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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X Annual report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the fiscal year ended March 31, 2000
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 Small Business Issuer as specified in its charter)
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<S> <C>
California 94-2743735
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
6360 San Ignacio Avenue
San Jose, CA 95119-1231
(Address of principal executive offices) (Zip Code)
Issuer'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) of the Act: Common Stock, no par value
(Title of Class)
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Indicate by check mark whether the issuer: (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-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [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 20, 2000 in the over-the-counter market, was approximately
$3,200,000. 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 20, 2000, Issuer had 35,566,396 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement for issuer's 2000 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-KSB.
Transitional Small Business Disclosure Format: yes x no
--- ---
The exhibit index appears on sequentially numbered page 35
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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 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Other Factors Affecting Future
Results, and elsewhere in this Form 10-KSB, 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,
develops and markets physical design software for use by integrated circuit
("IC") designers, including those of its subsidiary, Quality I.C. Corporation.
SVR software products are used to automatically and efficiently arrange and
connect the individual components that comprise an integrated circuit. While
this process, commonly referred to as "place and route", is a crucial element of
most chip designs, some critical areas require a more manual approach.
Designers at Quality I.C. Corporation are skilled in the production of custom
chip components to satisfy demanding performance and area requirements. By
combining both strengths, the Company's design project support and consulting
services encompass nearly all aspects of the physical integrated circuit design
process. The Company's end-user customers include Hyundai, Innovision Labs,
Micron, Motorola, N.E.C., OKI Semiconductor, Samsung Electronics, SigmaTel,
Sony, Texas Instruments, 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 (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
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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, as well as on the Linux operating system. All of SVR's products
support industry standards such as Motif, X-Windows, GDSII Stream format, EDIF,
Verilog, LEF and DEF. In addition, the Company has ported two of its products,
QIC/APR and SC, to operate on the Red Hat version of the Linux operating system
running on X86 workstations. SVR offers interfaces to Mentor Graphics Falcon
Framework and Synopsys, Inc.'s synthesis tools and Cadence's physical design
tools. The Company's products have a similar technology foundation and are
modular in nature. Each of the products offered by the Company is 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 QIC/APR: SVR QIC/APR is the Company's latest product offering. QIC/APR is
the combined offering of DCP, QICPlace and QICRoute. QIC/APR offers all of the
features of the combined products in one comprehensive and affordable package.
QIC/APR is being made available under the Company's Peak Usage Leasing (PUL).
Peak Usage Leasing offers unlimited usage of QIC/APR over a two year term.
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.
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
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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 sold principally through its exclusive worldwide
distributor, The Shearwater Group, a global distributor and reseller of EDA
(Electronic Design Automation) software. Both the Company and the Shearwater
Group are responsible for marketing the products. The Company is dependent, in
part, upon The Shearwater Group for its revenues until Fall of 2000 when the
Company and The Shearwater Group will either negotiate continued exclusivity or
The Shearwater Group's exclusivity will automatically be extended for one (1)
year based upon sales then to date achieved. 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 plans to use either The Shearwater Group, or with the
consent of The Shearwater Group, one or more other distributors to service the
Japanese and Taiwanese markets.
The Company markets its products both domestically and internationally to
integrated circuit designers and manufacturers, large electronic systems
manufacturers, and major aerospace, automotive, and consumer electronics
companies. Consolidated revenue from SVR's major customers consists of the
following:
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<CAPTION>
Year Ended March 31,
Customer 1999 2000
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<S> <C> <C>
Motorola, Inc. 18% 16%
SigmaTel * 13%
The Shearwater Group * 12%
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*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
fully paid up 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 agreements typically for a one year
term, through its distributor for a fee, which includes technical support and
services such as telephone consultation regarding the use of the products,
problem resolution and product enhancements.
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 the porting of two products to the Linux
operating system, significant improvements to the Clock Tree Synthesis
application, including more accurate clock tree building, as well as automatic
skew balancing. Addition of advanced routing features included the addition of
Steiner routing improvement, which has proven to be useful in the routing of
data paths. In fiscal 1999 and 2000, the Company spent approximately $2,275,000
and $1,070,000, or as a percentage of revenue 111% and 52%, respectively, on
engineering, research and development. 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 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 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 sales starting in June, 1997. CLK Computer-Aided Design was
acquired by Mentor Graphics in November 1998. SVR's license to distribute the
TeraCell placement technology expired in April 2000. The Company does not
anticipate any negative effect on revenues as a result of the expiration of the
agreement.
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 fluctuations.
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
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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
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, 2000, the Company employed 12 employees, which included 11 full-
time workers; 8 engaged in engineering, product development, and IC design
services and the remainder engaged in administrative activities. The 12
employees were located in the United States. 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.
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Item 2. Description of Property
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 SVR'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. In the past, several of the
Company's vendors initiated collection actions against the Company because of
its inability to pay its vendors due to its previous cash shortage. Through the
Credit Manager's Association, the Company settled with its creditors.
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 300
shareholders of record and approximately 5,200 beneficial holders as of
March 31, 2000.
