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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: January 31, 1999
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 000-15116
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Sigma Designs, Inc.
(Exact name of Registrant as specified in its charter)
California 94-2848099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
355 Fairview Way, Milpitas, California 95035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 262-9003
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)
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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 requirement for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
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 the voting stock held by non-affiliates of the
Registrant was approximately $95,528,329 as of April 14, 1999 based on the
closing price of the Common Stock as reported on The Nasdaq Stock Market for
that date. There were 15,596,462 of the Registrant's Common Stock issued and
outstanding on April 14, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of Sigma Designs, Inc.'s definitive Proxy Statement for the
1999 Annual Meeting of Shareholders to be held on June 11, 1999 are incorporated
by reference in Part III of this Form 10-K to the extent stated herein.
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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
We design, manufacture (using subcontractors) and market multimedia
products for use with personal computers. The emergence of multimedia
technology in the personal computer (PC) market has dramatically changed
the way in which users interact with computers. Multimedia integrates
different elements, such as sound and video, to enhance the computing
experience and deliver a heightened sense of realism. Through its
REALmagic product line incorporating Moving Picture Experts Group (MPEG)
technology, Sigma Designs has become a leader in this emerging market.
Prior to MPEG's introduction, video on personal computers suffered
from serious drawbacks. Motion pictures appeared jerky, and video was
confined to small window sizes. MPEG, a defined International Standards
Organization (ISO) standard for video compression, eliminated many of
those problems and revolutionized multimedia on the PC platform. For the
first time, MPEG users could play back full-screen, full-motion video
combined with stereo audio, even from a standard CD-ROM. A single CD-ROM
using the MPEG compression technique can store up to 74 minutes of full-
motion video and audio.
With MPEG technology, producers can create (and users can enjoy) an
interactive, television-like experience on a desktop PC. The result is a
significant new visual impact, thereby opening possibilities for a wide
range of entertainment, education, training and business presentation
applications. In April 1997, we announced our entry into the Digital
Video Disk ("DVD") market. A key element of the DVD specification is
the use of MPEG-2 for digital video compression, a technology in which
Sigma has established expertise. Sigma's REALmagic EM8300, EM8220 and
EM8800 PC-based DVD and Super Video Compact Disk ("SVCD") solutions are
extensions of our MPEG expertise and provide a highly-integrated solution
for the PC-DVD and PC-SVCD markets.
The REALmagic MPEG Standard
Since its first shipment in November 1993, REALmagic technology has
received support from PC industry leaders, software developers, and OEM
and retail customers.
Partnership with PC Industry Leaders
Sigma has developed strategic partnerships to develop and market
network streaming video products with companies such as Hughes Network
Systems, IBM, Microsoft Corporation, OptiVision, Oracle Corporation,
Silicon Graphics, Inc., Starlight Networks, acquired by Picturetel, Sun
Microsystems, and FVC.com.
Support from Software Developers
Support for Sigma's REALmagic MPEG standard has grown to over 1,200
software developers. To further expand the list of developers, Sigma has
worked directly with Microsoft on Microsoft's new streaming standard for
MPEG-2 called DirectShow. Sigma Designs is the first and currently the
only company shipping drivers with DirectShow support for streaming MPEG-
2 video, making it the first recommended decoder for use with Microsoft's
NetShow Theater video server.
Using the DirectShow standard, software developers can create
streaming video applications with virtually any video server-without any
C programming at all. This enables universities and corporations to get
live video and video on demand applications online very rapidly, which
shortens the sales process.
Support from Original Equipment Manufacturer ("OEM") Customers
In the United States, Dell Computer Corporation, Compaq Computer
Corporation, IBM, Hughes Network Systems and OptiVision have purchased
REALmagic cards for installation inside their systems for streaming
video. Additionally, Philips, Sony, Panasonic Canada, Matsushita,
Toshiba, VideoLogic and several other companies market DVD kits that
include REALmagic Hollywood Plus playback cards, and several vendors base
their DVD systems on REALmagic DVD playback cards.
