<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----
Exchange Act of 1934
For the quarterly period ended June 30, 1999 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 small business issuer 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
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(Address of principal executive offices) (Zip Code)
(408) 361-0333
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Issuer's telephone number
- --------------------------------------------------------------------------------
(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 Exchange Act 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___
---
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date.
Common Shares Outstanding at June 30, 1999: 26,218,220
Transitional Small Business Disclosure Statement Format (Check One): YES __ NO X
--
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SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Part I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and June 30, 1999 (unaudited) 3
Consolidated Statements of Operations -
Three Months Ended June 30, 1998 and 1999 (unaudited) 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended June 30, 1998 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Part II. OTHER INFORMATION 17-18
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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 19
Exhibit 27. Financial Data Schedule 20
</TABLE>
Page 2 of 20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
Assets March 31, 1999 June 30, 1999
- ------ -------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 247 $ 418
Accounts receivable, net of allowances of
$150 in each period 444 206
Prepaid expenses and other current assets 109 95
-------- --------
800 719
Fixed assets, net 290 254
Other assets, net 969 820
-------- --------
$ 2,059 $ 1,793
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Short-term borrowing $ 225 $ -
Current portion of long-term debt 137 -
Notes payable 50 50
Accounts payable 450 345
Accrued expenses 478 492
Deferred revenue 235 146
-------- --------
1,575 1,033
Long-term debt, less current portion - 712
-------- --------
Deferred tax liability 24 24
-------- --------
Commitments and Contingencies (Note 8)
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:
26,214 shares at March 31, 1999
and 26,218 shares at June 30, 1999 43,930 44,118
Accumulated deficit (43,587) (44,225)
Cumulative translation adjustment 117 131
-------- --------
460 24
-------- --------
$ 2,059 $ 1,793
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3 of 20
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SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1999
------- -------
<S> <C> <C>
Revenue:
License fees and other $ 225 $ 58
Maintenance and services 368 251
------- -------
Total revenue 593 309
------- -------
Cost of revenue:
License fees and other 70 80
Maintenance and services 229 131
------- -------
Total cost of revenue 299 211
------- -------
Gross margin 294 98
------- -------
Operating expenses:
Engineering, research and development 636 451
Selling and marketing 668 207
General and administrative 412 185
------- -------
Total operating expenses 1,716 843
------- -------
Operating loss (1,422) (745)
------- -------
Other income (expense):
Interest income 13 -
Interest expense (15) -
Other, net (139) 107
------- -------
Total other income (141) 107
------- -------
Loss before provision for
income taxes (1,563) (638)
Provision for income taxes - -
------- -------
Net loss $(1,563) $ (638)
======= =======
Net loss per basic and diluted share $ (0.06) $ (0.02)
======= =======
Weighted-average common shares
outstanding (basic and diluted) 24,371 26,217
====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 20
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SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1999
-------- ------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,563) $(638)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization:
Fixed assets 29 44
Software licenses and development costs 204 127
Gain on cancellation of debt - (96)
Changes in assets and liabilities, net:
Accounts receivable (74) 238
Prepaid expenses and other current assets 106 14
Accounts payable (107) (105)
Accrued expenses (45) 15
Deferred maintenance revenue (47) (89)
Other, net 21 21
------- -----
Net cash used in operating activities (1,476) (469)
------- -----
Cash Flows from Investing Activities:
Acquisition of fixed assets (13) (7)
Capitalization of software development costs and
purchase of software licenses (162) -
------- -----
Net cash used in investing activities (175) (7)
------- -----
Cash Flows from Financing Activities:
Proceeds from subordinated debt financing - 712
Principal payments of long-term debt (52) (135)
Principal payments on notes payable (50) -
Proceeds from issuance of common stock and warrants 2,088 56
------- -----
Net cash provided by financing activities 1,986 633
------- -----
Effect of exchange rate changes on cash 122 14
------- -----
Net increase in cash and cash
equivalents 457 171
Cash and cash equivalents at beginning
of period 1,926 247
------- -----
Cash and cash equivalents at end
of period $ 2,383 $ 418
======= =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5 of 20
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SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999- 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 Moss Adams LLP on the Company's fiscal 1999 consolidated
financial statements dated June 10, 1999 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 potential additional financing will be available to meet the
Company's business plans in fiscal 2000 and beyond.