Common Stock Prices
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<CAPTION>
Fiscal 1999 Quarter ended June 30 Sept. 30 Dec. 31 March 31
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<S> <C> <C> <C> <C>
High $1.38 $0.66 $0.41 $0.34
Low $0.59 $0.19 $0.16 $0.13
<CAPTION>
Fiscal 2000 Quarter ended June 30 Sept. 30 Dec. 31 March 31
------- -------- ------- --------
<S> <C> <C> <C> <C>
High $0.19 $0.15 $1.28 $1.19
Low $0.10 $0.13 $0.12 $0.48
</TABLE>
The prices set forth above reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
The Company has not declared or paid dividends on its common stock in fiscal
1999 and 2000. 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.
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Item 6. 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, for example, statements concerning releases of new products and
enhancements, expected revenue growth, continuation of expense reductions and
international sales. 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 6 and elsewhere in this Annual
Report on Form 10-KSB, 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 was relatively constant, increasing 1% from $2,046 in fiscal 1999
to $2,065 in fiscal 2000. US revenues increased approximately 50% from $1,303
to $1,972. The increase in revenues in fiscal 2000 resulted from several key
factors, including sales from the Company's agreement with its new and exclusive
distributor, The Shearwater Group, a global distributor and reseller of EDA
(Electronic Design Automation) software, and increased sales of design services.
In addition, new license revenue increased due to strong demand for the
Company's Linux based products, which run on Red Hat Linux 6.2, and upgrades of
existing products in anticipation of Y2K concerns. International sales were
approximately $744 and $93 for fiscal 1999 and 2000, respectively, representing
36% and 5% of total revenue for the respective periods. This decrease resulted
primarily from closure of the Company's Japan and Taiwan offices. The Company's
plans for fiscal 2001 include an aggressive new product plan, including new
releases of significant enhancements for each of the Company's primary products,
as well as plans to increase international sales. 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 1999 and 2000 maintenance and services revenue was $1,401 and $1,222,
respectively. Services revenue as a percentage of total revenue was 68% and 59%
for fiscal 1999 and 2000, respectively. The decline in maintenance fees
included in services revenue in fiscal 2000 was due to a reduction in
maintenance renewals.
If revenue levels are below expectations, operating results will be materially
and adversely affected. In addition, the Company's quarterly and annual results
may fluctuate as a result of many factors, including the efforts of its
exclusive distributor, The Shearwater Group, 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.
The Company's expense levels are based, in part, on its expectations as to
future revenue levels, which are difficult to predict.
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Cost of revenue
For fiscal 1999 and 2000, cost of licenses was $339 and $306, respectively.
Cost of licenses as a percentage of licenses revenue was 53% and 36% for fiscal
1999 and 2000, respectively. Cost of licenses consists primarily of the
amortization of capitalized software development costs and is not a function of
revenue.
For fiscal 1999 and 2000, cost of maintenance and services was relatively
constant, increasing 1% from $776 to $782, respectively. Cost of maintenance
and services as a percentage of maintenance and services revenue was 55% and 64%
for fiscal 1999 and 2000, respectively. Cost of maintenance and services
primarily includes the cost of providing design services. In addition, a small
percentage of costs are for technical support and technical documentation.
Engineering, Research and Development Expenses
Engineering, research and development expenses for fiscal 1999 and 2000 were
$2,275 and $1,070, respectively. The decrease in engineering, research and
development expenses in fiscal 2000 was due to cost-cutting measures instituted
by management, including a reduction in personnel, while maintaining an emphasis
on new product research and development. The Company believes it has the
personnel necessary to complete its planned product upgrades and releases during
2001.
Selling and Marketing Expenses
Selling and marketing expenses for fiscal 1999 and 2000 were $1,974 and $381,
respectively. The decrease in fiscal 2000 is due to the effects of the
engagement of The Shearwater Group as the Company's exclusive worldwide
distributor and the Company's cost cutting measures, including a reduction in
personnel and occupancy costs due to the closure of sales offices in Japan and
Taiwan. The Company plans to use The Shearwater Group, or upon the consent of
The Shearwater Group, one or more other distributors to service the Japan and
Taiwan markets in the future.
General and Administrative Expenses
General and administrative expenses for fiscal 1999 and 2000 were $909 and $521,
respectively. General and administrative expenses have decreased due to the
effects of the Company's cost-cutting measures instituted by management,
including a reduction in personnel and outside professional fees.
Other Income (Expense)
Other income (expense) for fiscal 1999 and 2000 was $(14) and $195,
respectively. Other income in fiscal 2000 includes the following one-time
items: $142 gain recognized on the cancellation of indebtedness, $150 foreign
currency translation gain recognized upon the closure of foreign subsidiaries
and $41 loss recognized on the sale of fixed assets. Other expense for 2000
includes interest expense on a subordinated debt/warrant financing.
Provision for Income Taxes
The provision for income taxes for fiscal 1999 and 2000 was $0 and $0,
respectively.
As of March 31, 2000, the Company had federal and state net operating loss
carryforwards of approximately $41,000 and $11,000, respectively. The Company
also had federal and California research and development tax credit
carryforwards of approximately $726 and $513, respectively. The net operating
loss and credit carryforwards will expire at various dates from 2001 through
2020, if not utilized (see Note 10 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 2000, the Company received $1,000 cash
proceeds from a subordinated debt/warrant financing. In fiscal 1999 and 2000,
the
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Company received cash of $2,096 and $1,223, respectively, from private
placements of common stock and warrants and the exercise of warrants and options
to purchase common stock.
