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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934
For the fiscal year ended March 31, 1999
Transition report under Section 13 or 15(d) of the Securities Exchange
-----
Act of 1934
For the transition period from ________________ to ________________
Commission File No. 0-13836
SILICON VALLEY RESEARCH, INC.
(Exact name of registrant as specified in its charter)
California 94-2743735
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
6360 San Ignacio Avenue
San Jose, CA 95119-1231
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (408) 361-0333
Securities registered under Section 12(b)
of the Act: None
Securities registered under Section 12(g) Common Stock, no par value
of the Act: (Title of Class)
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 past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES X NO___
-------
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the average of bid and asked prices of the Registrant's
common stock on June 11, 1999 in the over-the-counter market, was approximately
$1,650,000. Shares of voting stock held by each officer and director and by
each person who on that date owned 5% or more of the outstanding voting stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of June 11, 1999, Registrant had 26,218,220 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement for registrant's 1999 Annual Meeting of
Shareholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Form are
incorporated by reference into Part III of this Form 10-K.
The exhibit index appears on sequentially numbered page 42
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Part I
This report includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Other Factors Affecting Future
Results, and elsewhere in this Form 10-K, as well as other risks and
uncertainties described in the Company's other reports filed with the Securities
and Exchange Commission 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.
Item 1. Description of Business
General
Silicon Valley Research, Inc. ("the Company" or "SVR"), incorporated in 1979,
offers a broad line of integrated placement, routing and floorplanning physical
layout software products and design project support services which enable
electronics manufacturers to achieve improved performance and smaller die size
in their integrated circuit ("IC") designs. The Company's products incorporate
proprietary line probe technology to create denser circuit designs and hence
minimize die size, enabling a high performance and cost efficient IC design.
Further, these products perform at high speed, allowing designers rapid
turnaround time for their physical layout tasks, and are highly efficient,
requiring less workstation memory to complete the design. The Company has
closely linked its IC design floorplanning capabilities to its physical layout
tools through common placement and routing algorithms. This enables designers to
make placement predictions that closely match the actual placement during the
physical layout. Through its acquisition of Quality I.C. Corporation on March
31, 1998, the Company has gained front-end technology which improves the flow of
data into SVR's product tools and improves the resulting performance. In
addition, the Company provides design project support services encompassing
nearly all aspects of the physical IC design process, including cell-based APR,
FPGA to Gate Array conversion, custom analog and digital layout and chip
assembly capability, and CAD/EDA tool application methodology consulting
services. The Company's end-user customers include N.E.C., Hyundai, Motorola,
OKI Semiconductor, Samsung Electronics, Sony, Micron and Yamaha.
Industry Background
Electronics manufacturers face constant pressure to create faster, more complex,
and more reliable IC's. To compete effectively, electronics manufacturers must
shorten product development cycles, or "time to market" for new products.
Electronics manufacturers are also under increasing economic pressure to
increase manufacturing yield and reduce die size in order to maximize revenue
from semiconductor fabrication facilities. For example, the Semiconductor
Industry Association predicts that by 2001, minimum feature sizes for
semiconductors will drop 49% from 0.35 micron to 0.18 micron and the number of
transistors per chip will rise 433% to approximately 64 million transistors. The
interconnecting wire within the IC linking those transistors will approach one
and a quarter miles on a chip area of 350 square millimeters. As a result of
these trends, electronics manufacturers will require electronic design
automation ("EDA") software tools that improve the quality and increase the
speed of the design process to remain competitive.
The design cycle for IC's consists of a number of steps: (i) architectural
specification, or the definition of the overall architecture of the IC, (ii)
design (involving synthesis, functional and timing verification), which
describes the desired functionality of the IC, (iii) physical layout, the
placement and interconnection
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(routing) of physical components, and (iv) layout verification which verifies
that the physical layout meets the functional specification and manufacturing
constraints (design rules). Recent trends in IC design suggest that smaller
feature sizes are becoming more commonplace, thereby enabling higher frequency
designs. These designs require tighter timing constraints, smaller die size, and
lower power requirements, while at the same time maintaining manufacturing
yield.
The demands on EDA software tools have been compounded as companies designing
and manufacturing IC's are beginning to address the issues raised by "deep
submicron" design. Such design work involves feature sizes of 0.5 micron or
smaller. At deep submicron geometries, interconnect (wire) delay, rather than
gate (transistor) delay, increasingly becomes the factor which determines the
operating frequency of the IC. Deep submicron geometries require designers to
produce routing with minimal wire lengths and to achieve the smallest possible
die size to meet high frequency specifications. In addition, minimizing vias
(interconnections between various metal layers inside the IC) and corners in the
routing of IC's improves manufacturability, thereby increasing overall yield and
reliability. As IC technology advances further into deep submicron geometries,
the physical layout task is becoming increasingly difficult to complete within
design specifications. As a result, place and route tools such as those offered
by SVR are required to address these complex layout issues.
SVR Products
The Company offers a line of products for IC physical design. All of SVR's
products run on Unix workstations from Sun Microsystems, Inc. and Hewlett
Packard Company and support industry standards such as Motif, X-Windows, GDSII
Stream format and EDIF. In addition, the Company has ported two of its products
to operate on the Linux operating system. SVR offers interfaces to Mentor
Graphics Falcon Framework and Synopsys, Inc.'s synthesis tools. The Company's
products have a similar technology foundation and are modular in nature. Each of
the products offered by the Company are sold in a range of configurations based
on the size and complexity of the design to be developed with the SVR product.
In addition, the Company offers a set of design project support services
encompassing the IC development process including complete IC design engineering
services, VLSI mask design and chip assembly capability, and CAD/EDA tool
application methodology consulting services. The following summarizes SVR's
product families:
SVR DCP: SVR Design Cockpit Platform is a next-generation framework for tool
integration. SVR DCP combines an extensible database with a modular plug-in
architecture to provide a generic engine for VLSI design automation. Database
viewers, file format support, and complete interfaces to external tools such as
QICPlace and QICRoute are specified as plug-ins. SVR DCP is controlled through
an elegant graphical user interface which gives it advanced editing capabilities
suitable for floorplanning, full-custom layout, placement modification, and
route editing. Customers may use SVR DCP's standard scripting language, Perl, to
modify and customize the tool to the needs of their design flow.
SVR QICPlace: SVR QICPlace is a stand-alone placement engine based on the
powerful placement subsystem of SVR GARDS. It uses its timing-driven MinCut
algorithm to produce high-density results. SVR QICPlace provides design
flexibility by transparently supporting non-rectangular placement areas and
cells. For designs with sensitive timing budgets, SVR QICPlace's accurate clock-
tree synthesis minimizes the skew of critical paths. SVR QICPlace plugs
seamlessly into SVR DCP for complete interactive control.
SVR QICRoute: SVR QICRoute is SVR's next-generation routing solution,
combining the proven speed and efficiency of SVR GARDS routing subsystem with
powerful new features for deep submicron design. SVR QICRoute's pin-pair routing
gives designers precise control over timing-critical nets. Timing violations can
also be automatically eliminated using SVR QICRoute's MeetSkew routing
algorithm. Although the line-probe routing algorithm consistently delivers high-
quality routing results, SVR QICRoute can optionally be guided by global-routing
information. Like SVR QICPlace, SVR QICRoute is tightly integrated with SVR DCP
through a sophisticated plug-in interface.
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SVR GARDS: SVR believes that SVR GARDS, using the Company's line probe routing
algorithm, provides the fastest turnaround time for an area-based place and
route software tool in the EDA industry. In addition, SVR GARDS provides high
quality routing results with a minimum of vias, line segments, and total
interconnecting wire length. The product handles up to a million gates and has
been extended to handle n layers of interconnect. The interactive timing-driven
placement subsystem enables designers to improve their placement to handle
issues of congestion, timing or net length. The timing-driven routing
capabilities of the product allow designers to specify timing constraints on all
nets and on all critical paths without affecting run times. SVR GARDS has a
built-in simulator for timing analysis and a clock tree synthesis module that
minimizes clock delay. SVR GARDS includes a procedural language interface which
allows system designers to interface the tool to virtually any design flow. The
line probe routing algorithms enable the product to perform incremental ECOs
rapidly without disturbing the structure of the routed design outside the region
of interest.
SVR SC: SVR SC is a channel-based router for the automatic place and route of
standard cell-based IC's. SVR SC provides two to four layer routing for fixed
and variable height and width standard cells. Routing over cells and blocks is
supported on all layers. SVR SC provides efficient floorplanning, placement, and
routing of standard cells, macro blocks, and mixed block and cell designs.
Advanced features such as row flipping and power rail sharing allow designers to
create designs with fewer channels and thus reduced die size. Timing-driven
placement and routing capabilities are integrated into the product to assist
designers in the creation of designs which function according to their
specification.