Acceptance by the Corporate Market
REALmagic is the most well-known and most recognized brand name for
MPEG video on PCs. Sigma Designs has developed this brand name through
marketing campaigns and by building a reputation for delivering and
supporting inexpensive MPEG decoders with robust, powerful and flexible
software drivers. This has made Sigma Designs' REALmagic the de facto
standard for corporate market projects such as corporate-wide rollouts at
Merrill Lynch, Smith Barney and Wal-Mart.
REALmagic Business Strategy
Sigma's corporate objective is to continue to be a leading provider
of MPEG multimedia products that enable full-screen, full-motion, TV-like
quality video on the standard desktop and the notebook PC. To accomplish
this goal, we intend to promote widespread acceptance of REALmagic
technology. The key parts of this strategy include:
Win More OEM Partnerships and Further Penetrate the Corporate Market
To establish REALmagic for MPEG-2 as a standard, we will continue
to seek design wins with major PC manufacturers worldwide, in which the
OEMs will factory-install REALmagic boards or chipsets inside their
multimedia PCs. On the retail side, our systems integration sales team
will continue to work with its network of national distributors and
special Value Added Resellers (VARs) to distribute our high-end REALmagic
playback card. In Europe and Asia Pacific, we intend to continue to
expand our relationship with distributors as well as OEMs and VARs. In
addition, we will seek to sell chipsets to add-on card manufacturers that
will, in turn, market to owners of Pentium PCs.
Introduce New Generations of REALmagic, Offer REALmagic products at
Competitive Prices and Continually Reduce Product Costs
A significant aspect of our product strategy is to increase the
sale of REALmagic chipsets while continuing to develop newer versions and
generations of REALmagic products, including chipsets for both desktop
and notebook PCs. We seek to continue to offer consumers better-featured
and lower-priced products over time.
REALmagic Products
We currently offer a complete family of REALmagic products including:
o REALmagic Hollywood Plus-In April 1997, we announced our
entry into the DVD market. The REALmagic Hollywood Plus MPEG-
2 playback card turns a PC into a full-featured DVD player
that exploits many of the digital video and digital surround
sound capabilities of the DVD format and upcoming MPEG-2
interactive titles. The REALmagic Hollywood Plus DVD/MPEG-2
playback card displays flicker-free video at full-screen
resolution, making video watching on a PC a new experience.
Movies can be simultaneously displayed on the PC monitor and
on a large-screen TV.
o REALmagic NetStream 2-In October 1997, we announced our
entry into the MPEG-2 networked video market. Products in
the NetStream family include specialized hardware and
software developed specifically for delivering video to
corporate desktops and can be used for both video on demand
and broadcast video playback. NetStream 2 is an MPEG-2
playback card offering full plug and play installation and
compatibility with a broad range of third-party applications,
including video servers for video on demand, MPEG encoders
for stored or real-time playback, satellite delivery systems,
streaming video playback systems and scores of customizable
interactive training titles.
o REALmagic EM8300-In March 1998, we announced the
introduction of the EM8300 REALmagic DVD/MPEG-2/MPEG-1
decoder Integrated Circuit ("IC"). Integrating virtually
all functions of a DVD decoder on one chip, the EM8300 is
designed to provide a highly integrated, cost effective
vehicle for high-quality DVD. The EM8300 feature set draws
on Sigma's industry-leading experience in the DVD/MPEG-2
market with earlier designs such as the REALmagic Ventura and
REALmagic Hollywood decoder cards. The result is a blend of
performance and affordability that can be key to gaining
market share in the rapidly growing DVD market.
o REALmagic EM8220 DVD/MPEG-2 VGA Add-On Card-In June 1998, we
announced the introduction of a daughter card to add to Intel
i740-based 2D/3D Video Graphics Array ("VGA") graphics
cards to quickly and effectively deliver high-performance,
video-ready multimedia systems.
