UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2002
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 number 000-15116
Sigma Designs, Inc. (Exact name of Registrant as Specified in its Charter)
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355 Fairview Way
Milpitas, California 95035
(Address of Principal Executive Offices including Zip Code)
(408) 262-9003
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $82,138,620 as of April 22, 2002 based on the closing price of the Common Stock as reported on The Nasdaq Stock Market for that date. There were16,427,724 shares of the Registrant's Common Stock issued and outstanding on April 22, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of Sigma Designs, Inc.'s definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be held on June 21, 2002 are incorporated by reference in Part III of this Form 10-K to the extent stated herein.
Sigma Designs, Inc.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
| PART I | Page No. |
| Item 1. Business |
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| Item 2. Facilities |
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| Item 3. Legal Proceedings |
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| Item 4. Submission of Matters to a Vote of Security Holders |
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| PART II | |
| Item 5. Market for the Registrant's Common Stock |
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| Item 6. Selected Consolidated Financial Data |
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| Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 7A. Quantitative and Qualitative Disclosures About Market Risks |
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| Item 8. Consolidated Financial Statements and Supplementary Data |
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| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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| PART III | |
| Item 10. Directors and Executive Officers of the Company |
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| Item 11. Executive Compensation |
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| Item 12. Security Ownership of Certain Beneficial Owners and Management |
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| Item 13. Certain Relationships and Related Transactions |
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| PART IV | |
| Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K |
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| Signatures |
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Certain Factors Affecting Business, Operating Results, and Financial Condition" and elsewhere in this Annual Report on Form 10-K. In this Annual Report on Form 10-K, the "Company," "Sigma," "we," "us," and "our" refer to Sigma Designs, Inc.
Overview
Founded in 1982, Sigma Designs, Inc. specializes in silicon-based moving picture experts group, or MPEG, decoding solutions for broadband set-top appliances and commercial streaming systems that feature video-on-demand, or VOD. Headquartered in Milpitas, Calif., Sigma also has a research and development center in France, as well as sales offices in China, Europe, Hong Kong, Japan, Korea and Taiwan. Our award-winning REALmagic video-streaming technology is used in both commercial and consumer applications, providing highly integrated solutions for high-quality decoding of MPEG-1, MPEG-2 and MPEG-4 content. Based on this core technology, Sigma has developed system solutions for convergence products including streaming video, DVD playback, Internet connectivity and personal video recording. Sigma's products are sold worldwide through a direct sales force, distributors and original equipment manufactures.
A pioneer in the MPEG hardware decoder market, we introduced our REALmagic card in 1993, an MPEG playback card for PCs. In April 1997, we announced our entry into the DVD market. A key element of DVD specification is the use of MPEG-2 standards for digital video compression, a technology with which Sigma has established expertise. Our MPEG-2 chips and add-in boards have been used worldwide in leading multimedia PC platforms to enable applications such as DVD title creation, DVD decoding, streaming video and IP multicasting.
During the past few years, Sigma has expanded well beyond its PC card beginnings and is working with telecommunication companies, or telcos and cable operators on trial deployments involving advanced DSL, broadband over cable, fiber to the home, and other networks for delivering VOD to consumer homes, multiple dwelling units and commercial hotel chains. This involvement has led to technology investments in streaming video silicon and software. At the end of 2001, Sigma introduced the industry's first DVD resolution MPEG-4 decoder chip for set-top appliances, establishing a unique position to contribute to the deployment of next generation capabilities.
Industry Partnerships
To meet customer needs for a complete solution for set-top appliances, Sigma has developed strong partnerships with leading suppliers of chipsets, system software and video servers/encoders.
Complete solutions for streaming include key vendors of video servers, MPEG encoders and IP video routers, which include Apple, Cisco, Concurrent, Envivio, Infovalue, iVAST, Minerva, nCUBE, OKI, SGI, Streaming21, Sun Microsystems and Thirdspace.
Sigma's set-top appliance reference designs depend on vendors of processors, graphics controllers, video encoders and digital TV front-end chipsets, including B2C2, Focus Enhancements, Intel, National Semiconductor, Silicon Image, Cirrus Logic and TVIA.
In addition, Sigma is working with the following vendors of operating systems, middleware (DVD, DTV, VOD, PVR and Internet) and drivers to provide complete solutions for advanced set-top appliances, which include DTVRo, Enreach, Inprimis, Liberate, Metro Link, Microsoft and Tuxia.
Sigma Business Strategy
Our objective is to provide leading digital video decoding solutions that enable full-screen, full-motion, best quality video in streaming applications and on internet set-top boxes, and consumer DVD players. To accomplish this goal, we need to promote widespread acceptance of REALmagic technology and solutions. The key parts of this strategy include:
Win More Set-Top Box Partnerships
We are actively working with several partners to promote use of our silicon solutions for video on demand and DVD playback in set-top box applications. We will continue to nurture these relationships in order to associate with the volume manufacturers of these set-top boxes and enable more opportunities for uses of our silicon solutions. So far, these relationships have focused on set-top box designs that provide Internet connections via conventional dial up or Digital Subscriber Line, or DSL, technology and to a limited extend, cable networks. We are actively seeking additional relationships with an expanded set of network providers and manufacturers in these and other segments.
Introduce New Generations of Decoder Chipsets
A significant aspect of our product strategy is to increase the sale of chipsets featuring our REALmagic Video Streaming Technology while continuing to develop newer versions and generations of products, including chipsets for set-top boxes, consumer DVD progressive players, and HDTV applications. We seek to continue to offer consumers better-featured and lower-priced products over time.
Sigma Products
Sigma currently markets products primarily in two forms, chipsets and board-level products.
Chipset Products
Sigma's line of MPEG decoder chips featuring REALmagic video streaming technology is designed to provide the highest quality video possible. We complement our silicon technology with an embedded software base, portable to a wide range of operating environments. Featuring VOD and DVD client players, Sigma's software is available under Windows, Linux and WinCE operating systems.
EM8220/8300 series - provides MPEG-1 and 2 video decoding solutions for PC-based DVD playback and streaming video, which won wide acclaim as the top MPEG hardware for the PC, and included retail offerings by Panasonic.
EM8400 series - provides MPEG-1 and 2 video and audio decoding for broadband interactive set-top boxes, and has achieved over 40 design wins in its target segment, including such notables as Fujitsu-Siemens, Acer and Samsung.
EM8470 series - represents the first MPEG-4 silicon solution for the set-top box market, in a form that is pin-compatible with our widespread EM8400 to enable convenient upgrades to the latest decoding format.
Board-Level Products
Sigma board level products, which are based on our silicon and software technology, are marked into both commercial streaming video and consumer PC add-in markets.
NetStream 2000 Series - PC add-in cards featuring high performance MPEG-1 and 2 decoding, bring streaming video to virtually any PC-based system.
REALmagic DVR - a desktop PC add-in solution that plugs into a standard PCI slot, and works with standard DVD writeable media to enable encoding and authoring of DVD titles in a corporate or educational environment.
REALmagic Xcard - a consumer PC add-in solution that creates a home theatre solution by plugging into a standard PCI slot and providing TV output from content collected in DVD, VCD, DivX and ISMA MPEG-4 formats.
REALmagic Hollywood Plus - a consumer PC add-in solution that plugs into a standard PCI slot, and provides PC-based hardware playback of DVD or VideoCD content.
Other Products and Services
In addition to Sigma's main lines of product, we also offer stand-alone systems, primarily our NetStream console, as well as professional development services.
Reference Designs
As a marketing tool, Sigma provides reference designs, which are end-user prototype designs showing how our silicon solutions integrate into complex consumer appliances. These reference designs serve several purposes, including proof of concept to prospective customers, as well as an invaluable research and development experience for our engineers who develop the integrated end solution. This process always gives us ideas for what to incorporate into our next generation solutions.
Marketing and Sales
We currently sell most of our products through our direct sales force. We augment these sales through a select set of distributors and VARs operating in different regions of the world. Our U.S. distributor is Ingram Micro, Inc. Our OEMs include EPOX, Fujitsu-Siemens GCT-Allwell, Kreatel and Lung Hwa Electronics Co., Ltd. Our international distributors are strategically located in many countries around the world.
We generally maintain products for distribution through corporate markets based on forecasts rather than firm purchase orders. Additionally, we generally acquire products for sale to our OEM customers only after receiving purchase orders from such customers, which purchase orders are typically cancelable without substantial penalty from such OEM customers. We currently place non-cancelable orders to purchase semiconductor products from our suppliers on a twelve to sixteen week lead-time basis. Consequently, if, as a result of inaccurate forecasts or canceled purchase orders, anticipated sales and shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, requiring significant working capital and resulting in severe pressure on our financial condition. Three customers accounted for 15%, 14% and 11% of our total net revenues in fiscal 2002.
Sales to distributors are typically subject to contractual rights of inventory rotation and price protection. Regardless of particular contractual rights, the failure of one or more distributors or OEMs to achieve sustained sell-through of REALmagic products could result in product returns or delayed or uncollectable receivables, contributing to significant fluctuations in our operating results.
Research and Development
As of January 31, 2002, we had a staff of 60 research and development personnel. The research and development personnel conduct all of our product development with the assistance of a number of independent contractors and consultants. We are focusing our development efforts primarily on MPEG decoder products, including new and improved versions of REALmagic MPEG chipsets and cost reduction processes.
To achieve and maintain technological leadership, we must continue to make technological advancements in the areas of MPEG video and audio compression and decompression. These advancements include maintaining compatibility with emerging standards and multiple platforms, making improvements to the REALmagic architecture, and developing enhancements to the REALmagic Application Programming Interface (API).
We cannot guarantee that any substantial advances will be made in the REALmagic MPEG technology or, if they are made, that we will be able to market such advancements to achieve profitability.
During fiscal 2002, 2001, and 2000, our research and development expenses were $8.1 million, $7.4 million, and $6.4 million, respectively. We plan to continue to devote substantial resources to research and development of future generations of MPEG and other multimedia products.
Competition
The market for MPEG decoder products is highly competitive. Companies such as Broadcom, ST Microelectronics, and LSI Logic have high profiles in the industry. The possibility exists that other companies with more marketing and financial resources may develop a competitive product that may inhibit the wide acceptance of REALmagic technology. We believe that there are manufacturers who are developing MPEG products that will compete directly with REALmagic products in the near future.
We believe that the principal competitive factors in the market for MPEG decoder products include time to market for new product introductions, product performance, industry standards compatibility, price, and marketing and distribution resources. We believe that we compete most favorably with respect to time to market, product performance and price of our REALmagic products.
Licenses, Patents and Trademarks
We continually seek patent protection for certain software and hardware features in current and future versions of REALmagic. We currently have thirteen pending patent applications for our REALmagic technology. Seventeen patents have been issued to us. We cannot assure you that more patents will be issued or that such patents, even if issued, will provide adequate protection for our competitive position. We also attempt to protect our trade secrets and other proprietary information through agreements with customers, suppliers and employees and other security measures. Although we intend to protect our rights vigorously, we cannot assure you that these measures will be successful.
