<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
----- Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000 or
_____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________to________
Commission File No. 0-13836
SILICON VALLEY RESEARCH, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
California 94-2743735
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6360 San Ignacio Avenue San Jose, CA 95119-1231
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 361-0333
--------------------------------------------------------------------------------
Registrant's telephone number, including area code
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO___
---
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date.
Common Shares Outstanding at September 30, 2000: 35,805,503
Transitional Small Business Disclosure Statement Format (Check One)
YES NO X
--- ---
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Part I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2000 (unaudited) 3
Consolidated Statements of Operations -
Three and Six Months Ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Condensed Statements of Cash Flows -
Three and Six Months Ended September 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. OTHER INFORMATION 18-19
-----------------
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Securities Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures 20
Exhibit 27.1 Financial Data Schedule 21
</TABLE>
Page 2 of 21
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(Unaudited)
(In thousands)
Assets September 30, 2000
------ ------------------
Current Assets:
Cash and cash equivalents $ 142
Accounts receivable, net of allowances of $85 994
Prepaid expenses and other current assets 103
-------
1,239
Fixed assets, net 205
Other assets, net 345
-------
$ 1,789
=======
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities:
Notes payable $ 25
Accounts payable 287
Accrued expenses 171
Deferred revenue 25
-------
508
-------
Long-term debt, less current portion 926
-------
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:
35,806 shares 45,369
Accumulated deficit (45,031)
--------
338
--------
$ 1,789
========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3 of 21
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
License fees and other $ -- $ 18 $ 585 $ 76
Maintenance and services 261 385 445 636
------- ------- ------- -------
Total revenue 261 403 1,030 712
------- ------- ------- -------
Cost of revenue:
License fees and other 66 80 132 160
Maintenance and services 170 225 283 356
------- ------- ------- -------
Total cost of revenue 236 305 415 516
------- ------- ------- -------
Gross margin 25 98 615 196
------- ------- ------- -------
Operating expenses:
Engineering, research and development 209 265 369 716
Selling and marketing 285 33 490 240
General and administrative 180 136 335 321
------- ------- ------- -------
Total operating expenses 674 434 1,194 1,277
------- ------- ------- -------
Operating loss (649) (336) (579) (1,081)
------- ------- ------- -------
Other income (expense):
Interest income 2 -- 8 --
Interest expense (24) (21) (49) (21)
Other, net (32) (36) (32) 71
------- ------- ------- -------
Total other income (54) (57) (73) 50
------- ------- ------- -------
Loss before provision for
income taxes (703) (393) (652) (1,031)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Net loss $ (703) $ (393) $ (652) $(1,031)
======= ======= ======= =======
Net loss per basic share $ (0.02) $ (0.01) $ (0.02) $ (0.04)
======= ======= ======= =======
Weighted-average common shares
outstanding (basic) 35,591 26,220 35,554 26,219
======= ======= ======= =======
Net loss per diluted share $ (0.02) $ (0.01) $ (0.02) $ (0.04)
======= ======= ======= =======
Weighted-average common shares
outstanding (diluted) 35,591 26,220 35,554 26,219
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 21
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
2000 1999
------ -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(652) $(1,031)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization:
Fixed assets 56 76
Software licenses and development costs 142 253
Loss on sale of fixed assets 9 41
Write-off of bad debts 255 --
Gain on cancellation of debt -- (96)
Changes in assets and liabilities, net:
Accounts receivable (357) 141
Prepaid expenses and other current assets 18 19
Accounts payable 21 (128)
Accrued expenses (118) 56
Deferred revenue 17 (161)
Other, net 73 33
----- -------
Net cash used in operating activities (536) (797)
----- -------
Cash Flows from Investing Activities:
Acquisition of fixed assets (147) (7)
----- -------
Net cash used in investing activities (147) (7)
----- -------
Cash Flows from Financing Activities:
Proceeds from subordinated debt financing -- 1,000
Proceeds from sale of fixed assets -- 11
Principal payments on long-term debt -- (135)
Principal payments on notes payable -- (25)
Proceeds from issuance of common stock and warrants 10 80
----- -------
Net cash provided by financing activities 10 931
----- -------
Effect of exchange rate changes on cash -- 14
----- -------
Net increase (decrease) in cash and
cash equivalents (673) 141
Cash and cash equivalents at beginning
of period 815 247
----- -------
Cash and cash equivalents at end
of period $ 142 $ 388
===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5 of 21
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 - Unaudited
(In thousands)
Note 1: Basis of Presentation and Financial Statement Information
The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim financial statements. Therefore, they do not include all
the disclosures which were presented in the Company's annual report on Form 10-
KSB. These financial statements do not include all disclosures required by
generally accepted accounting principles and accordingly, should be read in
conjunction with the consolidated financial statements and notes included as
part of the Company's latest annual report on Form 10-KSB for the fiscal year
ended March 31, 2000.
