> <C>
Accrued payroll and
related costs $ 650 $ 434
Taxes payable 324 108
Other 355 901
------ ------
$1,329 $1,443
====== ======
</TABLE>
Other consists of accruals related to expenses incurred in the normal course of
business, such as professional fees, utilities, and travel and sales expenses.
NOTE 5 LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31,
Long-term debt comprise: 1996 1997
----- -----
<S> <C> <C>
Capitalized lease obligations $ 177 $ 200
Note payable -- 243
----- -----
177 443
Less current portion (139) (189)
----- -----
$ 38 $ 254
===== =====
</TABLE>
The Company has a $300 equipment line of credit with its bank. The line bears
interest at prime plus two percent, 10.5% at March 31, 1997. The line is
available for advances to purchase equipment and software through September 30,
1997. The line of credit 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. Amounts outstanding at March 31, 1997 were $243.
The aggregate principal payments of long-term debt and minimum lease payments
under capitalized lease obligations for the next five fiscal years ending March
31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 214
1999 162
2000 91
2001 24
2002 12
-----
503
Less amounts representing interest (60)
-----
$ 443
=====
</TABLE>
12
<PAGE> 13
Subsequent to March 31, 1997, the company received a commitment for an
additional line of credit from its bank. The revolving line of credit will
provide for borrowings up to $2,000 with available borrowings limited to certain
percentages of eligible accounts receivable. Interest at prime plus one percent
(9.5% at March 31, 1997) will be due monthly with principal due one year from
the completion of loan documents.
NOTE 6 COMMITMENTS AND CONTINGENCIES
The Company leases its corporate headquarters in the United States through June
30, 2001, and sales offices in the United States, Taiwan and Japan under
operating leases expiring at various dates, including renewal options, through
2001. In addition, the Company leases certain computer and office equipment
under operating leases expiring at various dates through 1999. In November,
1995, the Company signed a sale and leaseback agreement relating to computer
equipment. The Company received cash of $843 under this transaction and in
return the Company is obligated to make lease payments for 42 months.
Non-cancelable rental payments over the term of leases exceeding one year are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 842
1999 635
2000 540
2001 135
2002 4
------
$2,156
======
</TABLE>
The Company is generally responsible for its pro rata share of taxes,
maintenance and insurance on the facilities. Rental expense aggregated $999,
$1,041 and $935 in 1995, 1996 and 1997, respectively.
In June 1996, the Company entered into an agreement whereby the Company was
granted the exclusive marketing rights to Lucent Technologies' (Lucent) CLOVER
line of deep submicron verification products worldwide, with the exception of
Japan and Taiwan, where the Company will co-market with Lucent's existing
distributors. Pursuant to the four year agreement, the Company has made prepaid
royalty payments of $1,750. The agreement also provided for future prepaid
royalty payments of $1,250 in fiscal 1998 and $1,000 in fiscal 1999. In July and
August 1997, both parties sent notices of termination, alleging breach of the
agreement by the other party. The agreement provides that any dispute,
controversy or claim arising out of the agreement shall be resolved through good
faith consultation for a specified period. That period has passed. The agreement
provides that if the dispute is not resolved by consultation, it shall be
referred to and finally resolved by arbitration. Request for Arbitration has
been made and arbitrators currently are in the process of being appointed.
Lucent's request for arbitration includes a "Prayer for Relief" for $750 of
royalty prepayments, consequential, special and incidental damages in an
unspecified sum and punitive damages in an unspecified sum. The dispute is in
its early stages and the ultimate outcome cannot presently be determined.
Accordingly, no provision for any liability that may result upon adjudication
has been made in the Company's financial statements. The Company believes that
the Request for Arbitration is without merit and intends to vigorously dispute
the claim.