Manufacturing
To reduce overhead expenses, along with capital and staffing requirements, we currently use third-party contract manufacturers to fulfill all of our manufacturing needs, including chipset manufacture and board-level assembly. All of the chips used by us to develop our decoding products are manufactured by outside suppliers and foundries. Each of these suppliers is a sole source of supply to us of the respective chips produced by such supplier.
Our reliance on independent suppliers involves several risks, including the absence of adequate capacity and reduced control over delivery schedules, manufacturing yields and costs. Any delay or interruption in the supply of any of the components required for the production of REALmagic products could seriously harm our sales of products and, thus, our operating results.
Backlog
Since our customers typically expect quick deliveries, we seek to ship products within a few weeks of receipt of a purchase order. However, the customer may reschedule delivery of products or cancel the purchase order entirely without significant penalty. Historically, our backlog has not been reflective of future sales. We also expect that in the near term, our backlog will continue to be not indicative of future sales.
Employees
As of January 31, 2002, we had 108 full-time employees, including 60 in research and development, 24 in marketing, sales and support, 7 in operations, and 17 in finance and administration.
Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel, who are in great demand. Our employees are not represented by any collective bargaining unit, and we have never experienced a work stoppage. We believe that our employee relations are satisfactory.
Certain Factors Affecting Business, Operating Results, and Financial Condition
You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.
We have a history of operating losses and we could sustain future losses. We cannot assure you that we will be profitable and if we continue to lose money, our business may not be financially viable.
We incurred significant operating losses in fiscal 1995, 1996, 1998, 2001 and 2002 and had negative cash flow in fiscal 1995, 1998 and 2002. Since our introduction of the REALmagic MPEG product line in November 1993, we have made significant investments in marketing and technological innovation for our REALmagic products. As a result of our investments, we experienced significant losses through fiscal 1996. Fiscal 1995, 1996 and 1998 also included significant losses associated with products other than those related to our REALmagic technology. Fiscal 2002 and 2001 included significant loss associated with the decline in demand of our REALmagic products. Since our inception through January 31, 2002, our total accumulated deficit is $56,449,000. We cannot assure you that we will be able to sell our REALmagic products in substantial quantities or generate significant revenues from those sales. We cannot assure you that we will not incur operating losses in any future fiscal quarter or fiscal year.
If we fail to comply with or obtain waivers for covenants under our loan obligations, our financial condition will be serious harmed.
We have an amended and restated business loan agreement with Silicon Valley Bank, dated September 7, 2001. Under the agreement we gave two secured promissory notes in total principal amounts of $12.0 million and $6.0 million to Silicon Valley Bank, under which we may borrow as needed. Under the agreement and the notes, we are subject to certain covenants that, among other things, required us to maintain tangible net worth plus subordinated debt of at least $11.5 million as of January 31, 2002 and subsequently amended to $10.5 million. Since July 1997, we have, on occasion, been in violation some of the covenants and in all cases have obtained waivers releasing us from our obligation to meet these covenants as of previous dates. However, it is possible that we may need a waiver for future periods and there are no guarantees that Silicon Valley Bank will grant these waivers. In the instance that we do not meet these covenants, and cannot obtain waivers, the lender could accelerate payments on the notes. Payment of these notes, prior to securing additional financing, could substantially weaken our financial condition and our ability to sustain growth.
Marketing risks and volatility of OEM customer sales and resale distribution may harm our business.
Our ability to increase sales, achieve profitability and maintain REALmagic as an industry digital video decoding standard depends substantially on our ability to achieve a sustained high level of sales to new OEM customers. We have not executed volume purchase agreements with any of our customers. Our customers are not under any obligation to purchase any minimum quantity of our products. We have not achieved bundling agreements with many OEM customers to ensure the success of our REALmagic product line. Also, even if we achieve new design wins, we cannot assure you that these manufacturers will purchase our products in substantial volumes. Sales to any particular OEM customer are subject to significant variability from quarter to quarter and to severe price pressures by competitors. In addition, three of our customers accounted for 15%, 14% and 11% of our total net revenues, respectively, in fiscal 2002. Any reductions in those sales could seriously harm our business. Based on our experience in the industry, we expect that our actual sales to OEM customers will experience significant fluctuations. Also, estimates of future sales to any particular customer or groups of customers are inherently uncertain.
Our ability to achieve profitability also depends on a substantial increase in the sales of REALmagic products through domestic and international distributors for resale through corporate markets. Sales to such distributors are typically subject to contractual rights of inventory rotation or price protection. The failure of distributors to achieve sustained sell- through of REALmagic products could result in product returns or delayed or uncollectable receivables. For example, in fiscal 2001, we recorded sales returns from one of our distributors in the amount of approximately $1.4 million. We also provided for a bad debt allowance in the amount of approximately $2.2 million. Such returns and uncollectable receivables could continue to contribute to fluctuations in our results of operations. We cannot assure you that we will be successful in obtaining or maintaining a significant market for our REALmagic products.
Failure to keep pace with technological change will seriously harm our business.
Our success depends, among other things, on our ability to achieve and maintain technological leadership and to remain competitive in terms of price and product performance.
To have technological leadership, we must continue to make technological advancements and research and development investments in the area of MPEG video and audio decoding. These advancements include the following:
We cannot assure you that we will be able to make these advancements to our REALmagic technology. If we do make these advances, we cannot assure you that we will be able to achieve and maintain technological leadership. Any material failure by us or OEMs and software developers to develop or incorporate any required improvement could adversely affect the continued acceptance of our technology and the introduction and sale of future products based on our technology. We cannot assure you that products or technologies developed by others will not render obsolete our technology and the products based on our technology.
To be competitive, we must anticipate the needs of the market and successfully develop and introduce innovative new products in a timely fashion. We cannot assure you that we will be able to successfully complete the design of our new products, have these products manufactured at acceptable manufacturing yields, or obtain significant purchase orders for these products. The introduction of new products may adversely affect sales of existing products and contribute to fluctuations in operating results from quarter to quarter. Our introduction of new products also requires that we carefully manage our inventory to avoid inventory surplus and obsolescence. During fiscal 2002 and 2001, we wrote down our inventory in the amount of approximately $1.4 million and $1.9 million respectively, because of a continuing decline in demand for certain of our PC-related products. In addition, new products, as opposed to more mature products, typically have higher initial component costs. This higher cost could result in downward pressures on our gross margins.
Our industry is highly competitive and we cannot assure you that we will be able to effectively compete. If we fail to compete effectively, our business will not be financially viable.
The market for multimedia products is highly competitive and is also influenced by embedded processors provided by multiple companies. Processors have, in recent years, included increased graphics functionality. Other companies with more experience and financial resources may develop a competitive product that could inhibit future growth of our REALmagic technology. Increased competition may be generated from several major computer product manufacturers that have developed products and technologies that could compete directly with REALmagic products. These competitors include:
In addition, Intel computer CPU chips processors have become more powerful, such that video decoding could be done in software. Most of our competitors have substantial experience and expertise in audio, video and multimedia technology and in producing and selling consumer products through retail distribution and OEM channels. These companies also have substantially greater engineering, marketing and financial resources than we have. Our competitors could form cooperative relationships that could present formidable competition to us. We cannot assure you that our REALmagic technology will achieve commercial success or that it will compete effectively against other interactive multimedia products, services and technologies that currently exist, are under development, or may be announced by competitors.
Our future revenue growth depends in large part on the adoption of MPEG technology
MPEG LA, LLC provides licensing terms and administers royalty payments for use of patented technology associated with the use of MPEG standards. Terms of use of MPEG-2 patents have been in place for a number of years. Terms for use of MPEG-4 patents are still awaiting finalization, though proposed MPEG-4 royalties associated with shipments of decoders are consistent with that of MPEG-2. Run-time fees for MPEG-4 use in streaming and broadcast are still under consideration, which represent some risk to Sigma. Our business strategy is, and has been, to focus on REALmagic products by investing heavily in MPEG technology. If these fees are minor, as expected, the deployment of MPEG-4 will continue unabated. If these fees become substantive in nature, it may result in decreased adoption, which will negatively affect our revenue expectations from products incorporating this feature. In addition, there are MPEG-4 alternatives being pushed by companies such as Microsoft and RealNetworks that could compete with MPEG-4 for market share negatively affecting our revenue expectations.
Our operating results are subject to significant fluctuations due to many factors and any of these factors could adversely affect our stock price.
Our operating results have fluctuated in the past and may continue to fluctuate in the future. This fluctuation is due to a number of factors, including the following and others:
In addition, sales to OEM customers are subject to significant variability from quarter to quarter. This variability depends on OEMs' timing and release of products that incorporate our REALmagic technology, experience with sales of these products and inventory levels.
The market for consumer electronics products is characterized by significant seasonal swings in demand. Demand typically peaks in the fourth calendar quarter of each year. We expect to derive a substantial portion of our revenues from the sales of REALmagic products in the future. The demand for our products will depend in part on the success of digital video technology. In light of this, our revenues may vary with the availability of and demand for DVD titles. This demand may increase or decrease as a result of a number of factors that cannot be predicted, such as consumer preferences and product announcements by competitors.
Announcements of directly competing products will likely have a negative effect on our operating results. Based on our experience, we believe that a substantial portion of our shipments will occur in the third month of a quarter, with significant shipments completed in the latter part of the third month. This shipment pattern causes our operating results to be difficult to predict. Currently, we place orders to purchase semiconductor products from our foundries with a long lead-time. If, as a result of inaccurate forecasts or cancelled purchase orders, our anticipated sales and shipments in any quarter do not occur when expected, our inventory levels could be disproportionately high. This would require significant working capital and harm our operating results.
We face many risks because of our heavy reliance on certain manufacturers and suppliers that could harm our business and financial condition.
Our REALmagic products and components are presently manufactured by outside suppliers or foundries. We do not have long-term contracts with these suppliers. We conduct business with our suppliers on a written purchase order basis. Our reliance on independent suppliers subjects us to several risks. These risks include:
We obtain some of our components from a single source. In fiscal 2000 we experienced a delay and interruption from our source due to the earthquake in Taiwan in October 1999. We estimate that this event resulted in lost sales of about $2.5 million. Other delays or interruptions have not occurred to date, but any delay or interruption in the supply of any of the components required for the production of our REALmagic silicon or our REALmagic multimedia cards currently obtained from a single source could have a material adverse impact on our sales of REALmagic products, and on our business.
We must provide our suppliers with sufficient lead-time to meet our forecasted manufacturing objectives. Any failure to properly forecast such quantities could materially and adversely affect our ability to produce REALmagic products in sufficient quantities. We cannot assure you that our forecasts regarding new product demand will be accurate, particularly because we sell our REALmagic products on a purchase order basis. Manufacturing REALmagic chipsets is a complex process, and we may experience short-term difficulties in obtaining timely deliveries. This could affect our ability to meet customer demand for our products. Any such delay in delivering products in the future could materially and adversely affect our operating results. Also, should any of our major suppliers become unable or unwilling to continue to manufacture our key components in required volumes, we will have to identify and qualify acceptable additional suppliers. This qualification process could take up to three months or longer and additional sources of supply may not be in a position to satisfy our requirements on a timely basis.
In the past, we have experienced production delays and other difficulties, and we could experience similar problems in the future. In addition, product defects may occur and they may escape identification at the factory. This could result in unanticipated costs, cancellations, deferrals of purchase orders, or costly recall of products from customer sites.