In the opinion of management, the consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position, results of operations and
cash flows for the interim period. The results of operations presented are not
necessarily indicative of the results to be expected for the full year or for
any other period.
The report of Moss Adams LLP on the Company's fiscal 2000 consolidated
financial statements dated May 12, 2000 included an explanatory paragraph
regarding the Company's ability to continue as a going concern. There can be no
assurance that the Company will not continue to incur significant operating
losses or that required additional financing will be available to meet the
Company's business plans in fiscal 2001 and beyond.
Note 2: Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" (FAS 128). Under FAS 128, the Company presents two EPS
amounts. Basic EPS is calculated based on income or loss to common shareholders
and the weighted-average number of shares outstanding during the reported
period. Diluted EPS includes additional dilution from common stock equivalents,
such as stock issuable pursuant to the exercise of stock options and warrants.
Common stock equivalents were not included in the computation of diluted
earnings per share when the Company reported a loss because to do so would have
been antidilutive for the periods presented.
The following is a reconciliation of the computation for basic and diluted
EPS:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss $ (703) $ (393) $ (652) $(1,031)
======= ======= ======= =======
Weighted-average common shares
outstanding (basic) 35,591 26,220 35,554 26,219
Weighted-average common stock equivalents:
Stock options -- -- -- --
Warrants -- -- -- --
------- ------- ------- -------
Weighted-average common shares
outstanding (diluted) 35,591 26,220 35,554 26,219
======= ======= ======= =======
</TABLE>
Page 6 of 21
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2000 - Unaudited
(In thousands)
Note 3: Comprehensive Income (Loss)
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." This Statement requires that all items
recognized under accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. This Statement also requires
that an entity classify items of other comprehensive earnings by their nature in
an annual financial statement. Other comprehensive earnings in these financial
statements include foreign currency translation adjustments. The Company's
total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (703) $ (393) $(652) $(1,031)
Other comprehensive (loss) gain -- -- -- 14
------- ------- ----- -------
Total comprehensive loss $ (703) $ (393) $(652) $(1,017)
------- ------- ----- -------
Note 4: Statement of Cash Flows Information
Six Months Ended
September 30,
2000 1999
---- ----
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 42 $ --
Income Taxes $ -- $ --
Non-cash investing and financing activities:
Warrants for common stock issued
for cancellation of indebtedness $ -- $ 131
Common stock issued in exchange for
note payable $ 74 $ --
Note 5: Balance Sheet Components
September 30, 2000
------------------
Other Assets:
Software development costs $ 942
Software licenses 979
-------
1,921
Less accumulated amortization (1,719)
-------
202
Goodwill 122
Other 21
-------
$ 345
=======
Accrued Expenses:
Payroll and related costs $ 94
Taxes payable 38
Other 39
-------
$ 171
=======
</TABLE>
Page 7 of 21
<PAGE>
SILICON VALLEY RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2000 - Unaudited
(In thousands)
Note 6: Subordinated Debt Financing
In June 1999, the Company began a subordinated debt/warrant financing. The
financing included approximately $1,000 of three-year notes and the sale of
approximately 8,000 Warrants 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 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.
Note 7: Commitments and Contingencies
As with other companies in industries similar to Silicon Valley Research,
Inc., 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.
Note 8: 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 disclosures prescribed by Statement of
Position 98-1 were effective for the year ending March 31, 2000 consolidated
financial statements.
Note 9: Year 2000 Issues
The "Year 2000 Issue" arises because most computer systems and programs
were designed to handle only a two-digit year, as opposed to a four-digit year.
The Company has not experienced and does not anticipate any material adverse
effects from Y2K on its operations or financial position.