The Company is subject to various types of litigation during its normal course
of business. In January, 1997, Gambit Automated Design, Inc. ("Gambit"), a
competitor of the Company, filed a complaint alleging misappropriation of trade
secrets, breach of contract, inducing breach of contract, breach of fiduciary
duty, unfair competition and unjust enrichment against the Company and a former
employee of Gambit who is a current employee of the Company. Gambit seeks
injunctive relief, compensation and punitive damages, restitution and attorneys
fees and costs. The parties are currently engaged in discovery. The Company
believes the lawsuit is without merit and intends to defend itself vigorously.
In February 1997, the Company and Mentor Graphics Corporation ("Mentor") settled
a legal action brought by Mentor against the Company in 1994. The Settlement
Agreement required the Company to issue 627 shares of Common Stock to Mentor and
to exchange certain technology. The Company agreed to register such shares under
the Securities Act. In addition, as of August 13, 1997, the Company may be
required to issue up to an aggregate of 1,255 additional shares of Common Stock
to Mentor should the average market price of the Common Stock trade below a
certain minimum price. Mentor has the right to require the Company to register
any such additional shares under the Securities Act.
NOTE 7 SAVINGS AND INVESTMENT PLAN
The Company has the Silicon Valley Research, Inc. Savings and Investment Plan
and Trust ("the Plan"), qualified under Sections 401(k) and 401(a) of the
Internal Revenue Code. The Plan provides for tax-deferred automatic salary
deductions and alternative investment options. Employees are eligible to
participate after completion of two months of employment. Participants may apply
for loans from their accounts.
The Plan permits Company contributions determined annually by the Board of
Directors. Contributions authorized, if any, will not exceed amounts allowed by
Internal Revenue Code Section 404. Allocation of employer contributions to
participants accounts is determined by the Board of Directors at the time of
contribution. The Company contributed $10, $22 and $25 to the Plan during fiscal
1995, 1996 and 1997, respectively. Administrative costs paid by the Company were
insignificant during fiscal 1995, 1996 and 1997.
27
<PAGE> 14
NOTE 8 CAPITAL STOCK
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.
STOCK SPLIT
On September 6, 1995, the shareholders of the Company approved a one for two
reverse stock split of the Company's common stock, which became effective on
January 25, 1996. All references to number of shares and to per share
information in the consolidated financial statements have been adjusted to
reflect the reverse stock split on a retroactive basis.
PRIVATE PLACEMENT
On June 6, 1995, the Company entered into a Stock Purchase Agreement with a
limited group of existing and new accredited investors. One of the investors is
a 5% shareholder. Under the terms of the Agreement, the Company sold 1,172 newly
issued, unregistered shares of the Company's common stock in exchange for $2,860
in cash (cost of issuance amounted to approximately $25). No officers or
directors participated in the offering. Anytime after August 31, 1995, holders
may request the Company to effect a registration and to date no qualifying
requests have been made.
On April 16, 1997, the Company completed a private placement of units comprising
4,517 shares of Common Stock and warrants to purchase an additional 4,517 shares
of Common Stock at $1.31 per share, with proceeds to the Company of
approximately $4,000. The shares of Common Stock are unregistered. The Company
will file a registration statement with the Securities Exchange Commission on or
before August 14, 1997 as part of the private placement agreement. One director,
one officer/director and two officers participated in the private placement.
PUBLIC OFFERING
On February 13, 1996, the Company closed on a public offering selling 2,000
shares of common stock for $9,400 (cost of issuance amounted to approximately
$652). Two shareholders also sold 2,408 shares of common stock in this offering.
STOCK OPTIONS
At March 31, 1997, the Company has reserved 2,453 shares of common stock for
issuance under its employee stock option plan and Directors Stock Option Plan.
Options are granted under the employee stock option plan by an Option Committee
designated by the Board of Directors at an exercise price equal to the fair
market value as of the date of the grant and generally vest over three to four
years after one year from the date of the grant.