SVR FloorPlacer: SVR FloorPlacer is an interactive floorplanning software
product for designers of embedded arrays, gate arrays, and structured custom
blocks. By integrating the Company's area-based routing technology, SVR
FloorPlacer helps designers obtain an accurate assessment of timing
characteristics and routability of their designs early in the design process.
SVR FloorPlacer reduces time to market by eliminating costly iterations between
synthesis and layout. The software products provide interfaces and links which
allow direct back annotation of delays from SVR FloorPlacer products into
synthesis and simulation. The graphical user interface provides improved
usability and gives the user interactive control over the floorplan while
providing comprehensive graphical analysis and feedback. This interface helps
users improve routability and the timing attributes of their designs.
IC Design and Consulting Services: The Company provides a set of design project
support services focused mainly on the physical design portion of the IC
development process including complete physical design engineering services,
VLSI mask design and chip assembly capability, and CAD/EDA tool application
methodology consulting services. Design capabilities include standard cell
library layout and verification, hierarchical chip floorplanning, full custom
internal-block layout, standard-cell-block place-and-route implementation and
top level place and route chip assembly. As an integrated EDA tool supplier and
IC design and layout organization, the Company also provides consulting in the
areas of high-level design methodology, EDA tool application and integration,
customized environments and need-specific tool enhancements.
Marketing and Sales
The Company's products are marketed principally through its direct sales force
in the United States. The Company has domestic sales/support offices in
metropolitan areas of California and Texas. Effective December 1998, the Company
discontinued operating its Tokyo office and in March 1999, the Company
discontinued operating its Taiwan office. In the future, the Company will use
distributors to service the Japanese and Taiwanese markets.
International sales were approximately $1,390,000, $874,000 and $744,000 for
fiscal 1997, 1998 and 1999, respectively, representing 25%, 32% and 36% of total
revenue for the respective periods, of which 24%, 31% and 32% came from the Far
East, principally Japan and Taiwan. (See Note 13 of Notes to Consolidated
Financial Statements).
The Company markets its products both domestically and internationally to
integrated circuit designers and manufacturers, large electronic systems
manufacturers, and major aerospace, automotive, and
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consumer electronics companies. Consolidated revenue consists of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
Customer 1997 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C>
Hal Computers Systems, Inc. 14% * *
Lucent Technologies, Inc. 19% * *
Motorola, Inc. 13% 13% 18%
Aspec Technology * 20% *
</TABLE>
*less than 10% of consolidated revenue
The Company licenses its software to customers (except in Japan, where the
Company sells its software to customers) under agreements that provide for a
license fee or sales price to use the product in perpetuity on a specified
computer. License fees for individual products range from approximately $70,000
for the least expensive software to approximately $400,000 for the most complex
software product.
The Company provides software maintenance for a fee, which includes technical
support and services such as telephone consultation regarding the use of the
products, problem resolution, product enhancements, and distribution.
Product Development
The EDA market is characterized by rapid technological advances in both computer
hardware and software. The Company believes that the continued development of
new products and enhanced features is critical to its success. Engineering
efforts in the past year included significant improvements to the Company's
routing technology providing greater completion utilization rates. Addition of
advanced routing features include global routing, pin pair routing, and start
routing. In fiscal 1997, 1998 and 1999, the Company spent approximately
$3,609,000, $3,568,000, and $2,275,000 or as a percentage of revenue 66%, 130%
and 111%, respectively, on engineering, research and development. The 1998
expenditure includes $1,529,000 of unamortized software development costs which
were written off based upon changes in the Company's plans. These amounts are
net of costs capitalized in accordance with Statement of Financial Accounting
Standard No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed" (See Note 1 of Notes to Consolidated Financial
Statements).
Licensing Technology
The Company signed an OEM agreement with OEA International, Inc., a private
software development company, to market OEA's two and three-dimensional (2D/3D)
electric field equation solver bundled with SVR's Integrated Circuit (IC)
physical design tools. This technology gives SVR the ability to accurately
calculate critical performance parameters for deep sub-micron ICs. OEA's
analysis algorithm allows SVR products to detect timing errors in advanced high
speed ICs without resorting to costly design iterations, thereby shortening the
design cycle and extending SVR's solutions to the fastest and most advanced chip
designs, including microprocessors, telecommunications and multimedia ICs.
Also, the Company completed the integration and testing of a new high speed
automatic placement technology resulting in improved design quality and
turnaround time, as well as a smaller design die size, for SVR's SC(TM) family
of products. The new placement technology named TeraCell(TM) has been developed
by CLK Computer-Aided Design, Inc. SVR has licensed the TeraCell(TM) placement
technology, which is being offered as an option to existing SVR installations
and began being offered with new product
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sales starting in June, 1997. CLK Computer-Aided Design was acquired by Mentor
Graphics in November 1998. SVR's license to distribute the TeraCell(TM)
placement technology expires in April 2000.
Manufacturing
The Company's software production operations consist of configuring the existing
software product with the proper customer specifications, recording it on CD-ROM
or other recording media, producing user manuals and other documentation, and
shipping the product. Software is delivered to customers electronically over the
Internet. Package shipments are generally made within 10 days after an order is
received. 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. The Company is not dependent on seasonal flucuations.
Competition
The EDA software market in which the Company competes is intensely competitive
and subject to rapid technological change. The Company currently faces
competition from EDA vendors, including Cadence, which currently holds the
dominant share of the market for IC physical design software, Avant! and
Synopsys. These EDA vendors have significantly greater financial, technical and
marketing resources, greater name recognition and a larger installed customer
base than the Company. These companies also have established relationships with
current and potential customers of the Company and can devote substantial
resources aimed at preventing the Company from enhancing relationships with
existing customers or establishing relationships with potential customers. The
Company believes that competitive factors in the EDA software market include
product performance, price, support of industry standards, ease of use, delivery
schedule, product enhancement, and customer technical support and service.
Competition from other EDA companies that choose to enter the IC physical design
market could present particularly formidable competition due to their large
installed customer base and their ability to offer a complete integrated IC
design solution, which SVR does not offer. The Company expects additional
competition from other established and emerging companies. In addition, the EDA
industry has become increasingly concentrated in recent years as a result of
consolidations, acquisitions and strategic alliances. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on its business, operating results and financial
condition.
Proprietary Rights
The Company relies on contract, trade secret and copyright law to protect its
technology. There can be no assurance that others will not develop technologies
that are similar or superior to the Company's technology or duplicate the
Company's technology. The Company generally enters into confidentiality or
license agreements with its employees, distributors and customers, and limits
access to and distribution of its software, documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. In addition,
effective copyright and trade protection may be unavailable or limited in
certain foreign countries.
There has been substantial industry litigation regarding patents and other
intellectual property rights involving technology companies. In the future,
litigation may be necessary to protect and enforce the Company's intellectual
property rights, to defend the Company against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation could be costly and could divert
management's attention, which could have a material adverse effect on the
Company's business, results of operations or financial condition regardless of
the outcome of the litigation. In addition, third parties making claims against
the Company with respect to intellectual property infringement may be able to
obtain injunctive or other equitable relief that could effectively block the
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Company's ability to sell its products in the United States and abroad, and
could result in an award of substantial damages. In the event of a claim of
infringement, the Company and its customers may be required to obtain one or
more licenses from third parties. There can be no assurance that the Company or
its customers could obtain necessary licenses from third parties at a reasonable
cost or at all.
Employees
As of March 31, 1999, the Company employed 23 full-time workers, including 2 in
marketing and sales, 18 in engineering, product development, and IC design
services and the remainder engaged in administrative activities. Of the 23 full-
time employees, 21 were located in the United States and 2 were employed in
Taiwan, who have been subsequently terminated. The Company's success will
depend, in large part, on its ability to attract and retain trained and
qualified personnel who are in great demand throughout the industry. None of the
Company's employees is represented by a labor union.
The Company's development, management of growth and other activities depend on
the efforts of key management and technical employees. Competition for such
personnel is intense. The Company uses incentives, including competitive
compensation and stock option plans, to attract and retain well-qualified
employees. There can be no assurance, however, that the Company will continue to
attract and retain personnel with the requisite capabilities and experience. The
loss of one or more of the Company's key management or technical personnel also
could materially and adversely affect the Company. The Company generally does
not have employment agreements with its key management personnel or technical
employees.
Item 2. Properties
The Company's principal administrative, marketing, engineering development and
support and I.C. design functions occupy two facilities. One facility occupies
approximately 4,400 square feet in an office building in San Jose, California
under a five year lease expiring on June 30, 2001. The other occupies
approximately 6,800 square feet in an office building in Austin, Texas under a
lease expiring June 30, 2001.
Management believes that its facilities will be adequate for the Company's
operations.
Item 3. 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 $710,000 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the Company's
fourth quarter.
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Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock was traded on the Nasdaq National Market until
November 1998 and is currently traded on the OTC Bulletin Board (the "OTCBB")
under the symbol SVRI. The following table sets forth, for the fiscal period
indicated, the low and high closing sales prices for the common stock as
reported by Nasdaq and the OTCBB. The Company had approximately 400 shareholders
of record and approximately 2,800 beneficial holders as of March 31, 1999.