Note 2: Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" (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
June 30,
<S> <C> <C>
1998 1999
------- -------
Net loss $(1,563) $ (638)
======= =======
Weighted-average common shares
outstanding (basic) 24,371 26,217
Weighted-average common stock equivalents:
Stock options -- --
Warrants -- --
------- -------
Weighted-average common shares
outstanding (diluted) 24,371 26,217
======= =======
</TABLE>
Page of 6 of 20
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SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1999- 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. Other comprehensive earnings in these financial
statements include foreign currency translation adjustments. Annual financial
statements for prior periods have been reclassified, as required. The Company's
total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1999
------- --------
<S> <C> <C>
Net loss $(1,563) $ (638)
Other comprehensive gain 122 14
------- --------
Total comprehensive loss $(1,441) $ (624)
======= ========
Note 4: Statement of Cash Flows Information
Three Months Ended
June 30,
1998 1999
------- -------
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 15 $ -
Income Taxes - -
Non-cash investing and financing activities:
Warrants for common stock issued for
cancellation of indebtedness $ - $ 131
Note 5: Balance Sheet Components
March 31, June 30,
1999 1999
------- --------
<S> <C> <C>
Other Assets:
Software development costs $ 799 $ 799
Software licenses 979 979
------- --------
1,778 1,778
Less accumulated amortization (1,087) (1,214)
------- --------
691 564
Prepaid royalties, net 25 25
Goodwill 195 183
Other 58 48
------- --------
$ 969 $ 820
======= ========
Accrued Expenses:
Payroll and related costs $ 228 $ 252
Taxes payable 106 106
Accrued professional fees 108 99
Other 36 35
------- --------
$ 478 $ 492
======= ========
</TABLE>
Page 7 of 20
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SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1999 - Unaudited
(In thousands)
Note 6: Bank Line of Credit
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. $225
of this amount remained outstanding as of May 11, 1999. In addition, $137
outstanding on an equipment line with the same lender also became due and
payable. The amounts outstanding under its line of credit and equipment line of
credit are classified as current in the March 31, 1999 balance sheets. On May
11, 1999, the Company entered into a Settlement Agreement with the lender
whereby SVR agreed to issue a cash payment for a portion of the debt and to
issue warrants to purchase common stock ("Warrants") for cancellation of the
remainder. The Settlement Agreement required that SVR make the cash payment and
deliver the Warrants to the lender by June 8, 1999, which the Company did.
Note 7: Subordinated Debt Financing
In June 1999, the Company began a subordinated debt/warrant financing. The
financing included approximately $1,000 of three-year notes and the sale of
approximately 8,000 warrants to purchase common stock ("Warrants") at $0.01 per
Warrant. The debt bears simple interest of 10% and the Warrants have a five-year
term with an exercise price per share of $0.125. This financing transaction is
comprised of two closings. The first closing took place on June 7, 1999. The
Company received $768 cash proceeds from this closing. This included $712 of
three-year notes and the sale of approximately 5,700 Warrants at $0.01 per
Warrant. The second closing was to have taken place on July 15, 1999. However,
the closing has been postponed until on or before September 6, 1999. The funds
and associated notes and Warrants associated with the second closing are
currently in escrow, pending negotiation of a workout with the Credit Managers'
Association to resolve accounts payable issues that is satisfactory to the
majority of the investors. Assuming an agreement is reached that is satisfactory
to investors, the Company expects to receive approximately $311 cash proceeds
from the second closing. The Company has used part of the proceeds from the
financings to complete the Settlement Agreement with its lender and to pay other
accounts payable and intends to use the balance of the proceeds to help fund
its operations. Two Company director/officers, affiliates of a Company
director and two Company 10% shareholders participated in the financing. The
Company intends to register the shares of common stock underlying the Warrants
issued.