Although the Company reported net income for the third and fourth fiscal
quarters, the Company incurred an operating loss for the entire fiscal 2000. At
March 31, 2000, the Company had an accumulated deficit of $44,379. The
continuance of profitability is primarily dependent upon the continued
development and commercial acceptance of the Company's products, the successful
management of the business, management's ability to strategically focus the
Company and the distributor's marketing and sales ability. There can be no
assurance that profitable operations will continue. In addition, primarily
because of a longer collection period for its receivables resulting from its use
of a distributor, The Shearwater Group, the Company is experiencing negative
cash flow from operations and it is expected that it will continue to experience
negative cash flow for a portion of fiscal 2001 and potentially thereafter.
The Company's operating activities used cash of $3,259 and $1,225 in fiscal 1999
and 2000, respectively.
Investment activities, primarily comprising capitalized software development
costs, acquired fixed assets and purchased software licenses, were $(183) and
$(153) for fiscal 1999 and 2000, respectively.
The Company's primary unused sources of funds at March 31, 2000 consisted of
cash and cash equivalents of $815. On June 8, 1998, the Company's $2,000 line
of credit with its bank expired and the $285 outstanding under the line of
credit became due and payable. $225 of this amount remained outstanding as of
May 11, 1999. In addition, $137 outstanding on an equipment line with the same
lender also became due and payable. On May 11, 1999, the Company entered into a
Settlement Agreement with the lender whereby SVR agreed to issue a cash payment
for a portion of the debt and to issue warrants to purchase common stock
("Warrants") for cancellation of the remainder. The Settlement Agreement
required that SVR make the cash payment and deliver the Warrants to the lender
by June 8, 1999, which the Company did in full settlement of the debt.
In June 1999, the Company began a subordinated debt/warrant financing. The
financing included approximately $1,000 of three-year notes and the sale of
approximately 8,000 Warrants at $0.01 per Warrant. The debt bears simple
interest of 10% and the Warrants have a five-year term with an exercise price
per share of $0.125. This financing transaction consisted of two closings. At
the first closing, which took place on June 7, 1999, the Company received $768
cash proceeds. This included $711 of three-year notes and the sale of
approximately 5,700 Warrants at $0.01 per Warrant. The second closing was
originally scheduled for July 15, 1999. However, the second closing was extended
until September 24, 1999, pending negotiation of a workout with the Creditors'
Committee through the Credit Managers' Association to resolve accounts payable
issues. A workout agreement was reached and the Company received approximately
$312 cash proceeds from the second closing. The Company used part of the
proceeds from the financing to complete the Settlement Agreement with its lender
and to pay other accounts payable. The Company used the balance of the proceeds
to help fund its operations. The Company's CEO, the Company's Chairman of the
Board, an affiliate of a Company director and two Company 10% shareholders
participated in the financing.
The Company's operations have required substantial cash in the past; for
example, $1,225 during fiscal 2000, down from $3,259 in 1999. Management has
implemented cost reducing measures which helped yield this decrease and expects
revenues to increase during fiscal 2001. However, the Company is required to
pay creditors approximately $182 during calendar year 2000 in settlement of the
workout agreement. Assuming management's cost reductions are maintained the
entire fiscal year and revenue increases are achieved, the Company expects to be
profitable and to fund future operations without requiring additional financing.
However, if the Company grows and its receivables grow, the Company may seek to
borrow against the equity in its receivables. It is also possible that the
Company could require additional financing to fund future operations.
The Company may issue a series of Preferred Stock with rights, preferences, or
privileges senior to those of the Common Stock. It has no commitments or
arrangements to obtain any additional funding and there is no assurance that the
amount of capital required will be available on acceptable terms, if at all.
However, because its Common Stock was delisted from trading on the NASDAQ
national market in November, 1998, and now trades in the over-the-counter
market, its ability to sell Common Stock or
11
<PAGE>
securities convertible into Common Stock may be adversely affected. See
"Delisting From NASDAQ; Disclosure Relating to Low-Priced Stock" below for
possible effect of current common stock trading on future issuances.
The unavailability or timing of any financing could prevent or delay the
Company's continued development and marketing of SVR products and services. In
addition, substantial curtailment of its operations may be required which could
result in bankruptcy.
Other Factors Affecting Future Results
Recent and Expected Losses; Accumulated Deficit. The Company incurred a net
loss of $792 for the year ended March 31, 2000 and had an accumulated deficit of
$44,379 as of March 31, 2000. The Company may incur future losses although the
Company expects to be profitable for fiscal 2001, building upon its
profitability during the second half of fiscal 2000. There is no assurance that
the Company will generate positive cash flow from its operations to fund its
growth or that the Company will sustain profitability in any future period. To
the extent the Company incurs 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.
Need for Future Financing. As described above, under Management Discussion and
Analysis-Liquidity and Capital Resources, as long as the Company's revenues
continue to increase as anticipated and expenses are held to their second half
of fiscal 2000 levels, additional financing to fund operations in the future
should not be required. However, if the Company cannot achieve anticipated
revenues, additional funding may be required to service the Company's current
debt and any 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, 1999
and 2000 contained an explanatory paragraph indicating that the Company's
historical operating losses and limited capital resources raise substantial
doubt about its ability to continue as a going concern. If the Company is
unable to generate sufficient cash from operations or if necessary, raise
sufficient funds to cover the cost of operations, it is likely that any
independent accountant's report on future financial statements will include a
similar explanatory paragraph.