Common Stock Prices
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fiscal 1998 Quarter ended June 30 Sept. 30 Dec. 31 March 31
------- -------- ------- --------
High $1.31 $1.25 $1.06 $0.91
Low $0.93 $0.81 $0.50 $0.53
Fiscal 1999 Quarter ended June 30 Sept. 30 Dec. 31 March 31
------- -------- ------- --------
High $1.38 $0.66 $0.41 $0.34
Low $0.59 $0.19 $0.16 $0.13
</TABLE>
The Company has not declared or paid dividends on its common stock in fiscal
1997, 1998 and 1999. Certain covenants in the Company's loan agreements restrict
the payment of dividends. The Company currently anticipates that it will retain
all future earnings for use in the operation and expansion of its business and
does not anticipate paying any cash dividends in the foreseeable future.
Item 6. Selected Financial Data
The following financial data have been derived from the Company's consolidated
financial statements.
For the Years Ended March 31,
(in thousands, except per
share amounts)
<TABLE>
<CAPTION>
1995 1996 1997 1998 (a) 1999
------ ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue $8,251 $10,947 $ 5,504 $ 2,755 $ 2,046
Operating income (loss) 420 530 (10,105) (12,028) (4,227)
Net Income (loss) 211 569 (9,885) (12,038) (4,241)
Net income (loss) per share (basic) 0.03 0.06 (0.86) (0.69) (0.16)
Net income (loss) per share (diluted) 0.03 0.05 (0.86) (0.69) (0.16)
Weighted-average common 7,588 9,169 11,521 17,549 25,748
shares (basic)
Weighted-average common 8,257 10,386 11,521 17,549 25,748
shares and equivalents(diluted)
Consolidated Balance Sheet Data:
Working capital (deficit) $ 4 $11,848 $ 481 $ 60 $ (775)
Total assets 5,222 17,092 8,477 5,265 2,059
Long term obligations,
less current portion 794 38 254 77 24
Shareholders' equity 982 13,728 5,058 2,564 460
</TABLE>
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Summary Quarterly Data - Unaudited
<TABLE>
<CAPTION>
Jun.30 Sep.30 Dec.31 Mar.31 Jun.30 Sep.30 Dec.31 Mar.31
Quarter Ended 1997 (a) 1997 1997 1998 (a) 1998 1998 1998 1999
-------- ------- ------- -------- ------- ------- ------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 713 $ 984 $ 552 $ 506 $ 593 $ 360 $ 369 $ 724
Gross profit (loss) (711) 617 146 (75) 294 134 93 410
Operating loss (4,197) (1,744) (1,769) (4,318) (1,422) (1,374) (1,045) (386)
Net loss $(3,994) $(1,814) $(1,885) $ (4,345) $(1,563) $(1,252) $(1,033) $ (393)
Net loss per basic and diluted share $ (0.25) $ (0.11) $ (0.11) $ (0.21) $ (0.06) $ (0.05) $(0.04) $(0.01)
</TABLE>
(a) Based upon the Company's plans for the future, the Company wrote off $1,036
and $493 of unamortized software development costs in the first and fourth
quarters, respectively, of fiscal year ended March 31, 1998 resulting in
operating losses for those quarters. In addition, during the first quarter of
fiscal 1998, the Company recorded a $1,217 charge for the impairment of a
prepaid royalty. The fourth quarter of fiscal 1998 includes a write-off of
$2,480 for acquired in-process research and development. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
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Item 7. 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 views with respect to future events and financial performance,
including releases of new products and enhancements. These forward-looking
statements are subject to certain risks and uncertainties, including those
discussed in the Other Factors Affecting Future Results section of this Item 7
and elsewhere in this Annual Report on Form 10-K, as well as other risks and
uncertainties described in the Company's other reports filed with the Securities
and Exchange Commission, 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.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto. Dollar amounts are in thousands.
Revenue
Total revenue decreased from $2,755 in fiscal 1998 to $2,046 in fiscal 1999.
Total revenue was $5,504 in fiscal 1997. Revenue for 1999 includes $726 from the
activity of Quality I.C. Corporation ("QIC"), which was acquired by the Company
on March 31, 1998. No QIC revenue is included in the Company's 1997 and 1998
revenue. The decrease in revenues in fiscal 1999 resulted primarily from lower
license and maintenance revenue. The decrease was primarily due to weakened
demand based on a delay in capital investment by semiconductor manufacturers
caused, in part, by the current financial crisis in Asia, increased competition
and the timing of renewals of maintenance contracts. In addition, 1998 revenue
included a one-time multi-license order from a leading design services company.
International sales were approximately $1,390, $874 and $744 for fiscal 1997,
1998 and 1999, respectively, representing 25%, 32% and 36% of total revenue for
the respective periods. The Company's plans for fiscal 2000 include an
aggressive new product plan, including new releases of significant enhancements
for each of the Company's primary products. However, there can be no assurance
that these new products and enhancements will be released on a timely basis, if
at all, or will gain market acceptance. With the acquisition of QIC, the Company
has front-end technology which improves the flow of data into SVR product tools
and improves the resulting performance. The Company intends to focus
increasingly on the services market going forward in order to provide customers
with a service-driven integrated circuit design solution. See "Other Factors
Affecting Future Results-New Products and Rapid Technological Change; Risk of
Product Defects".
In fiscal 1997, 1998 and 1999 maintenance and services revenue was $2,620,
$1,802 and $1,401, respectively, including $726 in service revenues in 1999 from
the activity of QIC. Services revenue as a percentage of total revenue was 48%,
65% and 68% for fiscal 1997, 1998 and 1999, respectively. The decline in
maintenance fees included in services revenue in fiscal 1999 was due to reduced
license sales and a reduction in maintenance renewals. License fee revenues
declined from $2,884 in 1997 to $953 in 1998 and $645 in 1999.
In February 1997, the Company restated its unaudited consolidated financial
statements for the quarters ended June 30, 1996 and September 30, 1996 to
reverse certain transactions and related expenses which were recognized other
than in accordance with the Company's accounting policies. The Company has filed
Forms 10Q/A for the quarters ended June 30, 1996 and September 30, 1996. The
results of operations for the year ended March 31, 1997 include the effect of
the restatements referred to above.
The Company's expense levels are based, in part, on its expectations as to
future revenue levels, which are difficult to predict. If revenue levels are
below expectations, as in fiscal 1999, operating results may be materially and
adversely affected. In addition, the Company's quarterly and annual results may
fluctuate as a result of many factors, including the size and timing of software
license fees, timing of co-development projects with customers, timing of
operating expenditures, increased competition, new product announcements and
releases by the Company and its competitors, gain or loss of significant
customers or distributors, expense levels, renewal of maintenance contracts,
pricing changes by the
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Company or its competitors, personnel changes, foreign currency exchange rates
and economic conditions generally and in the electronics industry specifically.
Cost of revenue
For fiscal 1997, 1998 and 1999, cost of licenses was $1,308, $2,205 and $339,
respectively. Cost of licenses as a percentage of licenses revenue was 45%, 231%
and 53% for fiscal 1997, 1998 and 1999, respectively. Cost of licenses consists
primarily of the amortization of capitalized software development costs and, in
prior years, the amortization of prepaid royalty payments to third parties.
Based upon the Company's plans for the future, the Company determined that
$1,272 of unamortized software development costs were not recoverable and
accordingly recognized a negative gross margin on licenses revenue for the year
ended March 31, 1998. In addition during that year, license revenue decreased
while the Company remained obligated for royalty costs.
For fiscal 1997, 1998 and 1999, cost of maintenance and services was $546, $573
and $776, respectively. Cost of maintenance and services as a percentage of
maintenance and services revenue was 21%, 32% and 55% for fiscal 1997, 1998 and
1999, respectively. Cost of maintenance and services includes the cost of
providing technical support and technical documentation. In addition, costs of
maintenance and services for fiscal 1999 includes the personnel costs related to
the design services of QIC, which was acquired by the Company on March 31, 1998.
Engineering, Research and Development Expenses
Engineering, research and development expenses for fiscal 1997, 1998 and 1999
were $3,609, $3,568 and $2,275, respectively. The decrease in engineering,
research and development expenses in fiscal 1998 and 1999 was due to cost-
cutting measures instituted by management while maintaining an emphasis on new
product research and development.
Selling and Marketing Expenses
Selling and marketing expenses for fiscal 1997, 1998 and 1999 were $5,914,
$3,677 and $1,974, respectively. The decrease in fiscal 1999 is due to the
effects of the Company's cost-cutting measures, including a reduction in
salaries and occupancy costs, and lower commissions resulting from reduced
revenue during the year ended March 31, 1999.