Under the Directors' Stock Option Plan, options are granted automatically on the
effective date of the Plan to existing Board of Director members or upon initial
election or appointment of a member of the Board of Directors for up to 20
shares of the Company's common stock, and thereafter annually for up to 3 shares
of the Company's common stock at an exercise price equal to the fair market
value, as determined by the closing trading price on the grant date. The options
generally vest in equal monthly installments over three to four years after one
year from the date of the grant.
On November 21, 1996, the Compensation Committee of the Board of Directors
approved an offer to all employees permitting an election to amend options with
exercise prices in excess of $2.50 to change the exercise price to the fair
market value of the Company's common stock on that date, which was $2.50, with
continuation of the existing vesting schedule. Options for the purchase of a
total of 1,182 shares were amended.
14
<PAGE> 15
On February 11, 1997 the Company's Board of Directors approved a non-qualified
option grant to its Audit Committee. The Options totaled 25 shares of the
Company's common stock with an exercise price of $1.44. The Options were fully
vested and exercisable on the date of grant.
At March 31, 1997, options to purchase 302 shares of common stock were vested,
and 792 shares of common stock were available for future grant.
The following table summarizes stock option activity under the Company's Plans:
<TABLE>
<CAPTION>
For the year ended For the year ended
March 31, 1996 March 31, 1997
-------------- ------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 970 $ 2.13 1,251 $ 3.81
Granted 879 4.59 1,504 2.86
Exercised (196) 1.78 (76) 2.09
Forfeited (402) 2.66 (993) 3.91
------- ------
Outstanding at end of year 1,251 3.81 1,686 1.99
======= ======
Options exercisable at year-end 170 302
Weighted-average fair value of $ 2.65 $ 1.12
options granted during the year
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Shares Average Weighted- Shares Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 3/31/97 Contractual Life Exercise Price at 3/31/97 Exercise Price
<S> <C> <C> <C> <C> <C>
$ 0.88 - $ 1.19 86 6.16 $ 1.00 69 $ 1.00
$ 1.31 - $ 1.31 779 9.29 1.31 0 0.00
$ 1.44 - $ 2.38 111 7.55 1.82 80 1.71
$ 2.50 - $ 2.50 588 8.25 2.50 108 2.50
$ 3.19 - $ 8.75 122 7.58 4.68 45 4.37
----- ------ ------ --- ------
1,686 8.53 $ 1.99 302 $ 2.22
===== ====== ====== === ======
</TABLE>
The Company has adopted the disclosure-only provision of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation". Accordingly, no compensation expense has been recognized for its
stock option plan or its stock purchase plan. Had compensation costs for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans, consistent with the method of
SFAS 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C> <C>
Net income(loss) As reported $ 569 $ (9,885)
Pro forma $ (72) $ (11,195)
Net income(loss) per share As reported $ 0.05 $ (0.86)
Pro forma $ (0.01) $ (0.98)
</TABLE>
15
<PAGE> 16
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1997 and 1996, respectively; expected volatility of 86% for all years;
weighted-average risk-free interest rates of 6.38% and 5.79%, and
weighted-average expected lives of 3.52 years.
WARRANTS
The following warrants to purchase shares of the Company's common stock are
outstanding and fully vested at March 31, 1997:
<TABLE>
<CAPTION>
Expiring During
the Fiscal Number of Common
Year Ending Exercise Price Shares Under Warrants
- ----------- -------------- ---------------------
<S> <C> <C>
3/31/98 $3.31 50
3/31/99 $0.88 - $1.97 135
3/31/00 $1.25 - $1.50 368
---
553
===
</TABLE>
During the fiscal year ended March 31, 1997, warrants were exercised for 10
shares of the Company's common stock at a price of $0.88 per share for cash of
$9, 50 shares of the Company's common stock at a price of $1.13 per share for
cash of $56, 75 shares of the Company's common stock at a price of $1.50 per
share in a net exercise, cashless transaction, 18 shares of the Company's common
stock at a price of $1.13 per share in a net exercise, cashless transaction and
38 shares of the Company's common stock at a price of $0.50 per share in a net
exercise, cashless transaction.