Loss of key personnel could cause our business to suffer.
Our future success depends in large part on the continued service of our key technical, marketing, sales and management personnel. Given the complexity of REALmagic technology, we are dependent on our ability to retain and motivate highly skilled engineers involved in the ongoing hardware and software development of REALmagic products. These engineers are required to refine the existing hardware system and application programming interface and to introduce enhancements in future applications. The multimedia PC industry is characterized by high employee mobility and aggressive recruiting of skilled personnel. Despite incentives we provide, our current employees may not continue to work for us, and if additional personnel were required for our operations, we may not able to obtain the services of additional personnel necessary for our growth.
We face risks related to intellectual property rights.
Our ability to compete may be affected by our ability to protect our proprietary information. We currently hold seventeen patents covering the technology underlying the REALmagic products. We have filed certain patent applications and are in the process of preparing others. We cannot assure that any additional patents for which we have applied will be issued or that any issued patents will provide meaningful protection of our product innovations. Like other emerging multimedia companies, we rely primarily on trade secrets and technological know-how in the conduct of our business. We also rely, in part, on copyright law to protect our proprietary rights with respect to our REALmagic technology. We use measures such as confidentiality agreements to protect our intellectual property. These methods of protecting our intellectual property may not be sufficient.
The electronics industry is characterized by frequent litigation regarding patent and intellectual property rights. Any such litigation could result in significant expense to us and divert the efforts of our technical and management personnel. In the event of an adverse result in any such litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation, and we may not be successful in such development or in obtaining such licenses on acceptable terms, if at all. In addition, patent disputes in the electronics industry have often been settled through cross-licensing arrangements. Because we do not yet have a large portfolio of issued patents, we may not be able to settle an alleged patent infringement claim through a cross-licensing arrangement.
Our international operations are subject to certain risks.
During fiscal 2002, 2001, and 2000, sales to international customers accounted for approximately 42%, 65%, and 67% of our total net revenues, respectively. We anticipate that sales to international customers, including sales of REALmagic products, will continue to account for a substantial percentage of our net revenues. Also, some of the foundries that manufacture our products and components are located in Asia. Overseas sales and purchases to date have been denominated in U.S. dollars.
Due to the concentration of international sales and the manufacturing capacity in Asia, we are subject to the risks of conducting business internationally. These risks include unexpected changes in regulatory requirements and fluctuations in the U.S. dollar that could increase the sales price in local currencies of our products in international markets, or make it difficult for us to obtain price reductions from our foundries. We do not currently engage in any hedging activities to reduce our exposure to exchange rate risks. If and when we engage in transactions in foreign currencies, our results of operations could be adversely affected by exchange rate fluctuations.
We derive a substantial portion of our revenues from sales to the Asia Pacific region. This region of the world has recently been subject to increased levels of economic instability, and this instability could seriously harm our results of operations.
Our stock price may be volatile.
The market of our common stock has been subject to significant volatility. This volatility is expected to continue. The following factors, among others, may have a significant impact on the market price of our common stock:
The stock market has experienced, and is currently experiencing, volatility that particularly affects the market prices of equity securities of many high technology and development stage companies, such as those in the electronics industry. This volatility is often unrelated or disproportionate to the operating performance of such companies. These fluctuations, as well as general economic and market conditions, could decrease the price of our common stock.
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers and directors and their ages as of April 1, 2002 are as follows:
Name Age Position
- -------------------------- ---- ---------------------------------------------
Thinh Q. Tran 48 Chairman of the Board, President, and Chief
Executive Officer
Silvio Perich 53 Senior Vice President, Worldwide Sales
Jacques Martinella 46 Vice President, Engineering
Kenneth Lowe 46 Vice President, Business Development
Kit Tsui 52 Chief Financial Officer, and Secretary
William J. Almon(1)(2) 69 Director
William Wang(1)(2) 38 Director
Julien Nguyen(1) 45 Director
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(1) Member of the Audit Committee (2) Member of the Compensation Committee
Mr. Tran, a founder of Sigma, has served as President, Chief Executive Officer, and Chairman of the Board of Directors since February 1982. Prior to joining Sigma, Mr. Tran was employed by Amdahl Corporation and Trilogy Systems Corporation, both of which were involved in the IBM-compatible mainframe computer market.
Mr. Perich joined Sigma in September 1985 as Director, Sales. In September 1992, Mr. Perich became Senior Vice President, Worldwide Sales. Mr. Perich was a co-founder of Costar Incorporated, a manufacturers' representative organization for high technology products, where he served as partner from October 1979 to September 1985. From September 1972 until September 1979, Mr. Perich served in several sales management roles at Siliconix Inc, a specialty semiconductor manufacturer.
Mr. Martinella joined Sigma in May 1994 as Director, VLSI Engineering. In December 1995, Mr. Martinella became Vice President, Engineering. From June 1990 to April 1994, Mr. Martinella served in engineering and management positions at Weitek, a microchip manufacturer. In addition, Mr. Martinella was an engineer at National Semiconductor, a semiconductor manufacturer, from June 1982 to June 1990.
Mr. Lowe joined Sigma in May 2000 as Vice President, Marketing. In December 2000, Mr. Lowe became Vice President, Business Development. Prior to joining Sigma, Mr. Lowe served as the Director of Multimedia Marketing for Cadence Design Systems. From 1996 to 1998, Mr. Lowe served as the Vice President of Marketing for Chrontel. Prior to 1996, Mr. Lowe held various marketing management positions Sierra Semiconductor, Datquest, Personal CAD Systems, Performix and Gould-Biomation. In the late 1980's, Mr. Lowe served as Product Marketing Director of Sigma.
Ms. Tsui joined Sigma in November 1982 as its Accounting Manager. Ms. Tsui was promoted to Director of Finance in February 1990, acting Chief Financial Officer and Secretary in December 1996, Chief Accounting Officer in January 2000 and Chief Financial Officer in January 2001.
Mr. Almon has served as a Director of Sigma since April 1994. Mr. Almon also serves as a Director of Read-Rite Corporation, and Exabyte Corporation. Mr. Almon is currently Managing Director of Finaline Technology, a business software company. Prior to that Mr. Almon was Managing Director of Netfish Technology from 1999 to May 2001 when it was acquired by Iona Technologies PLC. He was Chairman of the Board of InterNet Image, an internet software company that was merged with Intraware Inc. in October 1999. In May 1994, Mr. Almon founded and served as Chairman of the Board and Chief Executive Officer of StorMedia, Inc., a manufacturer of thin film disks. From December 1989 until February 1993, Mr. Almon served as President and Chief Executive Officer of Conner Peripherals, Inc., a manufacturer of computer disk drives and storage management devices. Prior to 1987, Mr. Almon spent 30 years with IBM Corporation, holding executive positions in both software and hardware management, most recently as Vice President, Low End Storage Products.
Mr. Wang became a Director of Sigma in October 1995. From January 1995 to the present, Mr. Wang has served as Chairman of the Board, Chief Executive Officer and President of Princeton Graphic Systems, a supplier of computer monitors, and has served since January 1996 as a Director of Diva Labs. From 1990 to April 1997, Mr. Wang served as Chairman of the Board and Chief Executive Officer of MAG Innovision Co., Inc., a supplier of computer monitors. From 1986 until 1990, Mr. Wang worked at Tatung Company of America in the Video Display Division
Mr. Nguyen became a Director of Sigma in May 2000. Mr. Nguyen is Managing Partner of Applied Materials Ventures, a corporate venture fund. Mr. Nguyen co-founded and was the Chairman of ezlogin, a developer of personalization infrastructure tools for internet sites and wireless carriers. Prior to ezlogin, Mr. Nguyen founded Novita Communications, and served as its Chief Executive Officer. Novita developed Java-based communications software and services. In 1998, Novita was acquired by PlanetWeb. From February 1995 to October 1996, Mr. Nguyen served as Co-Chairman and Chief Technical Officer of the Company. From August 1993 until January 1995, he served as Vice President, Engineering and Chief Technical Officer of the Company. From May 1992 until October 1993, Mr. Nguyen was President and Chief Executive of E-Motions, which was acquired by the Company in 1993. Prior to founding E-Motions, Mr. Nguyen worked at Radius Inc. as Director of Product Development and was in charge of all product development for five years. Mr. Nguyen also serves as an observer on the boards of Zepton Networks, Siros Technologies, GlimmerGlass Networks.
ITEM 2. FACILITIES
We currently lease a 25,000 square foot facility in Milpitas, California that is used as our headquarters. The lease will expire in September 2002. We also lease facilities for sales offices in Hong Kong and Shenzhen China, and for research and development near Paris, France. Currently, we are in the process of negotiating a five-year lease of approximately 40,000 square foot facility in Milpitas, California. We believe that the new facility would be adequate to accommodate our operations in the near term.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR SIGMA DESIGNS' COMMON STOCK
Our common stock trades on the Nasdaq Stock Market's Nasdaq National Market under the trading symbol "SIGM". The table below sets forth the high and low sales prices per share of our common stock for the periods indicated.
Fiscal 2002 Fiscal 2001
------------- --------------
High Low High Low
------ ------ ------ -------
First quarter ended April 30..... 2.56 1.13 11.38 3.94
Second quarter ended July 31..... 3.18 1.37 7.13 3.50
Third quarter ended October 31... 1.97 0.83 6.44 2.13
Fourth quarter ended January 31.. 2.72 1.10 3.97 1.03
As of April 22, 2002, we had 228
shareholders of record. We have never paid cash dividends on our common stock and we do not plan to pay cash dividends to our common shareholders in the foreseeable future.ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data is derived from our consolidated financial statements. This data should be read in conjunction with our consolidated financial statements and notes thereto, and with Management's Discussion and Analysis of Financial Condition and Results of Operations.
Year ended January 31, 2002 2001 2000 1999 1998
- ------------------------- -------- -------- -------- -------- --------
(In thousands, except per share data)
Net revenues.......... $13,437 $29,476 $50,324 $43,540 $36,982
Net income (loss)
available to
common shareholders.. (10,392) (6,868) 2,263 (2,690) (5,648)
Diluted net income
(loss) per share
available to
common shareholders.. (0.64) (0.42) 0.13 (0.21) (0.51)
Working capital....... 10,475 19,706 27,092 23,578 18,960
Total assets.......... 26,274 38,334 44,751 44,220 38,329
Shareholders' equity.. 11,466 21,781 28,403 24,771 20,312
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, ABOUT THE MARKETS IN WHICH WE OPERATE AND OUR BUSINESS AND PROSPECTS, INCLUDING STATEMENTS ABOUT THE SUFFICIENCY OF OUR CURRENT RESERVE OF CASH AND CASH EQUIVALENTS, OUR SHORT-TERM INVESTMENTS AND OUR BANK LINES OF CREDIT TO MEET OUR WORKING CAPITAL REQUIREMENTS, AND THE EFFECT OF INTEREST RATE CHANGES ON THE VALUE OF OUR SHORT-TERM INVESTMENTS, OUR BANK LINES OF CREDIT AND OUR FOREIGN CURRENCY CASH BALANCES. THESE STATEMENTS ARE SUBJECT TO MANY RISKS AND UNCERTAINTIES WHICH MAY RESULT IN DIFFERENT OR DISAPPOINTING FUTURE BUSINESS AND FINANCIAL RESULTS. MANY OF THESE RISKS AND UNCERTAINTIES ARE DISCUSSED IN THIS REPORT, INCLUDING UNDER "FACTORS AFFECTING FUTURE OPERATING RESULTS".