General and Administrative Expenses
General and administrative expenses for fiscal 1997, 1998 and 1999 were $4,232,
$1,063 and $909, respectively. In fiscal 1997, the Company recorded
approximately $3,000 of nonrecurring charges associated with severance
arrangements, litigation accruals, legal fees and accounting fees. In addition,
general and administrative expenses have decreased due to a decrease in
professional fees and cost-cutting measures instituted by management. The year
ended March 31, 1999 also includes the activity of QIC, which was acquired by
the Company on March 31, 1998.
Impairment Loss On Prepaid Royalty
In June 1996, the Company entered into an agreement whereby the Company was
granted the exclusive marketing rights to Bell Labs' CLOVER line of deep
submicron verification products worldwide, with the exception of Japan and
Taiwan. Pursuant to the four year agreement, the Company had made prepaid
royalty payments of $1,750. Despite active marketing efforts, the product had
limited success due to product issues and to strong competitive factors.
Accordingly, the Company ceased sales of the product line in July 1997.
Provision was made in the financial statements for the year ended March 31, 1998
to expense the full amount of unamortized prepaid royalty of $1,217, the future
value of which was considered impaired.
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In-Process Research and Development
On March 31, 1998, the Company acquired Quality I.C. Corporation, a company that
provides engineering and consulting services to companies in the micro-
electronics industry. The acquisition was accounted for using the purchase
method of accounting. Accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
date of acquisition. The Company used the discounted cash flow approach to
determine the fair value of Quality I.C. Corporation and its identifiable
assets, including $2,480 allocated to in-process research and development for
the value of products in the development stage which were not considered to have
reached technological feasibility. In accordance with generally accepted
accounting principles, acquired in-process research and development is required
to be expensed.
Other Income (Expense)
Other income (expense) for fiscal 1997, 1998 and 1999 was $222, $(10) and $(14),
respectively. Other income in fiscal 1997, 1998 and 1999 resulted primarily from
interest income from investing the proceeds received in the secondary public
offering in fiscal 1996 and private placements of equity units in fiscal 1998
and 1999. Other expense includes interest expense and foreign exchange losses.
Provision for Income Taxes
The provision for income taxes for fiscal 1997, 1998 and 1999 was $2, $0 and $0,
respectively.
As of March 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $29,400 and $8,100, respectively. The Company
also had federal and California research and development tax credit
carryforwards of approximately $760 and $530, respectively. The net operating
loss and credit carryforwards will expire at various dates from 2000 through
2013, if not utilized (see Note 11 of Notes to Consolidated Financial
Statements).
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
private and public sales of equity securities and to a lesser extent, cash
generated from operations. In fiscal 1997, 1998 and 1999, the Company received
cash of $1,204, $6,722 and $2,096, respectively, from public and private
placements of common stock and the exercise of warrants and options to purchase
common stock.
The Company has incurred operating losses throughout fiscal 1999 and expects
such losses to continue at least in the near term until its revenues are
adequate to generate margin to cover expenses. At March 31, 1999, the Company
had an accumulated deficit of $43,587. The achievement of profitability is
primarily dependent upon the continued development and commercial acceptance of
the Company's products, the successful management of the business and
management's ability to strategically focus the Company. There can be no
assurance as to whether or when achievement of profitable operations will occur.
In addition, the Company is experiencing negative cash flow from operations and
it is expected that it will continue to experience negative cash flow through
fiscal 2000 and potentially thereafter.
The Company's operating activities used cash of $6,731, $5,478 and $3,259 in
fiscal 1997, 1998 and 1999, respectively.
Investment activities, primarily comprising capitalized software development
costs, acquired fixed assets and purchased software licenses, were $2,589,
$1,772 and $(183) for fiscal 1997, 1998 and 1999, respectively.
The Company's primary unused sources of funds at March 31, 1999 consisted of
cash and cash equivalents of $247. As of March 31, 1999, the Company's cash and
cash equivalents were not sufficient to discharge the Company's current
liabilities. On June 8, 1998, the Company's $2,000 line of credit with its bank
expired and the $285 outstanding under the line of credit became due and
payable. $225 of this
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amount remained outstanding as of May 11, 1999. In addition, $136 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.
On June 7, 1999, the Company received approximately $770 cash proceeds from a
subordinated debt/warrant financing. The financing included approximately $710
of three-year notes and the sale of approximately 5,700 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. The Company has used part of
the proceeds from the financing 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 financing remains open until July 15,
1999, with a planned maximum of $1,000 debt and 8,000 warrants. Even if the
offering were to be fully subscribed, the Company expects to require additional
financing prior to year end. A Company director/officer, an affiliate 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.
The Company believes that its cash and cash generated from operations will not
be sufficient to finance its operations through fiscal 2000. Management is
exploring financing alternatives to supplement the Company's cash position.
Potential sources of additional financing include private equity financings,
mergers, strategic investments, strategic partnerships or various forms of debt
financings. However, 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 $4,241 for the year ended March 31, 1999 and had an accumulated deficit of
$43,587 as of March 31, 1999. The Company expects to 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 believes that it will
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
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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.
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
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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 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
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variety of factors, including, without limitation, the high average selling
price and long sales cycle for the Company's products, the relatively small
number of orders per quarter, dependence on sales to a limited number of large
customers, timing of receipt of orders, successful product introduction and
acceptance of the Company's products and increased competition.
Dependence Upon Semiconductor and Electronics Industries; General Economic and
Market Conditions. The Company is dependent upon the semiconductor and, more
generally, the electronics industries. Each of these industries is
characterized by rapid technological change, short product life cycles,
fluctuations in manufacturing capacity and pricing and gross margin pressures.
Each of these industries is highly cyclical and has periodically experienced
significant downturns, often in connection with, or in anticipation of, declines
in general economic conditions during which the number of new IC design projects
often decreases. Purchases of new licenses from the Company are largely
dependent upon the commencement of new design projects, and factors negatively
affecting any of these industries could have a 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% and 36% of the Company's total revenue in
fiscal 1997, 1998, and 1999, 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. Sales orders received by
foreign sales subsidiaries are primarily denominated in currencies other than
the U.S. dollar. In order to reduce the risk of loss between the time the
Company's products are purchased by subsidiaries and the time payment is made,
the subsidiaries enter into foreign exchange contracts when economically
feasible. Effective December 1998, the Company discontinued operating its Tokyo
office and in March 1999, the Company discontinued operating its Taiwan office.
In the future, the Company will use distributors to service the Japanese and
Taiwanese markets. As described below in Dependence on Certain Customers and
Resellers, the Company has a limited history with these distributors on which it
will be dependent to generate a substantial portion of its revenue.
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
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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 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 June 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 (5,700) 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.
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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.
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Item 8. Financial Statements and Financial Statement Schedules
Index to Financial Statements and Financial Statement Schedules
<TABLE>
<S> <C>
Financial Statements:
Report of Independent Accountants 20
Report of Previous Independent Accountants 21
Report of Management 22
Consolidated Balance Sheets as of March 31, 1998 and 1999 23
Consolidated Statements of Operations for the years ended March 31,
1997, 1998 and 1999 24
Consolidated Statements of Changes in Shareholders' Equity for the years
ended March 31, 1997, 1998 and 1999 25
Consolidated Statements of Cash Flows for the years ended March 31,
1997, 1998 and 1999 26
Notes to Consolidated Financial Statements 27-39
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 40
</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.
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Report of Independent Accountants
To the Board of Directors and Shareholders of Silicon Valley Research, Inc.
We have audited the accompanying consolidated balance sheet of Silicon Valley
Research, Inc. and subsidiaries as of March 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. 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 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Silicon Valley Research, Inc.
and subsidiaries as of March 31, 1999, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant recurring losses from
operations and has limited capital resources 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/ Moss Adams LLP
San Francisco, California
June 10, 1999
20
<PAGE>
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, 1998 and the
results of their operations and their cash flows for each of the two years in
the period ended March 31, 1998, 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 audits. We conducted our audits 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. We have not audited the
consolidated financial statements of Silicon Valley Research, Inc. and its
subsidiaries for any period subsequent to March 31, 1998.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant recurring losses from
operations and has limited capital resources 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.
PricewaterhouseCoopers LLP
San Jose, California
June 12, 1998
21
<PAGE>
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 Moss Adams 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 independent accountants have access to the Audit Committee,
without management present, to discuss internal accounting controls, auditing,
and financial reporting matters.