Dependence on Certain Customers and Resellers. The Company has entered into an
agreement with The Shearwater Group that provides that The Shearwater Group will
be the exclusive worldwide distributor for all of SVR products for a minimum
term of one year. Such contract exclusivity will automatically be extended upon
the achievement of certain sales goals for an additional one-year period.
Otherwise, the Company and The Shearwater Group would negotiate the terms of
extension, including exclusivity. While The Shearwater Group has a financial
incentive to sell SVR products and its initial sales performance has been
satisfactory, it has no contractual obligation to sell SVR products. There can
be no assurance that the distributor will be able to successfully distribute and
support SVR products on a timely basis or that such distributor will not reduce
their efforts devoted to selling SVR products. There can be no assurance that
the contract with the distributor will be automatically extended or renewed, and
if renewed, what the terms would be. The loss of, or changes in, the
relationship with, or performance by, the distributor would likely have a
material adverse effect on the Company's business. A small number of customers
account for a significant percentage 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.
New Products and Rapid Technological Change; Risk of Product Defects. The
Electronic Design Automation ("EDA") industry is characterized by the following:
. extremely rapid technological change
. frequent new product introductions and enhancements
12
<PAGE>
. evolving industry standards
. rapidly changing customer requirements
The development of more complex integrated circuits with new technologies will
require more sophisticated design tools. The success of the Company's future
operations partly depends upon its ability to enhance current products and to
develop and introduce new products on a timely and cost-effective basis. SVR
products and services must keep pace with technological developments and
evolving industry standards and methodologies, as well as address the
increasingly sophisticated needs of SVR customers. During fiscal 2001, SVR will
have an aggressive new product release and current product update program, upon
which expected revenue increases are partially based. It is possible that in
the future, the Company may experience delays in new product development and
product enhancements. The Company has experienced similar delays in the past.
Such delays would likely decrease expected fiscal 2001 revenues, which could
cause the Company to incur losses and utilize its available cash or even run out
of cash.
In fiscal 2000, SVR released a new product named QIC/APR. However, there is no
guarantee that:
. this new product will gain market acceptance
. SVR will be successful in developing and marketing product enhancements
. SVR will be successful in developing other new products that respond to
technological change, evolving industry standards and changing customer
requirements
. SVR will not experience difficulties that could delay or prevent the
successful development introduction and marketing of these products or
product enhancements
. new products and product enhancements will adequately meet the requirements
of the marketplace and achieve any significant degree of market acceptance
All of SVR's present products operate in the Unix and/or Linux operating systems
and the Company intends for all future products to operate in the Unix and Linux
operating systems. 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. This would be costly and time consuming and
could have a material adverse effect on the Company's business, operating
results or financial condition. If the Company fails to develop and introduce
new products and product enhancements in a timely and cost-effective manner, for
technological or other reasons, it could also have material and adverse effects
on its business, operating results and financial condition. Introducing or even
announcing new products by SVR or its competitors, including new technologies or
changes in industry standards or customer requirements, could render some or all
of SVR's existing products obsolete or unmarketable. Furthermore, customers
might defer purchases due to the introduction or announcement, which would also
have a material adverse effect on the Company's business, operating results or
financial condition.
Complex software products, such as those SVR offers, can contain defects or even
fail when introduced or released. The Company has, in the past, discovered
defects in certain of its products. The Company may experience delays or lost
revenue in connection with repairs and corrections of defects found in the
future. Although to date the Company has not experienced material adverse
effects resulting from defects, it is possible in the future that despite
testing, errors will go undiscovered in new products or releases until after
shipment. These errors may result in loss of market share or failure to achieve
market acceptance. If this were to occur, it 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. The Company's
common stock was delisted from trading on the NASDAQ National Market November
16, 1998. The Company's common stock immediately began trading on the OTC
Bulletin Board. As a result, the Company's ability to obtain additional
financing through the issuance of common stock or securities convertible into
common stock may be adversely affected. Investors might find that disposing of
SVR common stock is more difficult than is has been in the past. The trading
price of SVR common stock is currently less than $5.00 per share. Because the
common stock falls into the category defined as penny stock, trading in the
common stock is currently subject to certain rules promulgated under the
Exchange Act, which require additional disclosure by broker-dealers. These
rules require the Company, in advance of trading, to provide you with disclosure
schedules, which explain the penny stock market and associated risks. The rules
impose various sales practice requirements on broker-dealers who sell penny
stock. Broker-dealers
13
<PAGE>
engaging in some types of these transactions must make a special suitability
determination and obtain your written consent prior to sale. This additional
burden may discourage broker-dealers from actively effectuating common stock
transactions, which in turn could have the adverse effect of severely limiting
the marketability of SVR common stock. Therefore, the ability of Silicon Valley
Research, Inc. shareholders to resell their stock would be limited. In turn,
this could adversely effect the Company's ability to obtain future equity
financing.
Possible Volatility of Stock Price. The market price of SVR common stock has
been volatile. The following events could cause the market price of our common
stock to fluctuate substantially:
. future announcements concerning the Company's competitors or its quarterly
variations in operating results
. the introduction of technological innovations, new products, or changes in
product pricing policies
. proprietary rights or other litigation, or
. changes in earnings estimates by analysts or other factors
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 like SVR. These fluctuations have often been
unrelated to the operating performance of particular companies.