Note 8: Commitments and Contingencies
As with other companies in the Company's industry, the Company is subject
to the risk of adverse claims and litigation on a variety of matters, including
infringement of intellectual property, intentional and/or negligent
misrepresentation of material facts and breach of fiduciary duties. Due to the
Company's cash shortage and resulting inability to pay its vendors, several of
the Company's vendors have initiated collection actions against the Company. As
described in Management's Discussion and Analysis-Liquidity and Capital
Resources, the Company in early June 1999 closed on approximately $710 of its
planned $1,000 subordinated debt financing. Although no assurance can be given,
the Company now believes that it has the cash resources so as to be able to
settle these lawsuits without a material adverse affect on its operating losses.
Page 8 of 20
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SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1999- Unaudited
(In thousands)
Note 9: Recent Accounting Pronouncements
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" and in October 1998 issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". Management does not expect
these pronouncements to have a material effect on the Company's financial
statements.
Note 10: 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 20
<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 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 first quarter of fiscal year 2000, which ended June 30,
1999, was $309, a decrease from $593 in the first quarter a year ago. The 48%
decrease in revenues resulted primarily from lower license and maintenance
revenue during the quarter ended June 30, 1999. The decrease was primarily due
to a substantial portion of the Company's resources being used for non-revenue
generating activities. Technical personnel were used to prepare for the
Company's annual trade show. Management and administrative personnel were
concentrating on new financing and investment, as well as working out a payment
solution with creditors. International sales, primarily Japan and the Far East
accounted for 2% of total revenue in the first quarter of fiscal 2000 compared
to 39% in the first 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 June 30, 1999, operating results may be
materially and adversely affected. In the current quarter, the Company's gross
margin for licenses was negative. In addition, the Company's quarterly and
annual results may fluctuate as a result of many factors, including the size and
timing of software license fees, timing of co-development projects with
customers, timing of operating expenditures, increased competition, new product
announcements and releases by the Company and its competitors, gain or loss of
significant customers or distributors, expense levels, renewal of maintenance
contracts, pricing changes by the Company or its competitors, personnel changes,
foreign currency exchange rates, and economic conditions generally and in the
electronics industry specifically.
COST OF REVENUE
Cost of license fees and other for the first quarter of fiscal year 2000
was $80, compared to $70 in the first quarter of fiscal 1999. Cost of sales of
license fees and other is primarily the amortization of software development
costs.
Cost of maintenance and services for the first quarter of fiscal year 2000
was $131 compared to $229 in the first quarter of fiscal 1999. Cost of
maintenance and services is primarily the cost of providing design services,
technical support and technical documentation. Cost of maintenance and services
includes the design services costs of Quality I.C. Corporation, which was
acquired by the Company on March 31, 1998.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES
Engineering, research and development expenses for the first quarter of
fiscal year 2000 were $451 compared to $636 in the first quarter a year ago.
Comparing the first quarter of fiscal 2000 and the first quarter of fiscal 1999,
engineering, research and development expenses were 146% and 107% of total
revenue, respectively. The decrease in engineering, research and development
expenses is due to cost-cutting measures instituted by management while
maintaining an emphasis on new product research and development.
Page 10 of 20
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SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the first quarter of fiscal year 2000
decreased to $207 from $668 in the first quarter a year ago. In the first
quarter of fiscal 2000 and the first quarter of fiscal 1999, selling and
marketing expenses were 67% and 113% of total revenue, respectively. The
decrease is due to the effects of the Company's cost-cutting measures including
a reduction in salaries, commissions and occupancy costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased to $185 for the first quarter
of fiscal year 2000 from $412 in the first quarter a year ago. In the first
quarter of fiscal 2000 and the first quarter of fiscal 1999, general and
administrative expenses were 60% and 70% of total revenue, respectively. The
decrease is due to the effects of the Company's cost-cutting measures including
a reduction in salaries and professional fees.