Robert R. Anderson James O. Benouis
Chairman of the Board President and
Chief Executive Officer
San Jose, California
June 30, 1999
22
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 1,926 $ 247
Accounts receivable, net of allowances of
$150 in each period 484 444
Prepaid expenses and other current assets 257 109
-------- --------
2,667 800
Fixed assets, net 667 290
Other assets, net 1,931 969
-------- --------
$ 5,265 $ 2,059
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Short-term borrowings $ 285 $ 225
Current portion of long-term debt 263 137
Notes payable 200 50
Accounts payable 352 450
Accrued expenses 968 478
Deferred revenue 539 235
-------- --------
2,607 1,575
-------- --------
Long-term debt, less current portion 77 -
-------- --------
Deferred tax liability 17 24
-------- --------
Commitments and contingencies (Note 7)
Shareholders' Equity
Preferred stock, no par value;
authorized: 1,000 shares;
issued and outstanding: none - -
Common stock, no par value;
authorized: 60,000 shares;
issued and outstanding: 23,759 shares
in 1998 and 26,214 shares in 1999 41,834 43,930
Accumulated deficit (39,346) (43,587)
Cumulative translation adjustment 76 117
-------- --------
2,564 460
-------- --------
$ 5,265 $ 2,059
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
SILICON VALLEY RESEARCH, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended March 31,
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Revenue
License fees and other $ 2,884 $ 953 $ 645
Maintenance and services 2,620 1,802 1,401
-------- -------- -------
Total revenue 5,504 2,755 2,046
-------- -------- -------
Cost of revenue
License fees and other 1,308 2,205 339
Maintenance and services 546 573 776
-------- -------- -------
Total cost of revenue 1,854 2,778 1,115
-------- -------- -------
Gross margin 3,650 (23) 931
-------- -------- -------
Operating expenses
Engineering, research and development 3,609 3,568 2,275
Selling and marketing 5,914 3,677 1,974
General and administrative 4,232 1,063 909
Impairment loss on prepaid royalty - 1,217 -
Acquired in-process research and development - 2,480 -
-------- -------- -------
Total operating expenses 13,755 12,005 5,158
-------- -------- -------
Operating loss (10,105) (12,028) (4,227)
-------- -------- -------
Other income (expense)
Interest income 276 151 54
Interest expense (55) (44) (60)
Other, net 1 (117) (8)
-------- -------- -------
Total other income (expense) 222 (10) (14)
-------- -------- -------
Loss before provision for income taxes (9,883) (12,038) (4,241)
Provision for income taxes 2 - -
-------- -------- -------
Net loss $ (9,885) $(12,038) $(4,241)
======== ======== =======
Net loss per basic and diluted share $ (0.86) $ (0.69) $ (0.16)
======== ======== =======
Weighted-average common shares
outstanding (basic and diluted) 11,521 17,549 25,748
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
SILICON VALLEY RESEARCH, INC.
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Accumulated Comprehensive Comprehensive
(In thousands) Shares Amount Deficit Income Income Total
------ ------ ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1996 11,308 $ 31,171 $(17,423) $ (20) $13,728
Foreign currency translation
adjustment -- -- -- 11 $ 11 11
Net loss -- -- (9,885) (9,885) (9,885)
--------
Comprehensive income -- -- -- -- $ (9,874) --
========
Common stock issued under
stock option and stock
purchase plans 144 339 -- -- 339
Common stock issued on
settlement of litigation 628 800 -- -- 800
Common stock issued on
exercise of warrants 147 65 -- -- 65
------ ------ -------- ------ -------
Balances, March 31, 1997 12,227 $ 32,375 $(27,308) $ (9) $ 5,058
Foreign currency translation
adjustment -- -- -- 85 $ 85 85
Net loss -- -- (12,038) (12,038) (12,038)
--------
Comprehensive income -- -- -- -- $ 11,953 --
========
Common stock issued under
stock option and stock
purchase plans 53 38 -- -- 38
Proceeds from issuance
of common stock 8,329 6,684 -- -- 6,684
Common stock issued in conjunction
with the acquisition of
Quality I. C. Corporation 3,150 2,737 -- -- 2,737
------ ------ -------- ------ -------
Balances, March 31, 1998 23,759 $ 41,834 $(39,346) $ 76 $ 2,564
Foreign currency translation
adjustment -- -- -- 41 $ 41 41
Net loss -- -- (4,241) -- (4,241) (4,241)
--------
Comprehensive income -- -- -- -- $ (4,200) --
========
Common stock issued under
stock option and stock
purchase plans 77 51 -- -- 51
Proceeds from issuance
of common stock 2,378 2,045 -- -- 2,045
------ -------- -------- ------ -------
Balances, March 31, 1999 26,214 $ 43,930 $(43,587) $ 117 $ 460
====== ======== ======== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
SILICON VALLEY RESEARCH, INC.
Consolidated Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(9,885) $(12,038) $(4,241)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for impairment of prepaid marketing royalty - 1,217 -
Acquired in-process research and development - 2,480 -
Provision for impairment of software - - 153
Loss on sale of assets - - 38
Depreciation and amortization:
Fixed assets 517 350 280
Software licenses and development costs 1,020 2,508 840
Changes in assets and liabilities, net of
effects of QIC acquisition in 1998:
Accounts receivable 3,364 670 40
Prepaid expenses and other current assets (173) 225 148
Accounts payable 201 (154) 98
Accrued expenses 141 (618) (490)
Deferred maintenance revenue (442) (479) (304)
Other, net (1,474) 361 179
------- -------- -------
Net cash used in operating activities (6,731) (5,478) (3,259)
------- -------- -------
Cash Flows from Investing Activities:
Acquisition of fixed assets (653) (55) (52)
Proceeds on sale of fixed assets - - 31
Capitalization of software development costs and
purchase of software licenses (1,936) (1,717) (162)
------- -------- -------
Net cash used in investing activities (2,589) (1,772) (183)
------- -------- -------
Cash Flows from Financing Activities:
Principal payments of long-term debt (164) (158) (224)
Principal payments on notes payable - - (150)
Advances on lines of credit - 340 -
Proceeds from issuance of common stock 1,139 6,722 2,096
Cash received upon issuances of notes and
common stock relating to QIC acquisition - 123 -
Proceeds from issuance of warrants 65 - -
------- -------- -------
Net cash provided by financing activities 1,040 7,027 1,722
------- -------- -------
Effect of exchange rate changes on cash 106 85 41
------- -------- -------
Net decrease in cash and cash equivalents (8,174) (138) (1,679)
Cash and cash equivalents at beginning of year 10,238 2,064 1,926
------- -------- -------
Cash and cash equivalents at end of year $ 2,064 $ 1,926 $ 247
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share price data)
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 also provides the IC design industry a comprehensive set of design
project support services encompassing nearly all aspects of the IC development
process, including cell-based APR, FPGA to Gate Array conversion, custom analog
and digital layout and chip assembly capability, and CAD/EDA tool application
methodology consulting services.
The Company has incurred significant losses for the last three fiscal years from
operations. Its line of credit expired on June 8, 1998. The amounts outstanding
under its line of credit and equipment line of credit are classified as current
in the March 31, 1999 balance sheet. Accordingly, additional financing may be
required for the Company to meet its business plan for fiscal 2000 and beyond.
The Company has recently introduced updated version 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 revenue. These events
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. Subsequent to year end, the Company
received approximately $770 in a debt financing. The financing included three-
year notes and the sale of warrants. The Company will use the proceeds from the
financing to complete the Settlement Agreement with the bank as described in
Note 6 and to fund its operations. The financing remains open through July 15,
1999 with a maximum amount of debt of $1,000. The accompanying financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries: Silicon Valley Research, Inc. - KK, Silicon Valley Research,
Inc. - Asia Pacific and Quality I.C. Corporation. All significant intercompany
accounts and transactions have been eliminated. Minority interest in net assets
and income (loss) for the years then ended are not significant. Effective
December 1998, the Company discontinued operating its Tokyo office and in March
1999, the Company discontinued operating its Taiwan office. In the future, the
Company will use distributors to service the Japanese and Taiwanese markets.
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 is recognized when earned. The Company's revenue recognition policies
are in compliance with American Institute of Certified Public Accountants
Statements of Position 97-2 and 98-4, Software Revenue Recognition. Revenue from
licenses is recorded when a license agreement has been executed, the software
has been delivered or shipped and the customer is invoiced. Software maintenance
revenue, including maintenance revenue bundled with the initial product license
revenue, is recognized ratably over the contract 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.
27
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
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. Significant estimates used
in these financial statements relate to realization of capitalized software
development costs and software licenses. It is at least reasonably possible that
management's estimate of revenue from software licenses could change in the near
term, which could have a material adverse effect on the Company's financial
condition and results of operations.
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 Asia. Generally, the Company performs
ongoing evaluation of its customer's 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, 1999, three
customers accounted for 54% of the Company's total receivables. At March 31,
1998, four customers accounted for 88% of the Company's total receivables. At
March 31, 1999 and 1998, one Japanese customer accounted for 9% and one
accounted for 28%, respectively, of the Company's total receivables.
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.
28
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" (FAS 128). As required by the statement, all prior period
earnings per share (EPS) amounts presented have been restated to conform with
the provisions of FAS 128. Under FAS 128, the Company presents two EPS amounts.
Basic EPS is calculated based on income or loss to common shareholders and the
weighted-average number of shares outstanding during the reported period.