Results of Operations
For the fiscal year ended January 31, 2002, our net revenues decreased 54% to $13.4 million from $29.5 million reported for fiscal 2001. This decrease in revenues was primarily attributable to the continuing slowdown of the general economic conditions, and the continuing decline in demand for our MPEG chipset and board products in PC add-in market due to the prevalence of DVD-enabling software provided as original equipment in many PCs. Even though overall total net revenues from sales of MPEG chipset and board products were significantly decreased year-over-year, revenues from sales of our new streaming video console and board products to commercial streaming video market and sales of our chipset products to consumer appliance market increased in fiscal 2002 as compared to fiscal 2001. Our revenues from sales of streaming video console and board products for the commercial steaming video market and sales of chipset products in the set top boxes for the consumer appliance market represented a relatively significant portion of our total net revenues while our revenues from sales of chipset and board products to PC add-in market represented a relatively insignificant portion of our total net revenues for fiscal 2002. The continuing decline in demand for chipsets and boards in PC add-in market, the slower than anticipated emergence of the set top box market, and delays in the deployment of streaming video applications which utilize our products may continue. Should they continue, this decline and these delays would continue to reduce our revenues and harm our business.
Net loss for the fiscal year ended January 31, 2002 was $10.4 million as compared to net loss of $6.9 million for the prior fiscal year. The net loss for fiscal 2002 was primarily caused by the decline in revenues. The net loss for fiscal 2002 included a charge of approximately $927,000 of impairment losses related to an investment of a start-up company, and a specific provision for bad debt allowance in the amount of approximately $121,000 (net of recovery $329,000) due to collectibility issues relating to one of our customers. The net loss for fiscal 2001 included a charge of $1.9 million to write down certain PC-DVD and video networking related inventories due to the decline in demand for those products, and a provision for bad debt allowance in the amount of $2.2 million due to collectibility issues relating to one of our customers and non-payment by another customer for customization services that we provided.
The following table shows certain items as a percentage of net revenues, which are included in our Consolidated Statement of Operations:
Fiscal Fiscal Fiscal
2002 2001 2000
--------- --------- ---------
Net revenues............................ 100% 100% 100%
Cost of revenues........................ 59% 70% 69%
--------- --------- ---------
Gross margin............................ 41% 30% 31%
Operating expenses:
Research and development.............. 60% 25% 13%
Sales and marketing................... 32% 14% 9%
General and administrative............ 21% 15% 6%
Other (income) expense.................. 5% -1% -1%
--------- --------- ---------
Net income (loss)....................... -77% -23% 5%
Dividends on preferred stock............ -- -- -1%
--------- --------- ---------
Net income (loss) available to
common shareholders................ -77% -23% 4%
========= ========= =========
Net Revenues
The following table sets forth our net revenues in each product group for the last three years:
(Dollars in thousands) Fiscal 2002 Fiscal 2001 Fiscal 2000
-------------- -------------- --------------
Boards.................... $6,961 52% $13,575 46% $22,940 46%
Chipsets.................. 3,858 29% 12,936 44% 25,831 51%
Other..................... 2,618 19% 2,965 10% 1,553 3%
--------- --------- ---------
TOTAL NET REVENUES...... $13,437 $29,476 $50,324
========= ========= =========
Our board level product lines are targeted at OEM customers to address the DVD upgrade market and system integrators to address the computer-based training, kiosks, and corporate video-on-demand markets. Our chipsets are targeted toward manufacturers and large volume OEM customers building interactive multimedia products for business and consumer markets. The "other" category includes our new product, Netstream consoles for the commercial streaming video market, set-top box products and accessories targeted at the consumer internet information appliance market - a market which we entered in fiscal 2000, and development revenues under agreements for the customization of certain MPEG decoding chips. The costs related to development revenues were included in research and development expenses.
The table below sets forth our revenues by market segment for each of the last three fiscal years:
(Dollars in thousands) Fiscal 2002 Fiscal 2001 Fiscal 2000
-------------- -------------- --------------
Commercial streaming video market $6,944 52% $6,673 23% $12,012 24%
Consumer appliance market..... 3,921 29% 2,775 9% 1,180 2%
PC add-in market.............. 2,166 16% 17,799 60% 36,675 73%
Other market.................. 406 3% 2,229 8% 457 1%
--------- --------- ---------
TOTAL NET REVENUES.......... $13,437 $29,476 $50,324
========= ========= =========
Revenues from sales to Commercial streaming video market accounted for 52% of our net revenues in fiscal 2002, 23% in fiscal 2001, and 24% in fiscal 2000. Revenues from sales to Consumer appliance market accounted for 29% of our net revenues in fiscal 2002, 9% in fiscal 2001, and 2% in fiscal 2000. PC add-in market accounted for 16% of our net revenues in fiscal 2002, 60% in fiscal 2001, and 73% in fiscal 2000. Revenues from sales to Other market accounted for 3% of our net revenues in fiscal 2002, 8% in fiscal 2001, and 1% in fiscal 2000. Revenues from sales to commercial streaming video market increased 4% to $6.9 million in fiscal 2002 from $6.7 million in fiscal 2001. Revenue from sales to consumer appliance market increased 41% to $3.9 million in fiscal 2002 from $2.8 million in fiscal 2001. Revenues from PC add-in market decreased 88% to $2.2 million in fiscal 2002 from $17.8 million in fiscal 2001. Revenues from other market decreased 82% to $0.4 million in fiscal 2002 from $2.2 million in fiscal 2001. The increase in revenues from sales of our products to commercial streaming video market in fiscal 2002 as compared to fiscal 2001 is mainly attributable to increased sales of our MPEG board products and the introduction of our new console products in corporate streaming video market. We expect our revenues from commercial streaming video market to continue to fluctuate year over year primarily due to the project-oriented nature of sales of our products to our corporate streaming video market. The increase in revenues from sales of our products to consumer appliance market in fiscal 2002 is attributable to increased sales of our MPEG chipset products to set-top box manufacturers. The consumer appliance market remains in an emerging phase and we expect fluctuating revenues to continue. The decrease in revenues from sales of our products to PC add-in market in fiscal 2002 is due to the continuing decline in demand for products in the PC add-in market. We expect our revenues from PC add-in market to be relatively insignificant in future periods as a result of our decision to focus on the video-on-demand and consumer appliance market. The category "Other market" in the above table consists of development fees under agreements relating to the development for customization of certain MPEG decoding chip technology and accessories for projects and products for various market segments. The overall decrease in net revenues from other market in fiscal 2002 as compared to fiscal 2001 is attributable to a decrease in development fees due to fewer development projects and the increasingly complex nature which requires longer development time. We expect that net revenues from other market will continue to fluctuate.
The table below sets forth our revenues by geographic region for each of the last three fiscal years:
(Dollars in thousands) Fiscal 2002 Fiscal 2001 Fiscal 2000
-------------- -------------- --------------
United States.................. $7,750 58% $10,241 35% $16,535 33%
Asia........................... 3,239 24% 17,326 59% 29,142 58%
Europe......................... 2,401 18% 1,574 5% 4,114 8%
Canada......................... 12 0% 16 0% 296 1%
Other regions.................. 35 0% 319 1% 237 0%
--------- --------- ---------
TOTAL NET REVENUES........... $13,437 $29,476 $50,324
========= ========= =========
Our U.S. revenues as a percentage of total net revenues were
58% in fiscal 2002, 35% in 2001, and 33% in fiscal 2000. Total U.S. revenues in
fiscal 2002 decreased 24% to $7.8 million, from $10.2 million in fiscal 2001.
Total Asia revenues as a percentage of total revenues were 24% in fiscal 2002,
59% in fiscal 2001 and 58% in fiscal 2000. Total Asia revenues in fiscal 2002
decreased 81% to $3.2 million in fiscal 2002, from $17.3 million in fiscal 2001.
Total Europe revenues as a percentage of total revenues were 18% in fiscal 2002,
5% in fiscal 2001 and 8% in fiscal 2000. Total Europe revenues in fiscal 2002
increased 53% to $2.4 million in fiscal 2002, from $1.6 million in fiscal 2001.
Our Asia revenues were derived predominantly from customers in Taiwan. Revenues
generated from Taiwan in fiscal 2002 accounted for 10% of our total net
revenues, as compared to 19% for fiscal 2001 and 30% for fiscal 2000. Three
customers based in U.S and one customer based in Europe accounted for 49% of our
total net revenues in fiscal 2002, as compared to two customers based in U.S and
three customers based in Asia accounting for 55% of our total net revenues in
fiscal 2001 and three customers based in Asia accounting for 41% of our total
net revenues in fiscal 2000. The overall year-to-year decrease in revenues from
fiscal 2001 to fiscal 2002 was primarily attributable to the global economic
downturn and the continuing decline in demand of our PC-DVD upgrade products in
the PC market.
Gross Margin
Our gross margin as a percentage of net revenues was approximately 41% in fiscal 2002, 30% in fiscal 2001, and 31% in fiscal 2000. Excluding development revenues of $0.4 million, the gross margin was approximately 39% in fiscal 2002. This increase was a result of increased sales of our products to streaming video market and chipset products to the set top box consumer appliance market which have relatively high gross margins and the decreased sales of our products to PC add-in market which have relatively low gross margins. We expect our gross margins will vary from period to period due to changes in the mix of product sales and provisions for inventory obsolescent.
Operating Expenses
Sales and marketing expenses increased $166,000 or 4% in fiscal 2002 over fiscal 2001. This increase was largely due to increased headcount and expenses associated the expansion of our product marketing and sales development group. The same expenses decreased $338,000, or 8%, in fiscal 2001 over fiscal 2000. The decrease was the result of a reduction of our business development group personnel, an elimination of outside public relations services, and reduced sales commissions in connection with reduced revenues. We believe that our sales and marketing expenses will increase in future periods as we intend to increase headcount in our sales and marketing organization and to expand our product marketing and sales development.
Research and development expenses increased $739,000 or 10% in fiscal 2002 over fiscal 2001 and $987,000, or 15% in fiscal 2001 over fiscal 2000. The increase in fiscal 2002 over fiscal 2001 was primarily attributable to additional engineering staff at our headquarters as well as at our development center in France, consulting services, and capital equipment related to product development. The increase in fiscal 2001 was largely due to increases in technical development support, and the research and development center established in France during the fourth quarter of fiscal 2000. We expect to continue our efforts in the development of our proprietary MPEG based products, and research and development expenses will likely increase accordingly year-over-year.