Page 8 of 21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands)
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements, which reflect
Silicon Valley Research, Inc.'s ("the Company" or "SVR") current view with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including those
discussed in the Other Factors Affecting Future Results section of this Item 2,
elsewhere in this Form 10-QSB and as set forth in the Company's Form 10-KSB on
file with the SEC, that could cause actual results to differ materially from
historical results or those anticipated. Some of the examples of forward-looking
statements in this report include the Company's plans to resume business in
Japan and other countries in the Far East, a possible source of cash in the
potential exercise of outstanding warrants, and the Company's financing
requirements if revenue increases as anticipated and the Company maintains its
cost reductions. In this report, the words "anticipates," "believes," "expects,"
"intends," "future," and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof.
RESULTS OF OPERATIONS
REVENUE
Revenue for the second quarter of fiscal year 2001, which ended September
30, 2000, was $261, a decrease from $403 in the second quarter a year ago.
Revenue for the six month period ended September 30, 2000 increased to $1,030
from $712 over the six month period ended September 30, 1999. Revenue decreased
for the second quarter due to a dramatic change in the Company's sales strategy.
Over the past three years, the Company has sold 31 seats of its software at
prices ranging anywhere from approximately $5 to approximately $200 per seat,
with an average price of approximately $45. During this quarter, the Company
completed the implementation of its internet software delivery system ahead of
schedule. At that time, the Company, being compelled to notify potential
customers of a rapidly approaching change in its licensing model, began to
accumulate a backlog of orders for its soon to be released time-based internet
licensing model products. Since the new time-based internet licensing model
would represent a substantial cost savings to the individual customer, the
Company was compelled to give its customers the option to wait until the
internet licensing option was available. Only one customer elected to purchase
a permanent license, while over a dozen customers and potential customers
elected to join the backlog of sales and potential sales waiting for the release
of the time-based internet licensing model. The relative lack of sales for the
Company reflects a one-time revenue hit necessary to make the transition from a
quarterly sales cycle to a pay-by-the-hour model while maintaining customer
relations by not intentionally selling substantial amounts of inventory prior to
a large price reduction represented in the new pay-as-you-go model. The Company
anticipates that its products will be available on-line by the hour during the
third quarter of fiscal 2001.
Several key factors contributed to the increase in revenue for the six
months ended September 30, 2000, including the Company's distribution agreement
with The Shearwater Group, a global distributor and reseller of EDA (Electronic
Design Automation) software and the reorganization efforts made during calendar
1999. The Company had no international sales in the second quarter of fiscal
2001 compared to international sales comprising 1% of the Company's total
revenue in the second quarter of fiscal year 2000. Prior to fiscal 2000,
international sales were made primarily in Japan and other countries in the Far
East. The Company intends to resume doing business in these areas in the future
by having its products available on the internet.
A substantial portion of the Company's revenues in each quarter results
from shipments during the last month of that quarter. For this reason among
others, the Company's revenues are subject to significant quarterly
fluctuations. If revenue levels are below expectations, operating results may
be materially and adversely affected. In addition, the Company's quarterly and
annual results may fluctuate as a result of many factors, including but not
limited to the size and timing of software license fees and service contracts,
timing of co-development projects with customers, timing of operating
expenditures, increased competition, new product
Page 9 of 21
<PAGE>
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.
COST OF REVENUE
Cost of license fees and other for the second quarter of fiscal year 2001
was $66 as compared to $80 in the second quarter of fiscal year 2000. Cost of
license fees and other for the six months ended September 30, 2000 was $132
compared to $160 for the six months ended September 30, 1999. Cost of sales of
license fees and other is primarily the amortization of software development
costs and is not a function of revenue.
Cost of maintenance and services for the second quarter of fiscal year 2001
was $170 compared to $225 in the second quarter of fiscal year 2000. Cost of
maintenance and services for the six months ended September 30, 2000 was $283
compared to $356 for the six months ended September 30, 1999. Cost of
maintenance and services is primarily the cost of providing design services,
technical support and technical documentation.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES
Engineering, research and development expenses for the second quarter of
fiscal year 2001 were $209 compared to $265 in the second quarter of fiscal year
2000. Comparing the second quarter of fiscal 2001 and the second quarter of
fiscal 2000, engineering, research and development expenses were 80% and 66% of
total revenue, respectively. Engineering, research and development expenses for
six months ended September 30, 2000 were $369 compared to $716 for the six
months ended September 30, 1999. Comparing these periods, engineering, research
and development expenses were 36% and 101% of total revenue, respectively. The
decrease in engineering, research and development expenses is due to cost-
cutting measures instituted by management, including a reduction in personnel.