Diluted EPS includes additional dilution from common stock equivalents, such as
stock issuable pursuant to the exercise of stock options and warrants. Common
stock equivalents were not included in the computation of diluted earnings per
share when the Company reported a loss because to do so would have been
antidilutive for the periods presented.
The following is a reconciliation of the computation for basic and diluted EPS:
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
(in thousands) 1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Net loss $(9,885) $(12,038) $(4,241)
======= ======== =======
Weighted-average common shares
outstanding (basic) 11,521 17,549 25,748
Weighted-average common stock equivalents:
Stock options - - -
Warrants - - -
------- -------- -------
Weighted-average common shares
outstanding (diluted) 11,521 17,549 25,748
======= ======== =======
</TABLE>
Options to purchase 2,006 shares of common stock at prices ranging from $0.56 to
$6.50 and options to purchase 1,399 shares of common stock at prices ranging
from $0.50 to $6.50 per share were outstanding at March 31, 1998 and 1999,
respectively, but were not included in the computation of diluted EPS because
inclusion of such options would have been 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 accumulated other comprehensive
income. 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
29
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
transactions. 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 not expect any significant losses as a result of
default by other parties. The cash requirements under these foreign exchange
contracts are not significant. There were no outstanding exchange contracts at
March 31, 1999.
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 Plans
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("FAS 123"). Under APB 25,
compensation cost is recognized over the vesting period based on the difference,
if any, on the date of grant between the fair market value of the Company's
stock and the amount an employee must pay to acquire the stock. The Company's
policy is to grant options with an exercise price equal to the quoted market
price of the Company's stock on the grant date. Accordingly, no compensation
has been recognized for its stock option plans.
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 2 FIXED ASSETS
<TABLE>
<CAPTION>
March 31,
Fixed assets comprise: 1998 1999
------- -------
<S> <C> <C>
Computer equipment $ 2,422 $ 2,124
Office equipment 638 390
------- -------
3,060 2,514
Less accumulated depreciation and amortization (2,393) (2,224)
------- -------
$ 667 $ 290
======= =======
</TABLE>
30
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
Fixed assets acquired under capital leases included above are as follows:
<TABLE>
<S> <C> <C>
Computer equipment $ 484 $ 308
Less accumulated amortization (373) (306)
------- -------
$ 111 $ 2
======= =======
</TABLE>
NOTE 3 OTHER ASSETS
<TABLE>
<CAPTION>
March 31,
Other assets comprise: 1998 1999
------- -------
<S> <C> <C>
Software development costs $ 2,098 $ 799
Software licenses 3,134 979
------- -------
5,232 1,778
Less accumulated amortization (3,898) (1,087)
------- -------
1,334 691
Prepaid royalties 67 25
Goodwill 245 195
Other 285 58
------- -------
$ 1,931 $ 969
======= =======
</TABLE>
Software development costs capitalized during 1997, 1998 and 1999 were $1,045,
$971, and $162, respectively, and the related amortization during each of the
periods was $593, $1,622 and $268, respectively. During 1999, the Company wrote
off approximately $1,460 of fully amortized software development costs and
approximately $1,837 of fully amortized purchased software costs. Other
consists primarily of deposits on facilities and equipment leases.
NOTE 4 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.
NOTE 5 ACCRUED EXPENSES
<TABLE>
<CAPTION>
March 31,
Accrued expenses comprise: 1998 1999
----- -----
<S> <C> <C>
Accrued payroll and
related costs $ 477 $ 228
Taxes payable 147 106
Accrued professional fees 229 108
Other 115 36
----- -----
$ 968 $ 478
===== =====
</TABLE>
Other consists of accruals related to expenses incurred in the normal course of
business, such as utilities and travel and sales expenses.
31
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
NOTE 6 BANK BORROWINGS AND LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31,
Long-term debt comprise: 1998 1999
------ ------
<S> <C> <C>
Capitalized lease obligations $ 116 $ -
Note payable 224 136
----- -----
340 136
Less current portion (263) (136)
----- -----
$ 77 $ -
===== =====
</TABLE>
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, $136
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 and 1998 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.
On June 7, 1999, the Company received approximately $770 cash proceeds from a
subordinated debt/warrant financing. The financing included approximately $710
of three-year notes and the sale of approximately 5,700 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. The Company has used part of
the proceeds from the financing 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 financing remains open until July 15,
1999, with a planned maximum of $1,000 debt and 8,000 warrants. Even if the
offering were to be fully subscribed, the Company expects to require additional
financing prior to year end. A Company director/officer, an affiliate 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 7 COMMITMENTS AND CONTINGENCIES
The Company leases its corporate headquarters and IC design offices in the
United States under operating leases expiring June 30, 2001. Non-cancelable
rental payments over the term of leases exceeding one year are as follows:
<TABLE>
<S> <C>
1999 $184
2000 164
2001 35
2002 -
2003 -
----
$383
====
</TABLE>
The Company is generally responsible for its pro rata share of taxes,
maintenance and insurance on the facilities. Rental expense aggregated $935,
$767 and $720 in 1997, 1998 and 1999, respectively.
NOTE 8 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.
32
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
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
participant's accounts is determined by the Board of Directors at the time of
contribution. The Company contributed $25, $19 and $4 to the Plan during fiscal
1997, 1998 and 1999, respectively. Administrative costs paid by the Company were
insignificant during fiscal 1997, 1998 and 1999.
NOTE 9 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.
Private Placement
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 $3,864. Subsequently, a registration statement was filed by the
Company to register the shares and the shares subject to warrants. One director,
one officer/director and two officers participated in the private placement.
On December 30, 1997, the Company completed a private placement of units
comprising 3,812 shares of common stock and warrants to purchase an additional
3,812 shares of common stock at $0.53 per share, with proceeds to the Company of
approximately $2,820. Subsequently, a registration statement was filed by the
Company to register the shares and the shares subject to warrants. One director
and one officer/director participated in the private placement.
On June 8, 1998, the Company completed a private placement of units comprising
2,378 shares of common stock and warrants to purchase an additional 2,378 shares
of common stock at $0.37 per share, with proceeds to the Company of
approximately $2,045. A registration statement will be filed by the Company to
register the shares and the shares subject to warrants by July 31, 1999. One
former director and one officer/director participated in the private placement.
Stock Options
At March 31, 1999, the Company has reserved 5,506 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 the Board of
Directors at an exercise price equal to the fair market value as determined by
the closing trading price on the grant date. Generally, 20% of the shares
pursuant to the options vests one year from the date of grant with the remaining
shares vesting in equal monthly installments over the next four years.
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 45 shares of
the Company's common stock, and thereafter annually for 9 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. Generally, 25% of the
shares pursuant to the options vests one year from the date of grant with the
remaining shares vesting in equal monthly installments over the next three
years.
33
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
On July 17, 1997, the Compensation Committee of the Board of Directors repriced
all options with exercise prices in excess of $0.875 to have an exercise price
of the fair market value of the Company's common stock on that date, which was
$0.875, with continuation of the existing vesting schedule. Options for the
purchase of a total of 1,563 shares were repriced.
At March 31, 1999, options to purchase 422 shares of common stock were vested,
and 4,132 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, 1998 March 31, 1999
-------------- --------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,686 $ 1.99 2,006 $ 0.83
Granted 1,268 0.71 868 0.49
Exercised - - (46) 0.88
Forfeited (948) 1.36 (1,429) 0.73
----- ------
Outstanding at end of year 2,006 $ 0.83 1,399 $ 0.72
===== ======
Options exercisable at year-end 441 422
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------------------
Weighted-
Shares Average Weighted- Shares Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 3/31/99 Contractual Life Exercise Price at 3/31/99 Exercise Price
<S> <C> <C> <C> <C> <C>
$ 0.50 - $ 0.50 390 8.65 $0.50 - $ -
$ 0.56 - $ 0.56 375 8.32 0.56 76 0.56
$ 0.59 - $ 0.59 63 8.06 0.59 16 0.59
$ 0.88 - $ 0.88 519 6.72 0.88 280 0.88
$ 1.19 - $ 6.50 52 6.75 1.99 50 1.94
----- ----- ----- ------ -----
1,399 7.75 $0.72 422 $0.93
===== ===== ===== ====== =====
</TABLE>
34
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
The Company applies the provisions of APB 25 and related interpretations in
accounting for compensation expense under the Employee Stock Option Plan, the
Directors' Stock Option Plan and the Employee Stock Purchase Plan. Had
compensation expense under these plans been determined pursuant to FAS 123, the
Company's net income (loss) per share for the years ended March 31, 1997, 1998
and 1999 would have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C> <C>
Net loss As reported $ (9,885) $(12,038) $(4,241)
Pro forma $(11,195) $(12,876) $(4,531)
Net loss per share (basic) As reported $ (0.86) $ (0.69) $ (0.16)
Pro forma $ (0.97) $ (0.73) $ (0.18)
Net loss per share (diluted) As reported $ (0.86) $ (0.69) $ (0.16)
Pro forma $ (0.97) $ (0.73) $ (0.18)
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes multiple option-pricing model with the following assumptions
used for grants in 1997, 1998 and 1999, respectively; expected volatility of
86%, 93% and 108%; weighted-average risk-free interest rates of 6.38%, 5.92% and
4.99%, and weighted-average expected lives of 2.98, 3.05 and 3.44. The
weighted-average fair value of options granted in 1997, 1998 and 1999 was $1.51,
$0.47 and $0.33, respectively.