EMPLOYEE STOCK PURCHASE PLAN
The 1993 Employee Stock Purchase Plan, under which 650 shares of common stock
have been reserved for issuance, allows substantially all employees to subscribe
to shares of common stock during participation periods set by the Board of
Directors at a purchase price which is the lower of 85% of the fair market value
at the beginning or the end of each period. There were 37, 63 and 68 shares of
common stock issued under the plan in 1995, 1996 and 1997, respectively, leaving
a balance of 425 shares available for issuance at March 31, 1997.
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following assumptions for 1996 and 1997,
respectively: expected volatility of 86% for all years; weighted-average
risk-free interest rates of 5.79% and 6.38%; and weighted-average expected lives
of 2 years. The weighted-average fair value of those purchase rights granted in
1996 and 1997 was $1.15 and $1.80, respectively.
NOTE 9 INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended March 31, 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CURRENT:
Federal $ -- $3 $--
State 3 2 --
Foreign (net of benefit of net operating loss
carryforward of $225 in 1995) 178 - 2
---- -- --
Total provision $181 $5 $2
==== == ==
</TABLE>
16
<PAGE> 17
Deferred income taxes result from temporary differences in the recognition of
certain expenses for financial and income tax reporting. The net deferred tax
assets at March 31 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Allowances and accruals not currently deductible $ 246 $ (211)
Net operating losses 3,809 7,271
------- -------
Total deferred tax assets 4,055 7,060
Less: valuation allowance (4,055) (7,060)
------- -------
Net deferred tax asset $ -- $ --
======= =======
</TABLE>
The Company has provided for a valuation allowance when it is more likely than
not that some portion or all of the net deferred asset will not be realized.
Based upon a number of factors, including the lack of a history of profits,
management believes that there is sufficient uncertainty regarding the
realization of deferred assets such that a full valuation allowance has been
provided.
At March 31, 1997, the Company had available federal and state tax net operating
loss carryforwards of $18,000 and $3,800, respectively. The federal and state
tax net operating loss carryforwards expire from 2002 to 2011 and 1998 to 2002,
respectively. For federal purposes, the Company has federal and state research
and development credit carryforwards of $400 and $100, respectively, expiring
from 1997 through 2011. These credits may be available to offset future taxes.
A reconciliation between the provision for income taxes computed at the
statutory rate and the effective rate reflected in the Consolidated Statement of
Operations is as follows:
<TABLE>
<CAPTION>
Years ended March 31, 1995 1996 1997
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Provision (benefit) at U.S. statutory rate $ 91 $ 195 $(3,361)
Tax losses not currently benefited -- -- 3,361
Tax effect resulting from foreign activity 178 -- 2
State taxes, net of federal tax benefit 3 2 --
Utilization of net operating loss carryforward (91) (192) --
----- ----- -------
Tax provision $ 181 $ 5 2
===== ===== =======
</TABLE>
NOTE 10 SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended March 31, 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 89 $ 98 $ 27
Income taxes $242 $ 10 $ 10
Noncash investing and financing activities:
Warrants for Common Stock $ 31 $ -- $ --
Computer equipment and software licenses
purchased by capital lease obligations
and notes payable $ 34 $259 $429
Exchange of software to acquire computer equipment $739 $294 $ --
</TABLE>
In March, 1995, the Company exchanged software with a customer in return for
computer equipment. The recorded cost of the computer equipment of $739
represented approximately the fair market value of that asset. The fair value of
the software exchanged for the computer equipment was approximately $789, which
resulted in cash receipts of approximately $50 in conjunction with the transfer.
In June, 1995, the Company exchanged software held for sale with a customer in
return for source code and recorded purchased software of $294 and license and
maintenance fee revenues of $262 and $32, respectively. The recorded cost of the
software of $294 represents approximately the fair market value of the asset.