While the Company has maintained an emphasis on new product research and
development, the Company's current products are further along in the development
cycle and reached the stage of maturity where they require less investment for
development.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the second quarter of fiscal year 2001
increased to $285 from $33 in the second quarter of fiscal year 2000. In the
second quarter of fiscal 2001 and the second quarter of fiscal 2000, selling and
marketing expenses were 109% and 8% of total revenue, respectively. Selling and
marketing expenses for the six months ended September 30, 2000 increased to $490
from $240 for the six months ended September 30, 1999. Comparing the six month
periods, selling and marketing expenses were 48% and 34% of total revenue,
respectively. The increase in selling and marketing expenses for the second
quarter resulted from a write-off of bad debts.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $180 for the second
quarter of fiscal year 2001 from $136 in the second quarter of fiscal 2000. In
the second quarter of fiscal 2001 and the second quarter of fiscal 2000, general
and administrative expenses were 69% and 34% of total revenue, respectively.
General and administrative expenses for the six months ended September 30, 2000
increased to $335 from $321 for the six months ended September 30, 1999.
Comparing the six month periods, general and administrative expenses were 32%
and 45% of total revenue, respectively. The increase is due to an increase in
professional fees, including accounting fees to comply with new SEC regulations,
legal fees and investor relations.
Page 10 of 21
<PAGE>
OTHER INCOME (EXPENSE)
Other income for the first six months of fiscal year 2000 includes $107
gain recognized on the cancellation of indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
sales of equity securities and to a lesser extent, cash generated from
operations. During the six months ended September 30, 2000, cash and cash
equivalents decreased $673 from $815 to $142. This decrease resulted from cash
provided by financing activities of $10 less cash used by operations of $536 and
less $147 of cash used for investing activities. The Company received
approximately $10 from the exercise of outstanding warrants. A possible future
source of cash for the Company is the potential exercise of outstanding warrants
if the Company's stock price were to increase.
The Company reported a net loss for the six months ended September 30, 2000
and had an accumulated deficit of $45,031. The achievement and maintenance 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 resume. 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 may continue to experience negative cash flow from operations for
a portion of fiscal 2001 and potentially thereafter.
The Company's primary unused sources of funds at September 30, 2000 consisted
of cash and cash equivalents of $142. On October 13, 2000, the Company issued a
Warrant Reduction Offer (the "Offer") to investors who held warrants to purchase
shares of SVR Common Stock ("Warrants") at an exercise price of $0.37 per share
(the "$0.37 Warrants"). Under the Offer, such investors would be able to
exercise the $0.37 Warrants at a reduced price of either $0.175 per share or
$0.155 per share. Investors who exercised at the $0.155 price would be
prohibited from selling the shares acquired from the exercise for 60 days
commencing from the exercise date. Investors who exercised at the $0.175 price
would have no restrictions on the sale of the underlying shares. The Offer
expired on Friday, October 20, 2000. 1,341,220 warrants were exercised at
$0.155 per share and 248,729 warrants were exercised at $0.175 per share,
raising approximately $250,000. One officer/director of the Company, one
affiliate of a Company director and one 10% shareholder participated in the
Offer.
The Company's operations have required substantial cash in the past; for
example, $536 during the first six months of fiscal year 2001. Management has
implemented cost reducing measures and expects revenues to increase during the
remainder of fiscal year 2001. The Company is also required to pay several
creditors approximately $98 during fiscal year 2001 in settlement of a workout
agreement. Assuming management is successful with its cost reduction and
revenue achievement programs, the Company expects to fund future operations
without requiring additional financing. However, the Company may elect to
pursue financing in order to fund growth if its immediate potential for growth
exceeds its cash on hand. It is possible that the Company could require
additional financing to fund future operations. If such an event is necessary,
the Company may not be able to obtain financing on favorable terms, if at all.
The Company may issue one or more 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 the Company's Common Stock was delisted from
trading on the NASDAQ national market in November, 1998, and now trades in the
over-the-counter market, its ability to sell Common Stock or 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.
Page 11 of 21
<PAGE>
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. For the six months ended
-----------------------------------------------
September 30, 2000, the Company reported a net loss of $652 and had an
accumulated deficit of approximately $45,031 as of September 30, 2000. The
Company may incur future losses. There is no assurance that the Company will
generate positive cash flow from operations or that the Company will obtain
profitability in the future. To the extent the Company grows or incurs losses,
its operating and investing activities may use cash and, consequently,
additional sources of financing may be required or operating expenses reduced in
the future.