Warrants
The following warrants to purchase shares of the Company's common stock are
outstanding and fully vested at March 31, 1999:
<TABLE>
<CAPTION>
Expiring During
the Fiscal Number of Common
Year Ending Exercise Price Shares Under Warrants
----------- -------------- ---------------------
<S> <C> <C>
3/31/00 $1.25 - $1.50 368
3/31/01 $ 1.31 4,517
3/31/03 $ 0.53 3,812
3/31/06 $ 0.37 2,378
------
11,075
======
</TABLE>
During the fiscal year ended March 31, 1999, no warrants were exercised. See
Note 15, Subsequent Event, relating to the issuance of warrants subsequent to
year end.
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 68, 53 and 30 shares of
common stock issued under the plan in 1997, 1998 and 1999, respectively, leaving
a balance of 341 shares available for issuance at March 31, 1999.
35
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
Note 10 Impairment Loss On Prepaid Royalty
In June 1996, the Company entered into an agreement whereby the Company was
granted the exclusive marketing rights to Bell Labs' CLOVER line of deep
submicron verification products worldwide, with the exception of Japan and
Taiwan. Pursuant to the four year agreement, the Company had made prepaid
royalty payments of $1,750. Despite active marketing efforts, the product had
limited success due to product issues and to strong competitive factors.
Accordingly, the Company ceased sales of the product line in July 1997.
Provision was made in the financial statements for the year ended March 31, 1998
to expense the full amount of unamortized prepaid royalty of $1,217, the future
value of which was considered impaired.
NOTE 11 INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended March 31, 1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - - -
Deferred - - -
Foreign 2 - -
------ ------ ------
Total provision $ 2 $ - $ -
====== ====== ======
</TABLE>
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>
1998 1999
---------- ----------
<S> <C> <C>
Allowances and accruals not currently deductible $ 462 $ 191
Net operating losses and other credits 10,413 10,787
-------- --------
Total deferred tax assets 10,875 10,978
Less: valuation allowance (10,875) (10,978)
-------- --------
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, 1999, the Company had available federal and state tax net operating
loss carryforwards of approximately $29,400 and $8,100, respectively. The
federal and state tax net operating loss carryforwards expire from 2000 to 2013
and 2000 to 2003, respectively. The Company has federal and state research and
development credit carryforwards of approximately $760 and $530, respectively,
expiring from 2000 through 2013. 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, 1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Provision (benefit) at U.S. statutory rate $(3,361) $(3,274) $(1,609)
Tax losses not currently benefited 3,361 3,274 1,609
Tax effect resulting from foreign activity 2 - -
------- ------- -------
Tax provision $ 2 $ - $ -
======= ======= =======
</TABLE>
36
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
NOTE 12 SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended March 31, 1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 27 $ 44 $ 60
Income taxes $ 10 $ - $ -
Details of Acquisition:
Fair value of assets $ - $ 646 $ -
Liabilities, including notes to sellers of $200 - 389 -
------ ------ ------
Cash paid - 257 -
Less cash acquired - 123 -
------ ------ ------
Net cash paid for acquisition $ - $ 134 $ -
====== ====== ======
Noncash investing and financing activities:
Computer equipment and software licenses
purchased by capital lease obligations
and notes payable $ 429 $ - $ -
</TABLE>
NOTE 13 BUSINESS SEGMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("FAS 131"), "Disclosures About Segments of an Enterprise and Related
Information." This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The disclosures prescribed by FAS 131 are
effective for the Company's consolidated financial statements for the year
ending March 31, 1999.
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. Effective December 1998, the Company
discontinued operating its Tokyo office and in March 1999, the Company
discontinued operating its Taiwan office.
The Company has provided segment information based on geographic regions. All
segments derive the majority of their revenues from software licenses, with the
exception of Quality I.C. Corporation, which generates the majority of its
revenues from services. Transactions between segments are accounted for on the
same basis as those with outside parties, except that they are eliminated when
presented on a consolidated basis.
37
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
The following table summarizes the United States, European, Japanese and
Taiwanese operations of the Company:
<TABLE>
<CAPTION>
United States Adjustments
Quality and
SVR I.C. Corp Europe Japan Taiwan Eliminations Consolidated
-------- --------- ------ ------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
======== ========= ======= ======= ======== ========== ========
Year ended March 31, 1998
Sales to unaffiliated customers $ 2,040 $ - $ 26 $ 689 $ - $ - $ 2,755
Transfer between geographic
regions 355 - - - $ - (355) -
-------- --------- ------- ------- -------- ---------- --------
Total sales $ 2,395 $ - $ 26 $ 689 $ - $ (355) $ 2,755
======== ========= ======= ======= ======== ========== ========
Operating income (loss) $(11,165) $ - $ 26 $ (435) $ (454) $ - $(12,028)
======== ========= ======= ======= ======== ========== ========
Identifiable assets $ 4,378 $ 301 $ - $ 518 $ 68 $ - $ 5,265
======== ========= ======= ======= ======== ========== ========
Year ended March 31, 1999
Sales to unaffiliated customers $ 884 $ 726 $ 86 $ 350 $ - $ - $ 2,046
Transfer between geographic
regions 312 463 - - - (775) -
-------- --------- ------- ------- -------- ---------- --------
Total sales $ 1,196 $ 1,189 $ 86 $ 350 $ - $ (775) $ 2,046
======== ========= ======= ======= ======== ========== ========
Operating income (loss) $ (3,639) $ 8 $ 62 $ (451) $ (207) $ - $ (4,227)
======== ========= ======= ======= ======== ========== ========
Identifiable assets $ 1,678 $ 302 $ - $ 79 $ - $ - $ 2,059
======== ========= ======= ======= ======== ========== ========
</TABLE>
Included in total United States revenue are export sales of $292, $155 and $307
for 1997, 1998 and 1999, respectively, principally to the Far East. Total
consolidated revenue outside of the United States was $1,390, $874 and $744 in
1997, 1998 and 1999, respectively.
Revenue from two products accounted for 35% and 21% of the Company's
consolidated revenue in fiscal 1999. Revenue from three products accounted for
60%, 21% and 17% of the Company's consolidated revenue in fiscal 1998. Revenue
from three products accounted for 52%, 20% and 23% of the Company's consolidated
revenue in fiscal 1997. A small number of customers account for a significant
percentage of the Company's total revenue as follows:
<TABLE>
<CAPTION>
Year ended March 31,
---------------------
Customer 1997 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C>
A 14% * *
B 19% * *
C 13% 13% 18%
D * 20% *
</TABLE>
* less than 10% of consolidated revenue
38
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
NOTE 14 ACQUISITION
On March 31, 1998, the Company completed its acquisition of Quality I.C.
Corporation ("QIC"). With the acquisition, the Company has obtained front-end
technology which improves the flow of data into the Company's product tools and
improves the resulting product performance. QIC also provides engineering and
consulting services to companies in the micro-electronics industry. The
transaction was accounted for under the purchase method of accounting, and
accordingly, the Company's consolidated financial statements do not include the
results of operations, financial position or cash flows of QIC prior to March
31, 1998. The purchase price for the acquisition was $2,937 consisting of notes
payable to the former shareholders of QIC in the amount of $200 and the issuance
of 3,150 shares of the Company's common stock valued at $2,737. The allocation
of the total purchase price among identifiable tangible and intangible assets
was based on an analysis of the fair values of those assets prepared by the
Company. The Company used the discounted cash flow approach to determine the
fair value of Quality I.C. Corporation and its identifiable assets, including
$2,480 allocated to in-process research and development for the value of
products in the development stage which were not considered to have reached
technological feasibility. In accordance with generally accepted accounting
principles, acquired in-process research and development is required to be
expensed. The allocation of the purchase price is as follows:
Net current assets $ 43
Property and equipment 83
Other non-current assets 103
Goodwill 245
Non-current deferred tax liability (17)
In-process research and development 2,480
Total purchase price $ $2,937
Goodwill represents cost in excess of net assets acquired. Such goodwill is
being amortized over a period of five years.
Acquired in-process research and development includes the value of products in
the development stage and not considered to have reached technological
feasibility. In accordance with generally accepted accounting principles,
acquired in-process research and development is required to be expensed.
The Company's consolidated balance sheet at March 31, 1998 includes QIC at the
date of acquisition. The following financial information presents the unaudited
pro forma results of operations for the year ended March 31, 1998 as if the
transaction had been completed at the beginning of the period presented, with
pro forma adjustments giving effect to the elimination of the charge for in-
process research and development acquired from QIC. The unaudited pro forma
financial information is not necessarily indicative of the results of operations
as they would have been had the transactions been effected on the assumed dates.