In the past, shareholder class action suits have been filed against companies
following periods of volatility of stock price. Litigation of this nature could
occur in the Company's future. Litigation often diverts management attention
and resources and is costly to the company. If the Company were placed in this
position, it could have a material adverse effect on the Company's business,
financial condition and operation results. Significant liabilities are always
possible effects of litigation.
Potential Fluctuations in Quarterly Operating Results. Numerous factors may
materially and unpredictably affect the Company's operating results, including:
. 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
. 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. As a
result, the Company operates with no significant backlog. Therefore, quarterly
revenue and operating results will 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 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 expenses vary with revenue. Operating results in any period should
not be considered indicative of the results to be expected for any future
period. The Company's revenues may or may not increase.
Lengthy Sales Cycle. The licensing and sale of the Company's software products
generally involve a significant commitment of capital from prospective
customers. Delays are frequently associated with
14
<PAGE>
large capital expenditures and lengthy acceptance procedures. For these and
other reasons, the sales cycle associated with the licensing of SVR products is
typically lengthy and subject to a number of significant risks over which we
have little or no control. Because the timing of customer orders is hard to
predict, the Company believes that quarterly operating results are likely to
vary significantly in the future. Actual results could vary materially as a
result of a variety of factors, including, without limitation:
. the high average selling price and long sales cycle for SVR 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
. acceptance of SVR products and increased competition
Dependence Upon Semiconductor and Electronics Industries; General Economic and
Market Conditions. Silicon Valley Research, Inc. 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. Each of these
industries is highly volatile and has periodically experienced significant
downturns. Often in connection with, or in anticipation of, declines in general
economic conditions, the number of new integrated circuit design projects often
decreases. Customer purchases of new licenses from the Company are largely
dependent upon the commencement of new design projects. 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 due to patterns and general
economic conditions in either the semiconductor or electronics industry.
International Sales. International sales, primarily in Japan and Taiwan,
accounted for approximately 36% and 5% of the total revenue in fiscal 1999 and
2000, respectively. Declining revenues from international sales resulted
primarily from closure of the Company's Tokyo office in December 1998, and
Taiwan office in March 1999 brought about, in part, by the reduction in capital
expenditures by semiconductor manufacturers, particularly in Asia and increased
competition in the EDA software market. The Company plans for international
sales through The Shearwater Group, or upon their consent, one or more other
distributors to account for a significant portion of revenue by the end of
fiscal 2001, as had been the case prior to fiscal 2000. However, this revenue
involves a number of inherent risks, including:
. economic downturn in the electronics industry in Asia
. traditionally slower adoption of SVR 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
. other trade barriers
. The Shearwater Group's performance under the distributor agreement
. Obtaining The Shearwater Group's consent and obtaining quality distributors if
The Shearwater Group is not adequate to increase revenues
The factors listed above may have a material adverse effect on future
international sales and, consequently, on operating results.
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,
15
<PAGE>
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 James O. Benouis, the Company's President and Chief Executive Officer. The
Company does not currently have "key man" life insurance on Mr. Benouis. The
loss of services of 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 Company's present directors, executive
officers and 5% shareholders and their affiliates beneficially own approximately
54% of the outstanding common stock as of March 31, 2000. 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 Silicon Valley
Research, Inc.
Depressive Effect of Warrants. As of March 31, 2000, the Company had a
substantial number of common stock warrants outstanding with an exercise price
of $0.125 (829) and of $0.37 (1,889). These warrants may have the effect of
causing the stock price to be lower than it would be otherwise. During fiscal
2000, the Company received approximately $1,115 from the exercise of 8,902
warrants.
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
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 our outstanding voting stock.
Inflation. To date, inflation has not had a significant impact on the results
of our 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."
Statement of Position 98-1 provides guidance for determining whether computer
software is internal-use software and on capitalization of the costs associated
with internal-use computer software. It also provides guidance on accounting
for the proceeds of computer software originally developed or obtained for
internal use and then subsequently sold to the public. The Company has not yet
determined the impact, if any, of adopting this statement. The disclosures
prescribed by Statement of Position 98-1 are effective for the year ending March
31, 2000 consolidated financial statements.
Year 2000 Issue. The "Year 2000 Issue" arises because most computer systems and
programs were designed to handle only a two-digit year, as opposed to a four-
digit year. The Company has not experienced and does not anticipate any material
adverse effects from Y2K on its operations or financial position.
16
<PAGE>
Item 7. Financial Statements and Financial Statement Schedules
Index to Financial Statements and Financial Statement Schedules
<TABLE>
<CAPTION>
Financial Statements:
<S> <C>
Report of Independent Accountants 18
Report of Management 19
Consolidated Balance Sheet as of March 31, 2000 20
Consolidated Statements of Operations for the years ended March 31,
1999 and 2000 21
Consolidated Statements of Changes in Shareholders' Equity for the years
ended March 31, 1999 and 2000 22
Consolidated Statements of Cash Flows for the years ended March 31,
1999 and 2000 23
Notes to Consolidated Financial Statements 24-33
</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.