17
<PAGE> 18
NOTE 11 BUSINESS SEGMENTS
The Company's products are principally distributed and serviced through its own
marketing and service organization. Operations are conducted in the United
States, Europe, Japan and Taiwan. The following table summarizes the United
States, European, Japanese and Taiwanese operations of the Company:
<TABLE>
<CAPTION>
Adjustments
United and
States Europe Japan Taiwan Eliminations Consolidated
------ ------ ----- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1995
Sales to unaffiliated customers $ 5,030 $ 75 $ 3,146 $ -- $ -- $ 8,251
Transfer between geographic
regions 1,394 -- -- $ -- (1,394) --
-------- ----- ------- ----- ------- --------
Total sales $ 6,424 $ 75 $ 3,146 $ -- $(1,394) $ 8,251
======== ===== ======= ===== ======= ========
Operating income (loss) $ 279 $ (38) $ 179 $ -- $ -- $ 420
======== ===== ======= ===== ======= ========
Identifiable assets $ 2,875 $ -- $ 2,347 $ -- $ -- $ 5,222
======== ===== ======= ===== ======= ========
YEAR ENDED MARCH 31, 1996
Sales to unaffiliated customers $ 7,116 $ 253 $ 3,578 $ -- $ -- $ 10,947
Transfer between geographic
regions 1,686 -- -- -- (1,686) --
-------- ----- ------- ----- ------- --------
Total sales $ 8,802 $ 253 $ 3,578 $ -- $(1,686) $ 10,947
======== ===== ======= ===== ======= ========
Operating income (loss) $ 74 $ 248 $ 208 $ -- $ -- $ 530
======== ===== ======= ===== ======= ========
Identifiable assets $ 15,354 $ -- $ 1,738 $ -- $ -- $ 17,092
======== ===== ======= ===== ======= ========
YEAR ENDED MARCH 31, 1997
Sales to unaffiliated customers $ 4,406 $ 77 $ 1,021 $ -- $ -- $ 5,504
Transfer between geographic
regions 410 -- -- -- (410) --
-------- ----- ------- ----- ------- --------
Total sales $ 4,816 $ 77 $ 1,021 $ -- $ (410) $ 5,504
======== ===== ======= ===== ======= ========
Operating income (loss) $ (8,195) $ 77 $(1,135) $(852) $ -- $(10,105)
======== ===== ======= ===== ======= ========
Identifiable assets $ 7,087 $ -- $ 1,262 $ 128 $ -- $ 8,477
======== ===== ======= ===== ======= ========
</TABLE>
Included in total United States revenue are export sales of $1,070, $909 and
$292 for 1995, 1996 and 1997, respectively, principally to the Far East. Total
consolidated revenue outside of the United States was $4,291, $4,740 and $1,390
in 1995, 1996 and 1997, respectively.
Revenue from three products accounted for 52%, 20% and 23% of the Company's
consolidated revenue in fiscal 1997. Revenue from one product accounted for 69%
of the Company's consolidated revenue in fiscal 1996. Revenue from a shareholder
was $43 in fiscal 1995. A small number of customers account for a significant
percentage of the Company's total revenue as follows:
<TABLE>
<CAPTION>
Customer 1995 1996 1997
-------- ---- ---- ----
<S> <C> <C> <C>
A 12% 16% 14%
B * * 19%
C * 11% 13%
D 10% * *
E 10% 11% *
</TABLE>
* less than 10% of consolidated revenue
18
<PAGE> 19
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Provision Write-off of
Balance at doubtful uncollectible Balance at
beginning of Accounts Accounts end of
Year Receivable Receivable Year
---- ---------- ---------- ----
<S> <C> <C> <C> <C>
Accounts receivable - allowances for
doubtful accounts
Year ended March 31, 1995 $ 50 $ -- $ -- $ 50
Year ended March 31, 1996 $ 50 $ 200 $ 225 $ 25
Year ended March 31, 1997 $ 25 $ 1,235 $ 1,110 $ 150
</TABLE>
19