Need for Future Financing. As described above, under Management Discussion and
-------------------------
Analysis-Liquidity and Capital Resources, as long as SVR revenues continue to
increase as anticipated and the Company is able to implement and maintain cost
reduction measures, the Company does not expect to require additional financing
to fund operations in the future. However, if the Company cannot achieve
anticipated revenues, the Company may require additional funding due to the cash
requirements to service its 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, 2000
and 1999 contain an explanatory paragraph indicating that historical operating
losses and limited capital resources raise substantial doubt about the Company's
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 its 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 entered into an
---------------------------------------------
agreement with The Shearwater Group in November 1999 that provides that The
Shearwater Group will be the exclusive worldwide distributor for all of SVR
products for a minimum term of one year. The Company has elected to not extend
the exclusive contract with the Shearwater Group, which expired November 10,
2000. During the second quarter of fiscal 2001, the Company changed its sales
strategy to a time-based internet licensing model. The Company anticipates that
its products will be available on-line by the hour during the third quarter of
fiscal 2001. There can be no assurance that this new time-based internet
licensing model will be successful.
A small number of customers account for a significant percentage of SVR
total revenue. For the first six months of fiscal year 2001, two customers
accounted for 78% of the Company's total revenue. In fiscal year 2000, three
customers accounted for 41% of the Company's 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
-- 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 SVR's future
operations partly depends upon its ability to enhance SVR 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
Page 12 of 21
<PAGE>
methodologies, as well as address the increasingly sophisticated needs of
customers. During fiscal year 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 year 2001 revenues, which could cause the Company to
incur losses and utilize its available cash or even run out of cash.
The Company announced a new product named QIC/APR. However, there is no
guarantee that:
-- this new product will gain market acceptance
-- the Company will be successful in developing and marketing product
enhancements
-- the Company will be successful in developing other new products that respond
to technological change, evolving industry standards and changing customer
requirements
-- the Company 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 present products operate in the Unix and/or Linux operating
systems and the Company intends for all future products to operate in the Unix
operating system, as well as the Linux operating system. In the event that
another operating system, such as Windows NT, were to achieve broad acceptance
in the EDA industry, the Company would be required to port its products. 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 the Company's 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 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 some of its products. The Company may experience delays or lost
revenue in connection with repairs and corrections of defects it finds 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. SVR common
--------------------------------------------------------------
stock was delisted from trading on the NASDAQ National Market on November 16,
1998. SVR 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 it has been in the past. The trading price of SVR common
stock is currently less than $5.00 per share. Because the Company's 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 investors 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 engaging in some types of these transactions must make a special
suitability determination and obtain investors 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
Page 13 of 21
<PAGE>
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 SVR common
stock to fluctuate substantially:
-- future announcements concerning the Company's competitor's or 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. 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 SVR were placed in
this position, it could have a material adverse effect on the Company's
business, financial condition and operating results.
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 SVR and its competitors
-- gain or loss of significant customers or distributors
-- expense levels
-- renewal of maintenance contracts
-- pricing changes by SVR 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 SVR 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. The Company's 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 and the Company
may or may not become profitable.
Lengthy Sales Cycle. The licensing and sale of SVR software products generally
-------------------
involve a significant commitment of capital from prospective customers. Delays
are frequently associated with 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 the Company has 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. The
Company's actual results could vary materially as a result of a variety of
factors, including, without limitation:
Page 14 of 21
<PAGE>
-- 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 our 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. SVR customers' purchases of new licenses 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 5% of the total revenue in fiscal 2000 and 36% in
1999. Declining revenues from international sales resulted primarily from the
closure of the Company's Tokyo office in December 1998 and Taiwan office in
March 1999, brought about, in part, by a reduction in capital expenditures by
semiconductor manufacturers, particularly in Asia, as a result of the recent
financial crisis in that region, and increased competition in the EDA software
market. The Company expects that international sales through its time-based
internet licensing model, will once again account for a significant portion of
SVR 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 market acceptance of a time-based licensing model
The factors listed above may have a material adverse effect on the
Company's future international sales and, consequently, on the Company's
operating results.
Effective December 1998, the Company discontinued operating its Tokyo
office and in March 1999, the Company discontinued operating its Taiwan office.
Competition. The EDA software market in which Silicon Valley Research, Inc.