Our general and administrative expenses decreased $1.8 million or 39% in fiscal 2002 from fiscal 2001. The decrease was mainly attributable to the significant reduction of approximately $2.2 million of bad debt expense from last fiscal year. Excluding the specific provision for bad debt of approximately $121,000 (net of recovery $329,000) and $1.9 million respectively, in fiscal 2002 and 2001, general and administrative expenses in fiscal 2002 was comparable to fiscal 2001. The same expense increased $1.6 million or 57% in fiscal 2001 from fiscal 2000. Excluding provision for bad debt of approximately $1.9 million in fiscal 2001, general and administrative expenses decreased $293,000 or 10% as compared to fiscal 2000. The decrease was largely due to the refund by our insurance company of costs previously expensed related to a shareholder lawsuit resolved in fiscal 2001 and reduction of legal expenses in general. We expect our general and administrative expenses will increase relatively in future periods due to the continually increasing cost of insurance, professional services and other expenditures associated with our business.
Liquidity and Capital Resources
As of January 31, 2002, our principal sources of liquidity included cash, cash equivalents, restricted cash, and short-term investments of $18.0 million, a decrease of $4.3 million compared with $22.3 million at January 31, 2001. This decrease resulted from operating activities that utilized cash of approximately $3.8 million, acquisition of fixed assets of $172,000, repayment of capital lease obligations of $321,000 and cash used for other investing activities of $118,000 which was partially offset by proceeds of $100,000 from the issuance of our common stock under our stock option plan and employee stock purchase plan.
As of January 31, 2002, we had $12.0 million outstanding under a $12.0 million bank revolving line of credit that expires in October 2002, bears interest at the U.S treasury bill rate (1.48% at January 31, 2002) plus 0.85%, and is collateralized by funds on deposit in accounts that have been assigned to the lender and is included in our consolidated balance sheet at January 31, 2002 as restricted cash. We also have a $6.0 million bank line of credit available that expires in October 2002 and is collateralized by our accounts receivable, inventories, equipment, and intangibles. As of January 31, 2002, we had utilized $178,000 of the standby letter of credit under this second line of credit. The lines of credit contain certain covenants that, among other things, required us to maintain certain levels of tangible net worth plus subordinated debt based on our projected operating results. At January 31, 2002, we were required to maintain total net equity worth of at least $11.5 million. As of that date, we were not in compliance with this covenant and subsequently obtained a modification to amend this covenant to $10.5 million.
Our primary sources of funds to date have been cash generated from operations, proceeds from preferred and common stock issuances, capital lease arrangements, and bank borrowings under lines of credit. It is likely that our operation will continue to consume cash in the foreseeable future. Based on our cash projection, we believe that our current reserve of cash and cash equivalents and short- term investments will be sufficient to meet anticipated working capital requirements and other cash needs for the next twelve months. In addition, we believe that we will be able to comply with or make modifications to the current covenants to maintain the availability of funds under our existing asset-based banking agreements. To insure that we have adequate working capital, we intend to raise additional funding through either public or private offerings of our common or preferred stock or from additional bank financing during the next twelve months. There is no assurance that such capital will be available to us. The estimate of time our cash and other resources will last is a forward-looking statement that is subject to the risks and uncertainties set forth below, as well as other factors, and actual results may differ as a result of such factors.
Factors Affecting Future Operating Results
Our annual and quarterly results have in the past and may in the future vary significantly due to a number of factors, including but not limited to new product introductions by us and our competitors; the ability of our REALmagic MPEG silicon to compete with other technologies in these merging markets; market acceptance of the technology embodied in our products generally and our products in particular; customer acceptance of our products; shifts in demand for the technology embodied in our products generally and our products in particular and/or those of our competitors; gains or losses of significant customers; reduction in average selling prices and gross margins, which may occur either gradually or precipitously; inventory obsolescence; write-downs of accounts receivable; an interrupted or inadequate supply of semiconductor chips or other materials-for example, our source of supply for silicon wafers was interrupted in fiscal 2000, and may continue to be interrupted in the future because of earthquakes in Taiwan; our inability to protect our intellectual property; loss of key personnel; technical problems in the development, ramp up, and manufacture of products causing shipping delays; and availability of third-party manufacturing capacity for production of certain of our products. We derive a substantial portion of our revenues from sales to the Asia Pacific region, a region of the world that is subject to increased economic instability. There can be no assurance that such instability will not have a material adverse effect on our future international revenues. Any adverse change in the foregoing or other factors could have a material adverse effect on our business, financial condition, and results of operations.
Due to the factors noted above, our future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends of future periods. Any shortfall in revenue or earnings could have an immediate and significant adverse effect on the trading price of our common stock. Additionally, we may not learn of such shortfall until late in a fiscal quarter, which could result in even more immediate and adverse effect on the trading price of our common stock. Further, we operate in a highly dynamic industry, which often results in volatility of our common stock price.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accounts receivable, and inventories. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition - Revenues consist of product and development revenue. Revenues from product sales to OEMs, distributors and end users are generally recognized upon shipment, except that revenues are deferred when the Company cannot reasonably estimate the amount of returns or where collectibility is not assured; deferred revenue is recognized when collection subsequently becomes probable and returns are estimable (generally upon resale by customers). Allowances for sales returns, price protection and warranty costs are recorded at the time that revenues are recognized.
Revenues from product development agreements are recognized using the percentage of completion method. Estimates are reviewed and revised periodically throughout the lives of the contracts. Any revisions are recorded in the accounting period in which the need for revisions becomes evident. We classify all development costs related to such agreements as research and development expenses. Development revenues were $406,000, $1.9 million, and $60,000 for fiscal 2002, 2001 and 2000, respectively.
Account Receivable - During industry downturns, certain of our customers have difficulty with their cash flows. For certain customers, typically those with whom we have long-term relationships, may delay their payments by 40-60 days beyong the original terms. We review the ability of our customers to pay the indebtedness they incur with us. We defer recognition of revenue and related receivable when we cannot reasonably estimate collectibility is assured at the time products and services are delivered to our customer. We provide an allowance for doubtful accounts for all specific receivables that we judge to be unlikely for collection. In addition, we record a reserve based on the size and age of all receivable balances against which we have not established a specific reserves. These estimated allowances are periodically reviewed, analyzing the customer's payment history and information regarding customer's credit worthiness known to us. In fiscal 2002 and 2001, we recorded a provision for general and specific bad debt allowance in the total amount of $121,000 (net of recovery of $329,000) and $2.2 million respectively.
Inventories - With the dramatic decrease in revenue during fiscal 2002 and 2001, we continue to monitor our inventory levels in light of product development changes and expectations of an eventual market upturn. We may be required to take additional charges for excess and obsolete inventories if the current industry downturn extends further into the future than we have currently estimated or we make changes in our current product development plans. We estimate inventory reserves for excess and obsolete inventories based on our assessments of future product sales giving considerations for factors such as the cyclical nature of our industry. These forecasts require us to estimate our ability to see demand for current and further products and compare those estimates with our current inventory levels. If these forecasts or estimates change adversely, or our product roadmaps change, then we would need to further write down inventory.
Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Stanford Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations", or SFAS No. 141, and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to the acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized. However, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested at least annually for impairment. The Company is required to adopt SFAS No. 142 effective February 1, 2002 and does not expect the effect of adoption to have a material impact on the Company's financial position, results of operations or cash flows.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for Impairment of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. The Company is required to adopt SFAS No. 144 on February 1, 2002. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We face exposure to market risk from adverse movements in interest rates and foreign currency exchange rates, which could affect our operations and financial condition. We do not use derivative financial instruments for speculative purposes.
Interest Rate Sensitivity. At January 31, 2002, we held $943,000 in short-term investments consisting of U.S. government and corporate debt securities with an average original maturity of less than one year. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. If market rates were to increase immediately and uniformly by 10 percent from levels at January 31, 2001, the fair market value of the short-term investments would decline by an immaterial amount. We generally expect to have the ability to hold our investments until maturity and therefore would not expect operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates for short-term investments.
At January 31, 2002, we had $12.0 million outstanding under a $12.0 million variable interest rate bank line of credit, no borrowing outstanding under a $6.0 million variable interest rate bank line of credit and utilized $178,000 of standby letter of credit under this second line of credit. If short- term interest rates were to increase 10 percent, the increased interest expense associated with these arrangements would not have a material impact on our net income and cash flows.
Foreign Currency Exchange Rate Sensitivity. The Hong Kong dollar and Euro are the financial currencies in our subsidiaries in Hong Kong and France. We do not currently enter into foreign exchange forward contracts to hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates. However, we do maintain cash balances denominated in the Hong Kong dollar and Euro. If foreign exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10 percent from the exchange rate at January 31, 2002, the fair value of these foreign currency amounts would decline by an immaterial amount.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Sigma's consolidated financial statements, the notes thereto, and the independent auditors' report appear on pages F-1 through F-23 and S-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item concerning our directors and executive officers is incorporated by reference from the information set forth in the sections entitled "Election of Directors" and "Other Information" contained in our Proxy Statement relating to the 2002 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy Statement"). Certain information required by this item concerning our executive officers is incorporated by reference to the information set forth in Part I of the Annual Report on 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding executive compensation is incorporated by reference from the information set forth in the sections entitled "Election of Directors-Compensation of Directors" and "Other Information-Executive Compensation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference from the information set forth in the section entitled "Other Information-Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Please see the information set forth in the section entitled "Transactions with Management" in our Proxy Statement, which we are incorporating into this Form 10-K by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- K
(a)
1. Consolidated Financial Statements
The following documents are filed as part of this Annual Report on Form 10-K:
|
Page |
|
|
Independent Auditors' Report |
F- 1 |
|
Consolidated Balance Sheets as of January 31, 2002 and 2001 |
F- 2 |
|
Consolidated Statements of Operations for the years ended January 31, 2002, 2001, and 2000 |
F- 3 |
|
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the years ended January 31, 2002, 2001, and 2000 |
F- 4 |
|
Consolidated Statements of Cash Flows for the years ended January 31, 2002, 2001 and 2000 |
F- 5 |
|
Notes to Consolidated Financial Statements |
F- 7 |
2. Consolidated Financial Statements Schedules
The following financial statement schedule is filed as part of this Annual Report on Form 10-K:
|
Schedule II-Valuation and Qualifying Accounts and Reserves |
S- 1 |
All other schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended January 31, 2002.