17
<PAGE>
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, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years 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, 2000, and the results of its operations and its
cash flows for each of the two years 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
May 12, 2000
18
<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-KSB 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 29, 2000
19
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
March 31, 2000
--------------
<S> <C>
Assets
Current Assets
Cash and cash equivalents $ 815
Accounts receivable, net of allowances of $85 892
Prepaid expenses and other current assets 121
--------
1,828
Fixed assets, net 123
Other assets, net 560
--------
$ 2,511
========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable 25
Accounts payable 266
Accrued expenses 290
Deferred revenue 8
--------
589
--------
Long-term debt, less current portion 1,000
--------
Deferred tax liability 17
--------
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: 35,184 shares 45,284
Accumulated deficit (44,379)
--------
905
--------
$ 2,511
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
SILICON VALLEY RESEARCH, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended March 31,
1999 2000
------- -------
<S> <C> <C>
Revenue
License fees and other $ 645 $ 843
Maintenance and services 1,401 1,222
------- -------
Total revenue 2,046 2,065
------- -------
Cost of revenue
License fees and other 339 306
Maintenance and services 776 782
------- -------
Total cost of revenue 1,115 1,088
------- -------
Gross margin 931 977
------- -------
Operating expenses
Engineering, research and development 2,275 1,070
Selling and marketing 1,974 381
General and administrative 909 521
------- -------
Total operating expenses 5,158 1,972
------- -------
Operating loss (4,227) (995)
------- -------
Other income (expense)
Interest income 54 5
Interest expense (60) (73)
Other, net (8) 271
------- -------
Total other income (expense) (14) 203
------- -------
Loss before provision for income taxes (4,241) (792)
Provision for income taxes - -
------- -------
Net loss $(4,241) $ (792)
======= =======
Net loss per basic and diluted share $ (0.16) $ (0.03)
======= =======
Weighted-average common shares
outstanding (basic and diluted) 25,748 28,172
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<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(Loss) Income(Loss) Total
------------ ----------- -------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
====== ======= ======== ======== =======
Foreign currency translation
adjustment -- -- -- (117) (117) $ (117)
Net loss -- -- (792) -- (792) (792)
-- ------
Comprehensive income(loss) -- -- -- -- $ (909) --
======
Common stock issued under
stock option and stock
purchase plans 68 28 -- -- 28
Proceeds from issuance
of common stock 8,902 1,326 -- -- 1,326
------ ------- ------- ------- -------
Balances, March 31, 2000 35,184 $45,284 $(44,379) $ -- $ 905
====== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
SILICON VALLEY RESEARCH, INC.
Consolidated Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
1999 2000
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(4,241) $ (792)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization:
Fixed assets 280 137
Software licenses and development costs 840 491
Loss on sale of fixed assets 38 41
Provision for impairment of software 153 --
Gain on cancellation of debt -- (142)
Changes in assets and liabilities:
Accounts receivable 40 (448)
Prepaid expenses and other current assets 148 (12)
Accounts payable 98 (138)
Accrued expenses (490) (169)
Deferred maintenance revenue (304) (227)
Other, net 179 34
------- -------
Net cash used in operating activities (3,259) (1,225)
------- -------
Cash Flows from Investing Activities:
Acquisition of fixed assets (52) (21)
Proceeds on sale of fixed assets 31 11
Capitalization of software development costs and
purchase of software licenses (162) (143)
------- -------
Net cash used in investing activities (183) (153)
------- -------
Cash Flows from Financing Activities:
Proceeds from subordinated debt financing -- 1,000
Principal payments of long-term debt (224) (135)
Principal payments on notes payable (150) (25)
Proceeds from issuance of common stock and warrants 2,096 1,223
------- -------
Net cash provided by financing activities 1,722 2,063
------- -------
Effect of exchange rate changes on cash 41 (117)
------- -------
Net increase (decrease) in cash and cash equivalents (1,679) 568
Cash and cash equivalents at beginning of year 1,926 247
------- -------
Cash and cash equivalents at end of year $ 247 $ 815
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<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 two fiscal years from
operations. 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. 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 also includes design services.
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, consulting and design revenues are recognized as these services are
performed.
24
<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, 2000, three customers accounted for 76% 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.
25
<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). 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) 1999 2000
------- -------
<S> <C> <C>
Net loss $(4,241) $ (792)
======= =======
Weighted-average common shares
outstanding (basic) 25,748 28,172
Weighted-average common stock equivalents:
Stock options - -
Warrants - -
------- -------
Weighted-average common shares
outstanding (diluted) 25,748 28,172
======= =======
</TABLE>
Options to purchase 3,568 shares of common stock at prices ranging from $0.135
to $6.50 per share were outstanding at March 31, 2000, 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.
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.
26
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
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 closing trade
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>
Fixed assets comprise: March 31, 2000
--------------
<S> <C>
Computer equipment $ 1,991
Office equipment 395
-------
2,386
Less accumulated depreciation and amortization (2,263)
-------
$ 123
=======
</TABLE>
There are no fixed assets acquired under capital leases included above.
NOTE 3 OTHER ASSETS
<TABLE>
<CAPTION>
March 31, 2000
--------------
<S> <C>
Other assets comprise:
Software development costs $ 942
Software licenses 979
-------
1,921
Less accumulated amortization (1,577)
-------
344
Prepaid royalties 25
Goodwill 147
Other 44
-------
$ 560
=======
</TABLE>
Software development costs capitalized during 2000 were $143 and the related
amortization during the year was $306. Other consists primarily of deposits on
facilities and equipment leases.
27
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
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.