OTHER INCOME (EXPENSE)
Other income for the first quarter of fiscal year 2000 includes $96 gain
recognized on the cancellation of indebtedness. See Note 6 to the Consolidated
Financial Statements
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
sales of equity securities and to a lesser extent, cash generated from
operations. To date in fiscal 2000, the Company has received approximately $768
cash proceeds from a subordinated debt/warrant financing. During the three
months ended June 30, 1999, cash and cash equivalents increased $171 from $247
to $418. This increase resulted from cash provided by the financing activities
of $633 less cash used by operations of $469 and $7 of cash used for investing
activities. During the same period, accounts receivable decreased from $444 to
$206 resulting from a decrease in revenue for the quarter.
The Company incurred a loss in the first quarter of fiscal 2000 and expects
operating losses to continue, at least in the near term, until its revenues are
adequate to generate margin to cover expenses. At June 30, 1999, the Company
had an accumulated deficit of $44,225. The achievement of profitability is
primarily dependent upon the continued development and commercial acceptance of
the Company's products, the successful management of the business and
management's ability to strategically focus the Company. There can be no
assurance as to whether or when achievement of profitable operations will occur.
In addition, the Company is experiencing negative cash flow from operations and
may continue to experience negative cash flow through fiscal 2000 and
potentially thereafter.
The Company's primary unused sources of funds at June 30, 1999 consisted
of cash and cash equivalents of $418. 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. $225 of this amount remained outstanding as
of May 11, 1999. In addition, $137 outstanding on an equipment line with the
same lender also became due and payable. On May 11, 1999, the Company entered
into a Settlement Agreement with the lender whereby SVR agreed to issue a cash
payment for a portion of the debt and to issue warrants to purchase common
stock ("Warrants") for cancellation of the remainder. The Settlement Agreement
required that SVR make the cash payment and deliver the Warrants to the lender
by June 8, 1999, which the Company did.
In June 1999, the Company began a subordinated debt/warrant financing. The
financing included approximately $1,000 of three-year notes and the sale of
approximately 8,000 warrants to purchase common stock ("Warrants") at $0.01 per
Warrant. The debt bears simple interest of 10% and the Warrants have a five-
year term with an exercise price per share of $0.125. This financing
transaction is comprised of two closings. The first closing took place on June
7, 1999. The Company received $768 cash proceeds from this closing. This
included $712 of three-year notes and the sale of approximately 5,700 Warrants
at $0.01 per Warrant.
Page 11 of 20
<PAGE>
The second closing was to have taken place on July 15, 1999. However, the
closing has been postponed until on or before September 6, 1999. The funds and
associated notes and Warrants associated with the second closing are currently
in escrow, pending negotiation of a workout with the Credit Managers'
Association to resolve accounts payable issues that is satisfactory to the
majority of the investors. Assuming an agreement is reached that is satisfactory
to investors, the Company expects to receive approximately $311 cash proceeds
from the second closing. The Company has used part of the proceeds from the
financings to complete the Settlement Agreement with its lender and to pay other
accounts payable and intends to use the balance of the proceeds to help fund its
operations. The Company expects to require additional financing prior to year
end. Two Company director/officers, affiliates of a Company director and two
Company 10% shareholders participated in the financing. The Company intends to
register the shares of common stock underlying the Warrants issued.
As of June 30, 1999, the Company's current assets were less than its
current liabilities; however, its cash and cash equivalents were roughly equal
to the cash required to fund its current liabilities as a substantial amount
of the accrued liabilities and deferred revenue do not require cash to fund
them at the present time. Assuming an agreement is reached with the CMA, the
Company would receive approximately $311 in cash and a reduction and/or
postponement in a portion of its current payables. The Company's operations
have required substantial cash to fund them in the past; for example $469
during the fiscal 2000 first quarter; however, management has implemented cost
reducing measures and expects revenues to increase during the remainder of
fiscal 2000. Assuming the CMA agreement is reached and management is
successful with its cost reduction and revenue achievement programs, the
Company expects not to require additional financing in order to fund its
operations. If the Company is not successful in these regards, then the
Company would require additional financing. However, the Company's Common
Stock was delisted from trading on the Nasdaq National Market in November 1998
and now trades in the over-the-counter 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 "Delisting
From Nasdaq; 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 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. The Company is currently
negotiating with its creditors for the terms and timing for repayment of
amounts due such creditors.