-----------
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 integrated circuit
physical design software, Avant! and Synopsys. These EDA vendors have
significantly greater financial, technical and marketing resources, greater name
recognition and a larger installed customer base than the Company. These
companies also have established relationships with current and potential
customers of the Company and can devote substantial resources aimed at
preventing the Company from enhancing relationships with existing customers or
establishing relationships with potential customers. The Company believes that
competitive factors in the EDA software market include:
Page 15 of 21
<PAGE>
-- product performance
-- price
-- support of industry standards
-- ease of use
-- delivery schedule
-- product enhancement
-- customer technical support and service
Competition from other EDA companies that choose to enter the integrated
circuit physical design market could present particularly formidable competition
due to their large installed customer base and their ability to offer a complete
integrated circuit design solution. 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 the Company's business, operating results and
financial condition.
Dependence on Key Personnel. The Company's success depends to a significant
---------------------------
extent upon a number of key technical and management employees, in particular,
James O. Benouis, 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 other key employees could have a material adverse effect on
the Company.
Also, the Company's success depends in large part on its ability to attract
and retain highly skilled technical, managerial, sales and marketing personnel.
Competition for such talented personnel is intense. There can be no assurance
that the Company will be successful in retaining key technical and management
personnel or in attracting and retaining the personnel it requires now in order
to grow.
Proprietary Rights. Silicon Valley Research, Inc. relies on contract, trade
------------------
secret and copyright law to protect its technology. Competitors may develop
similar or superior technologies or duplicate SVR technology. The Company
generally enters into confidentiality or license agreements with its employees,
distributors and customers, and limits access to and distribution of SVR
software, documentation and other proprietary information. Despite these
precautions, it is possible for a third party to copy or otherwise obtain and
use SVR 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 SVR 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 block the Company's ability to
sell products in the United States and abroad, and could result in an award of
substantial damages. In the event of a claim of infringement, Silicon Valley
Research, Inc. and its customers could be required to obtain one or more
licenses from third parties. There can be no assurance that either SVR
customers or the Company could obtain necessary licenses from third parties at a
reasonable cost or at all.
Concentration of Stock Ownership. The Company's present directors, executive
--------------------------------
officers and 5% shareholders and their affiliates beneficially own approximately
37% of the outstanding common stock as of September 30, 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.
Page 16 of 21
<PAGE>
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 the Company's outstanding voting stock.
Inflation. To date, inflation has not had a significant impact on the results
---------
of the Company's operations.
Recent Accounting Pronouncements. In April 1998, the American Institute of
--------------------------------
Certified Public Accountants issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use."
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 disclosures
prescribed by Statement of Position 98-1 were 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
Page 17 of 21
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
As with other companies in industries similar to Silicon Valley
Research, Inc., 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.
Item 2. Changes in Securities and Use of Proceeds: Not Applicable
Item 3. Defaults Upon Senior Securities: Not Applicable
Item 4. Submission of Matters to a Vote of Securities Holders: Not Applicable
Item 5. Other Information: Not Applicable
Page 18 of 21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
Exhibit
Number Description of Exhibit
------ ----------------------
(a)(1) The financial statements filed as part of this Report at Item 1 are
listed in the Index to Financial Statements and Financial Statement
Schedules on page 2 of this Report.
(a)(2) The following exhibits are filed with this Quarterly Report on Form 10-
QSB:
3.01 Registrant's Articles of Incorporation as amended to date (incorporated
by reference to Exhibit 3.01 of Registrant's Registration Statement on
Form S-1 (File No. 2-89943) filed March 14, 1984, as amended (the "1984
Registration Statement")).
3.02 Registrant's amendment to Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.02 of Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
3.03 Registrant's bylaws, as amended to date (incorporated by reference to
Exhibit 4.01 of the 1984 Registration Statement).
3.04 Amendment to Bylaws dated November 12, 1996 (incorporated by reference
to Exhibit 3.04 of Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996).
4.01 Warrant Reduction Offer Statement dated October 13, 2000 between Silicon
Valley Research, Inc. and certain warrant holders.
27.1 Financial Data Schedule
(B) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter covered by this report.
Page 19 of 21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SILICON VALLEY RESEARCH, INC.
Date: November 14, 2000 /s/ James O. Benouis
----------------- --------------------
James O. Benouis
President and
Chief Executive Officer
(Chief Financial and Accounting
Officer)
Page 20 of 21