<TABLE>
<CAPTION>
March 31,
1999 2000
------- -----
<S> <C> <C>
Net loss $(4,241) $(792)
Other comprehensive gain (loss) 41 (117)
------- -----
Total comprehensive income (loss) $(4,200) $(909)
======= =====
</TABLE>
NOTE 5 ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses comprise: March 31, 2000
--------------
<S> <C>
Accrued payroll and related costs $ 75
Taxes payable 106
Commissions payable 75
Other 34
-----
$ 290
=====
</TABLE>
Other consists of accruals related to expenses incurred in the normal course of
business, such as interest and sales expenses.
NOTE 6 BANK BORROWINGS AND LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt comprise: March 31, 2000
--------------
<S> <C>
Notes payable 1,000
Less current portion -
--------
$1,000
========
</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. On May
11, 1999, the Company entered into a Settlement Agreement with the lender
whereby SVR agreed to issue a cash payment for a portion of the debt and to
issue warrants to purchase common stock ("Warrants") for cancellation of the
remainder. The Settlement Agreement required that SVR make the cash payment and
deliver the Warrants to the lender by June 8, 1999, which the Company did in
complete settlement of the debt.
In June 1999, the Company began a subordinated debt/warrant financing. The
financing included approximately $1,000 of three-year notes and the sale of
approximately 8,000 Warrants at $0.01 per Warrant. The debt bears simple
interest of 10% and the Warrants have a five-year term with an exercise price
per share of $0.125. This financing transaction consists of two closings. The
first closing took place on June 7, 1999. The Company received $768 cash
proceeds from this closing. This included $711 of three-year notes and the sale
of approximately 5,700 Warrants at $0.01 per Warrant. The second closing was to
have taken place on July 15, 1999. The closing was extended until September 24,
1999 pending negotiation of a workout with the Creditors' Committee through the
Credit Managers' Association to resolve accounts payable issues that was
satisfactory to the majority of the investors. An agreement was reached and the
Company received approximately $312 cash proceeds from the second closing. 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 used
the balance of the proceeds to help fund its
28
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
operations. The Company's CEO, the Company's Chairman of the Board, an
affiliate of a Company director and two Company 10% shareholders participated in
the financing. These notes mature during the fiscal year ending March 31, 2003.
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>
2001 $175
2002 44
----
$219
====
</TABLE>
The Company is generally responsible for its pro rata share of taxes,
maintenance and insurance on the facilities. Rental expense aggregated $720 and
$217 in 1999 and 2000, 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.
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 $4 and $1 to the Plan during fiscal 1999
and 2000, respectively. Administrative costs paid by the Company were
insignificant during fiscal 1999 and 2000.
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.
Stock Options
At March 31, 2000, the Company has reserved 5,449 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.
29
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
At March 31, 2000, options to purchase 765 shares of common stock were vested,
and 3,155 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, 1999 March 31, 2000
--------------------------------------- ---------------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,006 $0.83 1,399 $0.72
Granted 868 0.49 3,154 0.14
Exercised (46) 0.88 (58) 0.47
Forfeited (1,429) 0.73 (927) 0.38
------ -----
Outstanding at end of year 1,399 $0.72 3,568 $0.29
====== =====
Options exercisable at year-end 422 765
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ ---------------------------------
Weighted-
Shares Average Weighted- Shares Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 3/31/00 Contractual Life Exercise Price at 3/31/00 Exercise Price
<S> <C> <C> <C> <C> <C>
$ 0.13 - $ 0.13 2,577 9.58 $0.13 275 $0.13
$ 0.14 - $ 0.59 613 7.56 0.51 217 0.55
$ 0.87 - $ 1.44 366 5.99 0.92 261 0.94
$ 3.19 - $ 3.50 10 3.84 3.27 10 3.27
$ 6.50 - $ 6.50 2 4.47 6.50 2 6.50
----- ------ ----- ----- -----
3,568 8.84 $0.29 765 $0.59
===== ====== ===== ===== =====
</TABLE>
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, 1999 and
2000 would have been as follows:
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C> <C>
Net loss As reported $(4,241) $ (792)
Pro forma $(4,531) $(1,126)
Net loss per share (basic) As reported $ (0.16) $ (0.03)
Pro forma $ (0.18) $ (0.04)
Net loss per share (diluted) As reported $ (0.16) $ (0.03)
Pro forma $ (0.18) $ (0.04)
</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 1999 and 2000, respectively; expected volatility of 108% and
143%; weighted-average risk-free interest rates of 4.99% and 5.91%, and
weighted-average expected lives of 3.44 and 3.00. The weighted-average fair
value of options granted in 1999 and 2000 was $0.33 and $0.1058, respectively.
30
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
Warrants
The following warrants to purchase shares of the Company's common stock are
outstanding and fully vested at March 31, 2000:
<TABLE>
<CAPTION>
Expiring During
the Fiscal Number of Common
Year Ending Exercise Price Shares Under Warrants
------------------ ---------------- ---------------------
<S> <C> <C>
3/31/01 $ 1.31 4,517
3/31/03 $ 0.53 3,330
3/31/05 $0.125 829
3/31/06 $ 0.37 1,888
------
10,564
======
</TABLE>
During the fiscal year ended March 31, 2000, 9,394 warrants were exercised.
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 30 and 10 shares of
common stock issued under the plan in 1999 and 2000, respectively, leaving a
balance of 331 shares available for issuance at March 31, 2000.