OTHER FACTORS AFFECTING FUTURE RESULTS
Recent and Expected Losses; Accumulated Deficit. The Company incurred a net
loss of $638 for the quarter ended June 30, 1999 and had an accumulated deficit
of $44,225 as of June 30, 1999. The Company may incur losses for most of its
next fiscal year. There can be no assurance that the Company will not incur
significant 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.
Need for Future Financing. As described above, under Management Discussion and
Analysis-Liquidity and Capital Resources, the Company may require additional
financing to fund its operations during fiscal 2000. This is due to the cash
requirements to service the Company's current debt and the Company's continued
negative cash flow from operations. There can be no assurance that the Company
will be able to raise such financing or that any such financing the Company is
able to conduct will be on attractive terms.
Going Concern Assumptions. The Company's independent accountants' report on its
consolidated financial statements as of and for the years ended March 31, 1997,
1998 and 1999 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.
Page 12 of 20
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New Products and Rapid Technological Change; Risk of Product Defects. The
Electronic Design Automation ("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 announced a new product named DCP (Design Cockpit Platform).
There can be no assurance that this new product 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.
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 could 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 adverse effect
upon the Company's business, operating results or financial condition.
Delisting From Nasdaq; Disclosure Relating to Low-Priced Stock. Effective
November 16, 1998, the Company's common stock was delisted from The Nasdaq Stock
Market ("Nasdaq") for failure to satisfy the requirements for continued listing
on Nasdaq. The Company's common stock immediately began trading on the OTC
Bulletin Board. An investor may find it more difficult to dispose of the
Company's common stock. With the trading price of the common stock less than
$5.00 per share, trading in the common stock will 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 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
Page 13 of 20
<PAGE>
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 fluctuations 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. These 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 involve 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 14 of 20
<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 25%, 32%, 36% and 2% of the Company's total revenue
in fiscal 1997, 1998, 1999 and the first three months of 2000, respectively.
Declining revenues from international sales were a result of the reduction in
capital expenditures by semiconductor manufacturers, particularly in Asia as a
result of the current financial crisis in that region, and increased competition
in the EDA software market. The Company expects that international sales will
continue to account for a significant portion of its revenue and plans to
continue to expand its international sales and distribution channels. This
revenue involves a number of inherent risks, including economic downturn in the
electronics industry in Asia, traditionally slower adoption of the Company's
products internationally, general strikes or other disruptions in working
conditions, generally longer receivables collection periods, unexpected changes
in or impositions of legislative or regulatory requirements, reduced protection
for intellectual property rights in some countries, potentially adverse taxes,
delays resulting from difficulty in obtaining export licenses for certain
technology and other trade barriers. There can be no assurance that such
factors will not have a material adverse effect on the Company's future
international sales and, consequently, on the Company's results of operations.
In addition to the downturn in the Asian market, the Company ceased using
employees of subsidiaries to generate revenue and now relies on distributors to
service those markets.
Dependence on Certain Customers and Resellers. A small number of customers
account for a significant percentage of the Company's total revenue. In fiscal
1997, HAL Computer Systems, Inc., a subsidiary of Fujitsu Ltd. ("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. In fiscal 1999, Motorola, Inc. accounted for 18% 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. The Company currently sells and
markets its products overseas through a limited number of distributors. The
Company has a limited history of performance by its distributors. In addition,
there can be no assurance that the new distributors will be able to successfully
distribute and support the Company's products on a timely basis or that such
distributors will not reduce their efforts devoted to selling the Company's
products or terminate their relationship with the Company as a result of
competition with other suppliers' products. The loss of, or changes in, the
relationship with, or performance by, one or more of the Company's international
distributors could have an adverse effect on the Company's business.