(c) Exhibits
The exhibits listed on the accompanying index to exhibits immediately following the financial statement schedules are incorporated by reference into this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Milpitas, State of California, on the 1st day of May 2002.
| SIGMA DESIGNS, INC. | |
| By: /s/ Thinh Q. Tran | |
| Chairman of the Board, | |
| President, and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thinh Q. Tran and Kit Tsui, and each of them, jointly and severally, his true and lawful attorneys-in-fact, each with full power of substitution and resubstitution, for him in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his or her substitute or substitutes or any of them, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
|
Signature |
Title |
Date |
|
/s/ Thinh Q. Tran Thinh Q. Tran |
Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer) |
May 1, 2002 |
|
/s/ Kit Tsui Kit Tsui |
Chief Financial Officer and Secretary |
May 1, 2002 |
|
/s/ William J. Almon William J. Almon |
Director |
May 1, 2002 |
|
/s/ William Wang William Wang |
Director |
May 1, 2002 |
|
/s/ Julien Nguyen Julien Nguyen |
Director |
May 1, 2002 |
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sigma Designs, Inc.:
We have audited the accompanying consolidated balance sheets of Sigma Designs, Inc. and subsidiaries as of January 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended January 31, 2002. Our audits also include the financial statement schedule listed in Item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sigma Designs, Inc. and subsidiaries at January 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
San Jose, California
March 26, 2002 (April 17, 2002 as to the last sentence of Note 6)
SIGMA DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2002 and 2001 (In thousands, except share data)
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 5,056 $ 5,422
Short-term investments.................................. 943 4,907
Accounts receivable (net of allowances of
$1,664 in 2002 and $2,124 in 2001).................... 2,168 5,122
Inventories............................................. 4,482 8,159
Restricted cash......................................... 12,000 12,000
Prepaid expenses and other.............................. 521 296
--------- ---------
Total current assets........................... 25,170 35,906
EQUIPMENT - net.......................................... 831 1,346
OTHER ASSETS............................................. 273 1,082
--------- ---------
TOTAL..................................................... $ 26,274 $ 38,334
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit..................................... $ 12,000 $ 12,000
Accounts payable........................................ 1,115 2,423
Accrued liabilities..................................... 1,336 1,448
Current portion of capital lease obligations............ 244 329
--------- ---------
Total current liabilities...................... 14,695 16,200
--------- ---------
CAPITAL LEASE OBLIGATIONS................................. 113 349
OTHER LONG TERM LIABILITIES............................... -- 4
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Common stock - no par value: 35,000,000
shares authorized; shares outstanding:
2002, 16,378,042; 2001, 16,313,464..................... 67,884 67,785
Shareholder notes receivable............................ -- (1)
Accumulated other comprehensive income.................. 31 54
Accumulated deficit..................................... (56,449) (46,057)
--------- ---------
Shareholders' equity 11,466 21,781
--------- ---------
TOTAL..................................................... $ 26,274 $ 38,334
========= =========
See notes to consolidated financial statements.
SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
(In thousands, except share data)
2002 2001 2000
--------- --------- ---------
NET REVENUES............................ $ 13,437 $ 29,476 $ 50,324
COSTS AND EXPENSES:
Cost of revenues...................... 7,909 20,661 34,481
Research and development.............. 8,123 7,384 6,397
Sales and marketing................... 4,318 4,152 4,490
General and administrative............ 2,758 4,511 2,869
--------- --------- ---------
Total costs and expenses..... 23,108 36,708 48,237
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (9,671) (7,232) 2,087
Interest income....................... 773 1,355 929
Interest expense...................... (584) (936) (770)
Other income (expense), net........... (906) (53) 162
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....... (10,388) (6,866) 2,408
PROVISION FOR INCOME TAXES.............. (4) (2) (60)
--------- --------- ---------
NET INCOME (LOSS)....................... (10,392) (6,868) 2,348
DIVIDENDS ON PREFERRED STOCK............ -- -- 85
--------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS.......................... $ (10,392) $ (6,868) $ 2,263
========= ========= =========
NET INCOME (LOSS) PER SHARE AVAILABLE
TO COMMON SHAREHOLDERS:
Basic................................. $ (0.64) $ (0.42) $ 0.14
========= ========= =========
Diluted............................... $ (0.64) $ (0.42) $ 0.13
========= ========= =========
SHARES USED IN COMPUTATION:
Basic................................. 16,317 16,262 15,728
========= ========= =========
Diluted............................... 16,317 16,262 17,704
========= ========= =========
See notes to consolidated financial statements.
SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
(In thousands)
Accumu-
lated
Share- Other Total
holder Compre- Compre-
Preferred Stock Common Stock Notes hensive Accumu- hensive
------------------ ----------------------- Receiv- Income lated Income
Shares Amount Shares Amount able (Loss) Deficit Total (Loss)
-------- -------- ----------- ---------- -------- -------- ---------- -------- --------
Balances, February 1, 1999..... 1,900 $ 1,536 15,435,094 $ 64,699 $ (12) $ - $ (41,452) $ 24,771
Net income..................... - - - - - - 2,348 2,348 $ 2,348
Unrealized gain on
investments.................. - - - - - 142 - 142 142
--------
Comprehensive income........... $ 2,490
========
Common stock issued under
stock plans.................. - - 418,570 987 - - - 987
Exercise of common stock
warrants..................... - - 40,000 207 - - - 207
Conversion of Series C
preferred stock.............. (1,900) (1,536) 330,416 1,536 - - - -
Dividends on Series C
preferred stock.............. - - - - - - (85) (85)
Cancellation of Active
Designs shares............... - - (3,300) (1) 1 - - -
Tax benefit of employee
stock transactions........... - - - 33 - - - 33
-------- -------- ----------- ---------- -------- -------- ---------- --------
Balances, January 31, 2000..... - - 16,220,780 67,461 (11) 142 (39,189) 28,403
Net loss....................... - - - - (6,868) (6,868) $ (6,868)
Unrealized loss on investments. - - - - (114) (114) (114)
Accumulated translation
adjustment................... - - - - 26 26 26
--------
Comprehensive loss............. $ (6,956)
========
Common stock issued under
stock plans.................. - - 131,684 308 - - - 308
Exercise of common stock
warrants..................... - - 5,000 26 - - - 26
Cancellation of Active
Designs shares............... - - (44,000) (10) 10 - - -
-------- -------- ----------- ---------- -------- -------- ---------- --------
Balances, January 31, 2001..... - - 16,313,464 67,785 (1) 54 (46,057) 21,781
Net loss....................... - - - - (10,392) (10,392) $(10,392)
Unrealized loss on investments. - - - - (15) (15) (15)
Accumulated translation
adjustment................... - - - - (8) (8) (8)
--------
Comprehensive loss............. $(10,415)
========
Common stock issued under
stock plans.................. - - 69,859 100 - - - 100
Cancellation of Active
Designs shares............... - - (5,281) (1) 1 - - -
-------- -------- ----------- ---------- -------- -------- ---------- --------
Balances, January 31, 2002..... - $ - 16,378,042 $ 67,884 $ - $ 31 $ (56,449) $ 11,466
======== ======== =========== ========== ======== ======== ========== ========
See notes to consolidated financial statements.
SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
(In thousands)
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $(10,392) $ (6,868) $ 2,348
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization................. 665 789 720
Loss on disposal of assets.................... 22 13 22
Other noncash expenses........................ 927 51 --
Changes in operating assets and liabilities:
Accounts receivable......................... 2,954 7,931 595
Inventories................................. 3,677 (137) 2,396
Prepaid expenses and other.................. (225) 201 165
Accounts payable............................ (1,308) 146 (1,832)
Accrued liabilities and other............... (116) (59) 374
-------- -------- --------
Net cash provided by (used for)
operating activities..................... (3,796) 2,067 4,788
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment additions............................. (172) (364) (466)
Proceeds from sales of equipment................ -- -- 36
Purchases of short-term investments............. (6,773) (37,636) (29,118)
Maturity of short-term investments.............. 10,722 38,978 38,009
Other assets.................................... (118) (1,019) 42
-------- -------- --------
Net cash provided by (used for)
investing activities...................... 3,659 (41) 8,503
-------- -------- --------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Bank line of credit borrowings, net............. -- (41) (1,675)
Increase in restricted cash..................... -- -- (12,000)
Proceeds from sale of common stock.............. 100 334 1,194
Dividends paid.................................. -- -- (80)
Repayment of capital lease obligations.......... (321) (382) (217)
-------- -------- --------
Net cash used for
financing activities...................... (221) (89) (12,778)
-------- -------- --------
Effect of exchange rates changes on cash.......... (8) 26 --
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. (366) 1,963 513
CASH AND CASH EQUIVALENTS:
Beginning of year............................... 5,422 3,459 2,946
-------- -------- --------
End of year..................................... $ 5,056 $ 5,422 $ 3,459
======== ======== ========
CASH PAID FOR INTEREST............................ $ 584 $ 916 $ 707
======== ======== ========
CASH PAID FOR INCOME TAXES........................ $ 4 $ 2 $ 75
======== ======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases......... $ -- $ 541 $ 244
======== ======== ========
Conversion of Series C preferred stock into
common stock.................................. $ -- $ -- $ 1,536
======== ======== ========
Cancellation of notes receivable and related
common stock.................................. $ 1 $ 10 $ 1
======== ======== ========
Tax benefit of employee stock transactions...... $ -- $ -- $ 33
======== ======== ========
Conversion of investment in private equity
securities into marketable equity securities.. $ -- $ -- $ 100
======== ======== ========
See notes to consolidated financial statements.
SIGMA DESIGNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Sigma Designs, Inc. (the Company) develops, manufactures and markets multimedia computer devices and products. The Company sells its products to computer manufacturers, distributors, value-added resellers and corporate customers.
Principle of Consolidation - The consolidated financial statements include Sigma Designs, Inc. and subsidiaries. Intercompany balances and transactions are eliminated.
Accounting Period - The Company's fiscal year ends on the Saturday closest to January 31. For convenience, the financial statements are shown as ending January 31, although the fiscal years ended on February 2, 2002, February 3, 2001, and January 29, 2000, respectively. Fiscal 2001 included 53 weeks, and fiscal 2002 and 2000 each included 52 weeks.
Pervasiveness of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The majority of the Company's cash and cash equivalents are on deposit with one financial institution. The Company's short-term investments are managed by a major domestic financial institution, in a portfolio with defined investment objectives of competitive money market returns, high liquidity and safety of capital. Its portfolio of short-term investments typically includes United States government obligations and corporate obligations. From time to time, the Company also makes investments in certificates of deposit with financial institutions, outside of its third-party managed portfolio. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for sales on credit. The Company maintains reserves for potential credit losses.
Cash and Cash Equivalents - The Company considers all highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash equivalents.
Short-Term Investments - The Company's short-term investments represent debt securities which are stated at fair value. All short-term investments are classified as available-for-sale. Any temporary difference between an investment's cost and its market value is recorded as a separate component of shareholders' equity until such gains and losses are realized. Available-for-sale securities are classified in the balance sheet based on management's current intended use for the securities. Gains and losses on the sale of securities are computed using the specific identification method.
Inventories are stated at the lower of cost (first-in, first- out) or market.
Restricted Cash represents funds on deposit in accounts which have been assigned to the Company's lender under a bank line of credit (see note 6).
Investments in private equity securities of less than 20% owned companies are accounted for using the cost method unless the Company can exercise significant influence or the investee is economically dependent upon the Company, in which case the equity method is used. Included in other income (expense) for fiscal 2002 is a $927,000 charge related to impairment of an investment accounted for under the cost method.
Equipment is stated at cost. Depreciation and amortization are computed using the straight-line method based on the useful lives of the assets (three to five years) or the lease term if shorter.
Long Lived Assets - The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Revenue Recognition - Revenues consist of product and development revenue. Revenues from product sales to OEMs, distributors and end users are generally recognized upon shipment, except that revenues are deferred when the Company cannot reasonably estimate the amount of returns or where collectibility is not assured; deferred revenue is recognized when collection subsequently becomes probable and returns are estimable (generally upon resale by customers). Allowances for sales returns, price protection and warranty costs are recorded at the time that revenues are recognized.