NOTE 10 INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended March 31, 1999 2000
----- -----
<S> <C> <C>
Current:
Federal $ - $ -
State - -
Deferred - -
Foreign - -
----- -----
Total provision $ - $ -
===== =====
</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>
2000
--------
<S> <C>
Allowances and accruals not currently deductible $ 107
Net operating losses and other credits 14,847
--------
Total deferred tax assets 14,954
Less: valuation allowance (14,954)
--------
Net deferred tax asset $ 0
========
</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.
31
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
At March 31, 2000, the Company had available federal and state tax net operating
loss carryforwards of approximately $41,000 and $11,000, respectively. The
federal and state tax net operating loss carryforwards expire from 2001 to 2020
and 2001 to 2005, respectively. The Company has federal and state research and
development credit carryforwards of approximately $726 and $513, respectively,
expiring from 2008 through 2019. 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, 1999 2000
------- -------
<S> <C> <C>
Provision (benefit) at U.S. statutory rate $(1,609) $(2,669)
Tax losses not currently benefited 1,609 2,669
------- -------
Tax provision $ 0 $ 0
======= =======
</TABLE>
NOTE 11 SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended March 31, 1999 2000
------- -------
<S> <C> <C>
Cash paid during the period for:
Interest $ 60 $ 46
Income taxes $ - $ -
</TABLE>
Noncash investing and financing activities: During the year ended March 31,
2000, the Company issued warrants valued at $131 as consideration for the
repayment of long-term debt.
NOTE 12 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, 2000.
The Company's products are principally distributed and serviced through its
worldwide distributor, The Shearwater Group. Effective December 1998, the
Company discontinued operating its Tokyo office and in March 1999, the Company
discontinued operating its Taiwan office. The Company now uses its distributor
to service these markets.
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.
The following table summarizes the United States, European, Japanese and
Taiwanese operations of the Company:
32
<PAGE>
SILICON VALLEY RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share price data)
<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, 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
======= ====== === ===== ===== ===== =======
Year ended March 31, 2000
Sales to unaffiliated customers $ 1,051 $ 980 $24 $ 10 $ - $ - $ 2,065
Transfer between geographic
regions - - - - - - -
------- ------ --- ----- ----- ----- -------
Total sales $ 1,051 $ 980 $24 $ 10 $ - $ - $ 2,065
======= ====== === ===== ===== ===== =======
Operating income (loss) $ (945) $ (101) $24 $ 8 $ 19 $ - $ (995)
======= ====== === ===== ===== ===== =======
Identifiable assets $ 2,308 $ 203 $ - $ - $ - $ - $ 2,511
======= ====== === ===== ===== ====== =======
</TABLE>
Included in total United States revenue are export sales of $307 and $59 for
1999 and 2000, respectively, principally to the Far East. Total consolidated
revenue outside of the United States was $744 and $93 in 1999 and 2000,
respectively.
Revenue from one product accounted for 13% of the Company's consolidated revenue
in fiscal 2000. 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 1999 2000
-------- ---- ----
<S> <C> <C>
A 18% 16%
B *% 13%
C *% 12%
</TABLE>
* less than 10% of consolidated revenue
33
<PAGE>
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
Item 9. 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 62) 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, Metron
Technology N.V., a distributor of parts and equipment for the semiconductor
industry and Trikon Technologies, Inc., a manufacturer of semiconductor process
equipment.
James O. Benouis (age 32) 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, 2000
for the information required by Item 9 with respect to the Company's directors
and the information required by Item 405 of Regulation S-B.
Item 10. 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, 2000
for the information required by Item 10.
Item 11. 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, 2000 for
the information required by Item 11.
Item 12. 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, 2000
for the information required by Item 12.
34
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(A) EXHIBITS
(a)(1) The financial statements filed as part of this Report at Item 7 are
listed in the Index to Financial Statements and Financial Statement
Schedules on page 17 of this Report.
(a)(2) The financial statement schedule filed as part of this Report at Item 7
is listed in the Index to Financial Statements and Financial Statement
Schedules on page 17 of this Report.
(a)(3) The following exhibits are filed with this Annual Report on Form 10-KSB:
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).
10.01Agreement and Stipulation between Registrant and Finova Technology
Finance, Inc. (incorporated by reference to Exhibit 10.01 of the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1999).
10.02Workout Agreement of Silicon Valley Research, Inc. (incorporated by
reference to Exhibit 10.02 of the Registrant's Quarterly Report on Form 10-
QSB for the quarter ended September 30, 1999).
10.03Contract with The Shearwater Group dated November 11, 1999 (incorporated by
reference to Exhibit 10.03 of the Registrant's Quarterly Report on Form 10-
QSB for the quarter ended December 31, 1999).
21.01 Subsidiaries of the Registrant
23.01 Consent of Moss Adams LLP
27.00 Financial Data Schedule
REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the fourth quarter of 2000.
35
<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: June 29, 2000 By: /s/ James O. Benouis
----------------- --------------------
James O. Benouis, President, Chief Executive
Officer and Chief Accounting 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-KSB 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 June 29, 2000
--------------------------------------------- -----------------
Robert R. Anderson, Chairman of the Board
/s/ James O. Benouis June 29, 2000
--------------------------------------------- -----------------
James O. Benouis, President, Chief Executive
Officer and Director (Principal Executive and
Financial Officer)
/s/ David G. Arscott June 29, 2000
--------------------------------------------- -----------------
David G. Arscott, Director
36