The unaudited pro forma total revenues for the year ended March 31, 1998 would
have been $3,951 (unaudited) with a net loss of $(9,584). The pro forma net
loss per share would have been $(0.46) (unaudited) based on weighted-average
basic and diluted common shares and equivalents of 20,691 (unaudited).
NOTE 15 SUBSEQUENT EVENT
On June 7, 1999, the Company received approximately $770 cash proceeds from a
subordinated debt/warrant financing. The financing included approximately $710
of three-year notes and the sale of approximately 5,700 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. The Company has used part of
the proceeds from the financing 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 financing remains open until July 15,
1999, with a planned maximum of $1,000 debt and 8,000 warrants. Even if the
offering were to be fully subscribed, the Company expects to require additional
financing prior to year end. A Company director/officer, an affiliate 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.
39
<PAGE>
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Provision Write-off of
Balance at doubtful uncollectible Balance
beginning Accounts Accounts at end
of Year Receivable Receivable of Year
------- ---------- --------- -------
<S> <C> <C> <C> <C>
Accounts receivable - allowances for
doubtful accounts
Year ended March 31, 1997 $ 25 $ 1,235 $ 1,110 $ 150
Year ended March 31, 1998 $ 150 $ - $ - $ 150
Year ended March 31, 1999 $ 150 $ - $ - $ 150
</TABLE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
On May 14, 1999, PricewaterhouseCoopers LLP resigned as the independent
accountants of Silicon Valley Research, Inc. as described in Form 8-K which was
filed with the Securities and Exchange Commission on May 21, 1999.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance Section 16(a) of the Exchange Act
The following sets forth certain information regarding the executive officers of
the Registrant:
Executive officers serve at the discretion of the Board of Directors of the
Registrant.
Robert R. Anderson (age 61) became Chairman of SVR in January 1994 and re-
assumed the position of Chief Executive Officer in December 1996 until August
1998. Prior to that, Mr. Anderson was Chief Executive Officer from April 1994
until July 1995 and was Chief Financial Officer from September 1994 to November
1995. Mr. Anderson co-founded KLA Instruments Corporation "KLA," a supplier of
equipment for semiconductor companies, in 1975. He served as Vice-Chairman of
the Board of KLA from November 1991 to March 1994 and served as Chairman of the
Board of KLA from May 1985 to November 1991. Prior to that, Mr. Anderson served
as Chief Operating Officer and Chief Financial Officer of KLA for nine years.
Mr. Anderson currently serves as a director of Applied Science & Technology
Inc., a supplier of systems components for the semiconductor industry.
James O. Benouis (age 31) became President and Chief Operating Officer of the
Company in March 1998 and was appointed Chief Executive Officer in August 1998.
Mr. Benouis came to the Company from Quality I.C. Corporation ("QIC"), an
integrated circuit design services company based in Austin, Texas, which was
acquired by the Company in March 1998, where he was President from 1995 to 1998.
While at QIC, his roles included project leadership for all IC design projects,
software enhancements and daily business operation management. He holds a
degree in Electrical Engineering from the University of Texas.
The Registrant incorporates by reference the Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A on, or before, July 29, 1999
for the information required by Item 10 with respect to the Company's directors
and the information required by Item 405 of Regulation S-K.
40
<PAGE>
Item 11. Executive Compensation
The Registrant incorporates by reference the Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A on, or before, July 29, 1999
for the information required by Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Registrant incorporates by reference the Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A on, before, July 29, 1999 for
the information required by Item 12.
Item 13. Certain Relationships and Related Transactions
The Registrant incorporates by reference the Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A on, or before, July 29, 1999
for the information required by Item 13.
41
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) EXHIBITS
(a)(1) The financial statements filed as part of this Report at Item 8 are
listed in the Index to Financial Statements and Financial Statement
Schedules on page 18 of this Report.
(a)(2) The financial statement schedule filed as part of this Report at Item
8 is listed in the Index to Financial Statements and Financial
Statement Schedules on page 18 of this Report.
(a)(3) The following exhibits are filed with this Annual Report on Form 10-K:
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.01 Registrant's Articles of Incorporation as amended to date
(incorporated by reference to Exhibit 3.01 of Registrant's
Registration Statement on Form S-1 ( File No. 2-89943) filed March 14,
1984, as amended (the "1984 Registration Statement")).
3.02 Registrant's amendment to Amended and Restated Articles of
Incorporation filed October 16, 1998 (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).
4.01 Form of Unit Purchase Agreement dated May 29, 1998 among Silicon
Valley Research, Inc. and several investors (incorporated by reference
to Exhibit 4.01 of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
4.02 Form of Warrant to Purchase the Company's Common Stock dated May 29,
1998 among Silicon Valley Research, Inc. and several investors
(incorporated by reference to Exhibit 4.02 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
10.01* Registrant's 1990 Directors' Stock Option Plan, as amended to date,
(incorporated by reference to Exhibit 10.01 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998).
10.03* Registrant's 1988 Stock Option Plan, as amended to date, including the
stock option grant form and the stock option exercise notice and
agreement (incorporated by reference Exhibit 10.03 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998).
*Management Contract or Compensatory Plan or Arrangement
21.01 Subsidiaries of the Registrant
23.01 Consent of Moss Adams LLP
23.02 Consent of PricewaterhouseCoopers LLP
27.00 Financial Data Schedule
*Management Contract or Compensatory Plan or Arrangement
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the fourth quarter of 1999.
42
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SILICON VALLEY RESEARCH, INC.
(Registrant)
Officer
Date: July 13, 1999 By: /s/ James O. Benouis
----------------- -------------------------------
James O. Benouis, President
and Chief Executive Officer
POWER OF ATTORNEY
Each of the officers and directors of Silicon Valley Research, Inc. whose
signature appears below hereby constitutes and appoints Robert R. Anderson and
James O. Benouis and each of them, their true and lawful attorneys and agents,
with full power of substitution, each with power to act alone, to sign and
execute on behalf of the undersigned any amendment or amendments to the annual
report on Form 10-K and to perform any acts necessary in order to file such
amendments, and each of the undersigned does hereby ratify and confirm all that
said attorneys and agents or their or his substitutes, shall do or cause to be
done by virtue hereof.
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
NAME/TITLE DATE
/s/ Robert R. Anderson July 13, 1999
- --------------------------------------------- -------------
Robert R. Anderson, Chairman of the Board
/s/ James O. Benouis July 13, 1999
- --------------------------------------------- -------------
James O. Benouis, President, Chief Executive
Officer and Director (Principal Executive and
Financial Officer)
/s/ David G. Arscott July 13, 1999
- --------------------------------------------- -------------
David G. Arscott, Director
/s/ David Knight July 13, 1999
- --------------------------------------------- -------------
David Knight, Director
43
<PAGE>
EXHIBIT 21.01
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
March 31, 1999
Percentages
Organized Under of Voting
Laws of Securities Owned
--------------- ----------------
Silicon Valley Research, Inc. (Registrant) California ---
Subsidiaries:
------------
Silicon Valley Research, Inc. K.K. Japan 97%
Silicon Valley Research, Inc. - Asia Pacific Taiwan 100%
Quality I.C. Corporation Texas 100%
All of the above subsidiaries are included in
Silicon Valley Research, Inc.'s Consolidated Financial Statements.
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Annual Report on Form 10-K of Silicon
Valley Research, Inc. and Subsidiaries for the year ended March 31, 1999 and to
the incorporation by reference in the Registration Statements on Form S-8 (Nos.
33-97988 and 333-36025) and in the Prospectus constituting part of the
Registration Statements on Form S-3 (Nos. 333-26599, 333-36023 and 333-46997) of
Silicon Valley Research, Inc. of our report dated June 10, 1999.
/s/ MOSS ADAMS LLP
San Francisco, California
July 12, 1999
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-97988 and 333-36025) and in the Prospectus
constituting part of the Registration Statements on Form S-3 (Nos. 333-26599,
333-36023 and 333-46997) of Silicon Valley Research, Inc. of our report dated
June 12, 1998 relating to the consolidated financial statements as of March 31,
1998 and for each of the two years then ended, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
July 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 247
<SECURITIES> 0
<RECEIVABLES> 594
<ALLOWANCES> 150
<INVENTORY> 0
<CURRENT-ASSETS> 800
<PP&E> 2,514
<DEPRECIATION> 2,224
<TOTAL-ASSETS> 2,059
<CURRENT-LIABILITIES> 1,575
<BONDS> 0
0
0
<COMMON> 43,930
<OTHER-SE> (43,470)
<TOTAL-LIABILITY-AND-EQUITY> 2,059
<SALES> 645
<TOTAL-REVENUES> 2,046
<CGS> 1,115
<TOTAL-COSTS> 5,158
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (60)
<INCOME-PRETAX> (4,241)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,241)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,241)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