Revenues from product development agreements are recognized using the percentage of completion method. Estimates are reviewed and revised periodically throughout the lives of the contracts. Any revisions are recorded in the accounting period in which the need for revisions becomes evident. The Company classifies all development costs related to such agreements as research and development expenses. Development revenues were $406,000, $1,852,000, and $60,000 for fiscal 2002, 2001 and 2000, respectively.
Research and Development expenses include costs and expenses associated with the design and development of new products. To the extent that such costs include the development of computer software, they are generally incurred prior to the establishment of the technological feasibility of the related product that is under development. Accordingly, software costs incurred after the establishment of technological feasibility have not been material and therefore have been expensed. All other research and development is expensed as incurred.
Income Taxes - Deferred income taxes are provided for temporary differences between financial statement and income tax reporting. Income taxes are accounted for under an asset and liability approach. Deferred tax liabilities are recognized for future taxable amounts and deferred tax assets are recognized for future deductions net of a valuation allowance to reduce deferred tax assets to amounts that are more likely than not to be realized.
Stock-Based Compensation - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and all of its interpretations and presents pro forma disclosures required by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 which requires that the fair value of such instruments be recognized as an expense over the period in which the related services are received.
Foreign Currency - The functional currency of the Company's foreign subsidiaries is the local currency of each country. Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries are included in shareholders' equity. Transaction gains and losses, which are included in the other income (expenses) in the accompanying consolidated statements of operations, have not been significant for all years presented.
Net Income (Loss) per Share - Basic earnings per share (EPS) excludes dilution and is computed by dividing net income by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock (see Note 7).
Fair Value of Financial Instruments - The Company believes that carrying amounts reported in the balance sheet for cash, cash equivalents, restricted cash, investments and line of credit borrowings as of January 31, 2002 approximate fair market value.
Geographic Operating Information - SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," provides annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographical areas and major customers. The Company operates in one reportable segment (Note 12).
Derivatives - In June 1998, the Financial Accounting Standards Board, or the FASB, issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains and losses resulting from changes in the fair market values of those derivative instruments would be accounted for depending on the use of the instrument and whether it qualifies for hedge accounting. The Company adopted SFAS No. 133, as amended, on February 1, 2001. The adoption of this statement did not have an effect on the Company's financial position, results of operations or cash flows as the Company had no derivative financial instruments as of January 31, 2002 and historically has not entered into any derivative transactions.
As a matter of policy, the Company does not currently enter into transactions involving derivative financial instruments. In the event the Company enters into such transactions in the future, the Company will account for those transactions in accordance with SFAS No. 133, in which case the Company will formally document all relationships between the hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking such hedge transactions.
Recent Accounting Pronouncements - On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to the acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized. However, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested at least annually for impairment. The Company is required to adopt SFAS No. 142 effective February 1, 2002 and does not expect the effect of adoption to have a material impact on the Company's financial position, results of operations or cash flows.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for Impairment of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of", and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. The Company is required to adopt SFAS No. 144 on February 1, 2002. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
2. SHORT-TERM INVESTMENTS
Short-term investments included the following securities and gross unrealized losses and gains as of January 31, 2002 and 2001 (in thousands). Fair values are based on quoted market prices obtained from the Company's broker. All of the Company's short-term investments are classified as available for sale, since the Company intends to sell them as needed for operations. All of the Company's short-term investments mature in fiscal 2003.
Unrealized Unrealized
Loss on Gain on
Invest- Invest- Market
Cost ment ment Value
--------- ---------- ---------- ---------
January 31, 2002:
Corporate debt securities.. $930 $0 $13 $943
========= ========== ========== =========
January 31, 2001:
Corporate debt securities.. $4,879 $0 $28 $4,907
========= ========== ========== =========
3. INVENTORIES
Inventories at January 31 consist of (in thousands):
2002 2001
---------- ----------
Raw materials................................. $1,568 $3,635
Work in process............................... 1,338 2,325
Finished goods................................ 1,576 2,199
---------- ----------
Inventories - net............................. $4,482 $8,159
========== ==========
4. EQUIPMENT
Equipment at January 31 consists of (in thousands):
2002 2001
---------- ----------
Computers and test equipment.................. $4,387 $4,299
Furniture and fixtures........................ 654 622
Other......................................... 119 101
---------- ----------
Total......................................... 5,160 5,022
Accumulated depreciation and amortization..... (4,329) (3,676)
---------- ----------
Equipment - net............................... $831 $1,346
========== ==========
At January 31, 2002 and 2001, equipment with a net book value of $361,000 and $671,000 (net of accumulated amortization of $1,118,000 and $808,000, respectively), has been leased under capital leases.
5. ACCRUED LIABILITIES
Accrued liabilities at January 31 consist of (in thousands):
2002 2001
---------- ----------
Accrued salary and benefits................... $509 $539
Other accrued liabilities..................... 827 909
---------- ----------
Total......................................... $1,336 $1,448
========== ==========
6. BANK LINES OF CREDIT
The Company has $12,000,000 outstanding at January 31, 2002 under a $12,000,000 bank line of credit that expires in October 2002, bears interest at the U.S. Treasury Bill rate (1.48% at January 31, 2002) plus 0.85%, and is collateralized by funds on deposit in accounts which have been assigned to the lender and included in the Company's consolidated balance sheet as of January 31, 2002 as restricted cash.
The Company also has a $6,000,000 bank line of credit that expires in October 2002, and is collateralized by the Company's accounts receivable, inventories, equipment and intangibles. The Company has $178,000 of standby letters of credit outstanding as of January 31, 2002 under the same bank line of credit. Borrowings under this line of credit are generally limited to maximum 70% of eligible accounts receivable (as defined). Availability to utilize this $6,000,000 bank line of credit is dependent on the Company's ability to maintain compliance with covenants under the amended bank line of credit agreement.
The line of credit agreement contains certain covenants that, among other things, require the Company to maintain certain levels of tangible net worth plus subordinated debt (Tangible Net Worth). At January 31, 2002, the Company was required to maintain Tangible Net Worth of at least $11,500,000 and was not in compliance with this covenant. In April 2002, the Company obtained a modification to the line of credit agreement to amend this covenant to $10,500,000.
7. SHAREHOLDERS' EQUITYPreferred Stock
At January 31, 2000, warrants to purchase 64,285 shares of the Company's common stock issued in connection with the issuance of Series A nonvoting cumulative preferred stock were outstanding. The warrants were exercisable at $5.16 per share beginning in January 1998 and expired in fiscal 2001.
During fiscal 1999, the Company issued 5,000 shares of Series B nonvoting convertible preferred stock for $1,000 per share and warrants to purchase 50,000 shares of the Company's common stock. The warrants are exercisable at $5.16 per share and expired on April 30, 2001.
During fiscal 1999, the Company issued 1,900 shares of Series C nonvoting convertible preferred stock for $1,000 per share and warrants to purchase 95,000 shares of the Company's common stock at $5.16 per shares. In fiscal 2001 and 2000, warrants to purchase 5,000 and 40,000 shares of the Company's common stock were exercised for proceeds of approximately $26,000 and $207,000 respectively. The unexercised warrants expired in fiscal 2001.
Common Stock
The Company's common shareholders' rights agreement expired in fiscal 2000.
During fiscal year 2002, the Company increased the number of authorized shares of common stock by 15,000,000 shares from 20,000,000 to a total of 35,000,000 shares.
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods presented (in thousands, except per-share data):
Years Ended January 31,
--------------------- ---------
2002 2001 2000
--------- --------- ---------
Numerator:
Net income (loss) available to
common shareholders, basic
and diluted......................... $($10,392) $ ($6,868) $ $2,263
--------- --------- ---------
Denominator:
Weighted average common shares
outstanding........................ 16,318 16,305 15,784
Weighted average common shares
outstanding subject to repurchase.. (1) (43) (56)
--------- --------- ---------
Shares used in computation, basic....... 16,317 16,262 15,728
Effect of dilutive securities:
Common shares subject to repurchase... -- -- 56
Stock options......................... -- -- 1,876
Warrants.............................. -- -- 44
--------- --------- ---------
Shares used in computation, diluted..... 16,317 16,262 17,704
--------- --------- ---------
Net income (loss) per share:
Basic................................. $ (0.64) $ (0.42) $ 0.14
========= ========= =========
Diluted............................... $ (0.64) $ (0.42) $ 0.13
========= ========= =========
The Company excluded certain potentially dilutive securities in fiscal 2002 and 2001 from its dilutive EPS computation because either the exercise price of the securities exceeded the average fair values of the Company's common stock or the Company had net losses, and, therefore, these securities were antidilutive.
A summary of the excluded potential dilutive securities as of the end of each fiscal year follows (in thousands):
Years Ended January 31,
--------------------- ---------
2002 2001 2000
--------- --------- ---------
Common shares subject to repurchase..... -- 5 --
Stock options........................... 4,108 3,421 --
Stock warrants.......................... -- 50 --
Stock Option Plan
During fiscal 2002, the Company adopted the 2001 employee stock option plan and reserved 500,000 shares of the Company's Common stock for issuance under the plan, with an automatic annual increase on the first day of the Company's fiscal year equal to the lesser of (i) 1,000,000 shares, (ii) 4% of the Company's outstanding common stock on such date or (iii) a lesser number of shares as determined by the Board of Directors. The annual increases begin in the fiscal year beginning February 1, 2002. The Company's 1994 stock option plan provides for the granting of options to purchase up to 4,400,000 shares of common stock. Generally, the 1994 and 2001 plans provide for the granting of options to purchase shares of common stock at the fair market value on the date of grant. Options granted under the 1994 and 2001 plans become exercisable over a five-year period and expire no more than ten years from the date of grant (all options outstanding at January 31, 2002 expire ten years from date of grant).
Stock option activity and balances are summarized as follow:
Weighted
Average
Exercise
Number Price
of Per
Shares Share
----------- ----------
Balances, February 1, 1999 (1,090,538
exercisable at a weighted-average price
of $2.36)..................................... 3,029,895 $2.25
Granted (weighted-average fair value of $4.09).. 335,500 5.70
Canceled........................................ (154,003) 2.40
Exercised....................................... (375,316) 2.23
----------- ----------
Balances, January 31, 2000 (1,360,270
exercisable at a weighted-average price
of $2.37)..................................... 2,836,076 2.65
Granted (weighted-average fair value of $2.59).. 960,500 3.57
Canceled........................................ (278,855) 3.79
Exercised....................................... (96,540) 2.34
----------- ----------
Balances, January 31, 2001 (1,733,336
exercisable at a weighted-average price
of $2.48)..................................... 3,421,181 2.83
Granted (weighted-average fair value of $0.93).. 837,500 1.28
Canceled........................................ (148,887) 2.97
Exercised....................................... (1,825) 1.00
----------- ----------
Balances, January 31, 2002...................... 4,107,969 $2.51
=========== ==========
At January 31, 2002, options to purchase 34,064 shares were available for future grant. Effective at the beginning of fiscal 2003, an additional 655,122 shares resulting from the automatic annual increase of 4% of the Company's outstanding common stock was added to the shares available for issuance under the 2001 plan.