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. Effective April
2, 1999, Laurence G. Colegate, Jr. resigned as Chief Financial Officer of the
Company. The Company's ability to manage growth successfully will require its
management personnel to work together effectively and will require the Company
to improve its operational, management and financial systems and controls. If
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 or Mr. Benouis. The loss of
services of Mr. Anderson or Mr. Benouis or any of the Company's other key
employees 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
Page 15 of 20
<PAGE>
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.
Concentration of Stock Ownership. The present directors, executive officers and
5% shareholders of the Company and their affiliates beneficially own
approximately 76% of the outstanding common stock as of August 11, 1999. 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.
Depressive Effect of Warrants. The Company has a substantial number of common
stock warrants outstanding with an exercise price of $0.125 (6,951) and of $0.37
(2,400). These warrants may have the effect of causing the Company's stock
price to be lower than it otherwise would be.
Effect of Certain Charter Projections; 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 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.
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 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 16 of 20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
As with other companies in the Company's industry, the Company is
subject to the risk of adverse claims and litigation on a variety of
matters, including infringement of intellectual property, intentional
and/or negligent misrepresentation of material facts and breach of
fiduciary duties. Due to the Company's cash shortage and resulting
inability to pay its vendors, several of the Company's vendors have
initiated collection actions against the Company. As described in
Management's Discussion and Analysis-Liquidity and Capital Resources,
the Company in early June 1999 closed on approximately $712,000 of its
planned $1,000,000 subordinated debt financing. Although no assurance
can be given, the Company now believes that it has the cash resources
so as to be able to settle these lawsuits without a material adverse
affect on its operating losses.
Item 2. Changes in Securities and Use of Proceeds:
(c) Recent Sales of Unregistered Securities
In June 1999, the Company began a subordinated debt/warrant financing.
The financing included approximately $1,000 of three-year notes and
the sale of approximately 8,000 warrants to purchase common stock
("Warrants") at $0.01 per Warrant. The debt bears simple interest of
10% and the Warrants have a five-year term with an exercise price per
share of $0.125. This financing transaction is comprised of two
closings. The first closing took place on June 7, 1999. The Company
received $768 cash proceeds from this closing. This included $712 of
three-year notes and the sale of approximately 5,700 Warrants at $0.01
per Warrant. The second closing was to have taken place on July 15,
1999. However, the closing has been postponed until on or before
September 6, 1999. The funds and associated notes and Warrants
associated with the second closing are currently in escrow, pending
negotiation of a workout with the Credit Managers' Association to
resolve accounts payable issues that is satisfactory to the majority
of the investors. Assuming an agreement is reached that is
satisfactory to investors, the Company expects to receive
approximately $311 cash proceeds from the second closing. The Company
has used part of the proceeds from the financings to complete the
Settlement Agreement with its lender and to pay other accounts payable
and intends to use the balance of the proceeds to help fund its
operations. Two Company director/officers, affiliates of a Company
director and two Company 10% shareholders participated in the
financing. The Company intends to register the shares of common stock
underlying the Warrants issued.
Item 3. Defaults Upon Senior Securities: Not Applicable
Item 4. Submission of Matters to a Vote of Securities Holders: Not Applicable
Item 5. Other Information: Not Applicable
Page 17 of 20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
Exhibit
Number Description of Exhibit
- ------ ----------------------
(a)(1) The financial statements filed as part of this Report at Item 1 are
listed in the Index to Financial Statements and Financial Statement
Schedules on page 2 of this Report.
(a)(2) The following exhibits are filed with this Quarterly Report on Form
10-Q:
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 (incorporated by reference to Exhibit 3.02 of
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 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).
27.00 Financial Data Schedule
(B) Reports on Form 8-K:
One Current Report on Form 8-K was dated May 21, 1999 and filed on May 21, 1999.
This reported the Company's change in independent accountants.
Page 18 of 20
<PAGE>
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: August 16, 1999 /s/ James O. Benouis
--------------- --------------------------------
James O. Benouis
President and
Chief Executive Officer
(Chief Financial and Accounting
Officer)
Page 19 of 20
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
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