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Number Number
Outstanding Weighted Weighted Exercisable Weighted
at Average Average at Average
Range of Exercise January 31, Remaining Exercise January 31, Exercise
Prices 2002 Life Price 2002 Price
- -------------------- ----------- ----------- ---------- ----------- ----------
$0.09 6,572 0.86 $0.09 6,572 $0.09
$1.00 - $1.25 1,151,716 8.69 $1.16 239,437 $1.01
$1.63 - $2.44 1,469,360 5.52 $2.28 1,312,565 $2.31
$2.56 - $3.81 986,988 7.07 $3.15 569,884 $3.01
$4.25 - $6.38 493,333 7.75 $5.06 213,580 $5.14
- -------------------- ----------- -----------
$0.09 - $6.38 4,107,969 7.04 $2.51 2,342,038 $2.60
==================== =========== ===========
The Company uses the intrinsic value method specified by APB No. 25 to calculate compensation expense associated with issuing stock options and, accordingly, has recorded no such expense through January 31, 2002 as such issuances have been at the fair value of the Company's common stock at the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1996. Under SFAS No. 123, the fair value of stock- based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions for fiscal 2002, 2001 and 2000, respectively: expected life, 18, 18 and 19 months following vesting; stock volatility, 104%, 100% and 97%; risk free interest rates, 4.67%, 4.84% and 5.5%; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of awards had been amortized to expense over the vesting period of the awards, pro forma net income (loss) available to common shareholders would have been (in thousands, except per share amounts):
Years Ended January 31,
--------------------- ---------
2002 2001 2000
--------- --------- ---------
Net income (loss) available to
common shareholders:
As reported......................... $ (10,392) $ (6,868) $ 2,263
========= ========= =========
Pro forma........................... $ (11,635) $ (8,317) $ 1,279
========= ========= =========
Net income (loss) per share
available to common shareholders:
As reported:
Basic............................. $ (0.64) $ (0.42) $ 0.14
========= ========= =========
Diluted........................... $ (0.64) $ (0.42) $ 0.13
========= ========= =========
Pro forma:
Basic............................. $ (0.71) $ (0.51) $ 0.08
========= ========= =========
Diluted........................... $ (0.71) $ (0.51) $ 0.07
========= ========= =========
Employee Stock Purchase Plan
During fiscal 2002, the Company adopted the 2001 Employee Stock Purchase Plan and reserved 100,000 shares of the Company's Common stock for issuance under the plan, with an automatic annual increase on the first day of the Company's fiscal year equal to the lesser of (i) 500,000 shares, (ii) 2% of the Company's outstanding common stock on such date or (iii) a lesser number of shares as determined by the Board of Directors. The Company's 1986 Employee Stock Purchase Plan (1986 ESPP) provided for the sale of up to 300,000 shares of common stock. At January 31, 2001, all shares authorized for issuance under 1986 ESPP had been issued. Under both plans, eligible employees may authorize payroll deductions of up to 10% of their regular base salaries to purchase common stock at 85% of the fair market value at the beginning or end of each six-month offering period. During fiscal 2002, 2001 and 2000, 68,034, 35,144, and 43,254 shares were purchased at an average price of $1.45, $2.34, and $3.45 per share, respectively. At January 31, 2002, 31,966 shares under 2001 Purchase Plan remain available for future purchase. Effective at the beginning of fiscal 2003, an additional 327,561 shares was added to the shares available for issuance under the 2001 purchase plan resulting from the automatic annual increase of 2% of the Company's outstanding common stock.
8. INCOME TAXES
As a result of net losses and net operating loss carryforwards in fiscal 2002, 2001 and 2000, the Company has recorded no material income tax provision for all years presented.
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.
The tax effects of significant items comprising the Company's deferred taxes are as follows (in thousands):
January 31,
-------------------
2002 2001
--------- ---------
Deferred tax assets:
Net operating losses and tax credit carryforwards.. $25,333 $21,725
Reserves not currently deductible.................. 2,739 2,311
Capitalized research and development expenditures.. 1,027 713
Other.............................................. 153 61
--------- ---------
29,252 24,810
Valuation allowance.................................. (29,252) (24,810)
--------- ---------
Net deferred taxes................................... $ -- $ --
========= =========
SFAS No. 109 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's recent history of operating losses, risks associated with its new product introduction including the dependence on rapid acceptance of new technology, the dependence on development of complimentary software by third parties and other risks, such as technological change in the industry, short product life cycles and reliance on a limited number of suppliers and manufacturing contractors, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not appropriate and, accordingly, has provided a valuation allowance.
Net operating losses and tax credit carryforwards as of January 31, 2002 are as follows (in thousands):
Expiration
Amount Years
--------- --------- ----------
Net operating losses, federal.... $ 57,859 2009 -2021
Net operating losses, state...... 2,635 2002 -2006
Tax credits, federal............. 2,256 2006 -2021
Tax credits, state............... 1,739 -
Net operating losses, foreign.... 5,016 -
Current federal and California tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. Accordingly, the Company's ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such ownership change. Such a limitation could result in the expiration of carryforwards before they are utilized.
The effective tax rate of the Company's provision for income taxes differs from the federal statutory rate as follows (in thousands):
2002 2001 2000
--------- --------- ---------
(in thousands)
Computed at 35%................... $ (3,636) $ (2,402) $ 842
State taxes, expiration of net
operating loss carryforwards.... $ 2 $ 1 $ 226
Valuation allowance............... 3,781 2,550 (1,386)
Other............................. (143) (147) 378
--------- --------- ---------
Total............................. $ 4 $ 2 $ 60
========= ========= =========
9. COMMITMENTS AND LEASES
Leases - The Company's primary facilities are leased under a noncancelable lease which expires in September 2002. Currently, we are in the process of negotiating a five-year lease of an approximately 40,000 square foot facility in Milpitas, California. In addition, the Company leases certain equipment under capital lease arrangements. Future minimum annual payments under capital and operating leases are as follows (in thousands):
Fiscal Year Ending Capital Operating
January 31, Leases Leases
------------------------------- ---------- ----------
2003..................................... $264 $239
2004..................................... 119 --
2005..................................... -- --
---------- ----------
Total minimum lease payments.................. 383 $239
Amount representing interest at a rates ==========
of 7.84% to 10.32%.......................... (26)
----------
Present value of minimum lease payments....... 357
Current portion............................... (244)
----------
Long-term portion............................. $113
==========
Rent expense was $504,000, $482,000, and $448,000 for fiscal 2002, 2001 and 2000, respectively.
Royalties - The Company pays royalties for the right to sell certain products under various license agreements. During fiscal 2002, 2001 and 2000, the Company recorded royalty expense of $85,000, $491,000, and $732,000, respectively.
Benefit Plan - The Company sponsors a 401(k) savings plan in which most employees are eligible to participate. The Plan commenced in fiscal 1994. The Company is not obligated to make contributions to the plan and no contributions has been made by the Company.
10. MAJOR CUSTOMERS
Three domestic customers accounted for 15%, 14% and 11% of net revenues in fiscal 2002, respectively. No domestic customer accounted for more than 10% of net revenues in fiscal 2001 and 2000. During fiscal 2002, no international customers accounted for more than 10% of net revenues. During fiscal 2001, three international customers accounted for 15%, 14% and 11% of net revenues, respectively. During fiscal 2000, two international customers accounted for 26% and 13% of net revenues, respectively.
11. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), which is displayed in the Consolidated Statements of Shareholders' Equity, represents net income (loss) available to common shareholders plus the results of certain shareholders' equity changes not reflected in the Consolidated Statements of Operations.
The components of accumulated other comprehensive income (loss) are as follows (in thousands):
Total
Accumulated
Unrealized Other
Accumulated Holding Comprehensive
Translation Gains/ Income/
Adjustment (Losses) (Loss)
----------- ---------- ------------
Beginning Balance, February 1, 1999. $ -- $ -- $ --
Current Year Change................. -- 142 142
----------- ---------- ------------
Ending Balance, January 31, 2000.... -- 142 142
Current Year Change................. 26 (114) (88)
----------- ---------- ------------
Ending Balance, January 31, 2001.... 26 28 54
Current Year Change................. (8) (15) (23)
----------- ---------- ------------
Ending Balance, January 31, 2002.... $ 18 $ 13 $ 31
=========== ========== ============
12. SEGMENT AND GEOGRAPHICAL INFORMATION
As discussed in Note 1, the Company follows the requirements of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The Company's operating segments consist of its geographically based entities in the United States, Hong Kong and France. All such operating entities segments have similar economic characteristics, as defined in SFAS No. 131, and accordingly, the Company operates in one reportable segment: the development, manufacturing and marketing of multimedia computer devices and products.
For the years ended January 31, 2002, 2001 and 2000, the Company recorded sales to customers throughout the United States and Canada, Taiwan, Hong Kong, Singapore, Japan; Germany, Belgium, Denmark, Finland, The Netherlands, Norway, Sweden, The United Kingdom, France, Italy, Spain (collectively referred to as "Europe"); Korea, China, Thailand, New Zealand, Turkey, Israel and South Africa (collectively "Rest of Asia/New Zealand/Other Region")
The following table summaries total net revenues and long-lived assets attributed to significant countries as of and for the fiscal years ended January 31 (in thousands):
2002 2001 2000
--------- --------- ---------
Net revenues:
United States.......................... $ 7,750 $ 10,241 $ 16,535
Europe................................. 2,401 1,574 4,114
Taiwan................................. 1,298 5,469 15,021
Rest of Asia/New Zealand/Other Region.. 887 997 2,021
Hong Kong.............................. 811 2,916 2,754
Japan.................................. 191 3,330 1,375
Singapore.............................. 87 4,933 8,208
Canada................................. 12 16 296
--------- --------- ---------
Total net revenues*...................... $ 13,437 $ 29,476 $ 50,324
========= ========= =========
Long-lived assets:
United States.......................... $ 807 $ 1,331 $ 1,218
Hong Kong.............................. 16 -- 4
France................................. 8 15 21
--------- --------- ---------
Total long-lived assets.................. $ 831 $ 1,346 $ 1,243
========= ========= =========
* Net revenues are attributed to countries based on invoicing location of customer.
13. SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
The follow table presents unaudited quarterly financial information for each of the Company's last eight quarters (in thousands, except per share data).
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Year ended January 31, 2002:
Net revenues........................... $ 3,222 $ 2,982 $ 3,416 $ 3,817
Income (loss) from operations.......... (2,674) (2,713) (1,703) (2,581)
Net income (loss) available to common
shareholders......................... (2,614) (2,610) (1,666) (3,502)
Net income (loss) per share available
to common shareholders:
Basic................................ $ (0.16) $ (0.16) $ (0.10) $ (0.21)
Diluted.............................. $ (0.16) $ (0.16) $ (0.10) $ (0.21)
Year ended January 31, 2001:
Net revenues........................... $ 10,401 $ 10,663 $ 5,479 $ 2,933
Income (loss) from operations.......... 101 419 (795) (6,958)
Net income (loss) available to common
shareholders......................... 189 482 (665) (6,874)
Net income (loss) per share available to
common shareholders:
Basic................................ $ 0.01 $ 0.03 $ (0.04) $ (0.42)
Diluted.............................. $ 0.01 $ 0.03 $ (0.04) $ (0.42)