o REALmagic DVD/MPEG-2 Notebook Module-Designed to connect
directly to the VGA controller through the ZV-bus and to the
system bus through the module's Peripheral Component
Interconnect ("PCI") interface, the notebook module gives
notebook users all of the power and impact of DVD performance
with their go-anywhere systems.
o REALmagic EM8800-In October 1998, we announced the REALmagic
EM8800 decoder IC, the first single-chip PC solution for
China's new SVCD standard. Integrating virtually all SVCD
decoding functions on one chip, the EM8800 can turn a PC into
a full-featured home theater video player that fully exploits
the improved video quality supported by the SVCD standard.
Marketing and Sales
Sigma Designs currently distributes its products through sales to
national and regional distributors, VARs and OEMs in the U.S. and
throughout the world. Our U.S. distributors include Ingram Micro, Inc.
and Tech Data, and our OEMs include Sony, Philips, Panasonic Canada, IBM,
Matsushita, Toshiba, Kapok Computers, Royal Computer, ASE Technologies,
LungHwa Electronics Co., Ltd., Formosa Industrial Computing, Labway
Corporation and others. Our international distributors are strategically
located in many countries around the world.
We generally acquire and 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 cancellable without substantial penalty from such
OEM customers. We currently place noncancellable 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 cancelled 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. One customer
accounted for 28% of our net sales in fiscal 1999.
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 collection problems, contributing to significant
fluctuations in our operating results.
Research and Development
As of January 31, 1999, we had a staff of 36 research and
development personnel. The research and development personnel conduct
all of our product development. We are focusing our development efforts
primarily on MPEG multimedia 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 assure you that we will be able to make any such
advancements in the REALmagic MPEG technology or, if they are made, that
we will be able to market such advancements to maintain profitability and
technological leadership.
During fiscal 1999, fiscal 1998 and fiscal 1997, our research and
development expenses were $5,678,000, $4,948,000 and $4,688,000,
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 multimedia products is highly competitive;
companies such as C-Cube Microsystems have a high profile in the
industry. Although we do not believe that any products sold by a third
party are in direct competition with the REALmagic decoding card in terms
of price and performance, the possibility that other companies with more
marketing and financial resources may develop a competitive product may
inhibit the wide acceptance of REALmagic technology. We believe that
many computer product manufacturers 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 multimedia hardware products include time to market for new product
introductions, product performance, compatibility with industry
standards, 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 are seeking patent protection for certain software and hardware
features in current and future versions of REALmagic. We currently have
fifteen pending patent applications for our REALmagic technology. Ten
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 Sigma's 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, 1999, we had 78 full-time employees, including 36
in research and development, 19 in marketing, sales and support, 9 in
operations, and 14 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 or 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 incurred significant operating losses in fiscal 1995, 1996 and
1998 and had negative cash flow in fiscal 1995 and 1998. Since our
introduction of the REALmagic Moving Picture Experts Group ("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. Since our inception through January 31, 1999, our total
accumulated deficit is $41,452,000. We cannot assure you that we will
continue to sell our new REALmagic products in substantial quantities or
generate significant revenues from those sales. We cannot assure you
that we will return to profitable operations in any future fiscal quarter
or fiscal year. If profitable operations are achieved, we cannot assure
you that they will be sustained.
Liquidity
We have an Amended and Restated Business Loan Agreement with
Silicon Valley Bank, dated October 26, 1998. Under the Agreement we gave
two secured Promissory Notes in total principal amounts of $12 million
and $6 million to Silicon Valley Bank, under which we may borrow as
needed. Under the Agreement and the Notes, we are subject to a certain
profitability covenant. Since July 1997, we have, on occasion, been in
violation of the profitability covenant and have obtained waivers
releasing us from our obligation to meet this covenant. We were granted
such a waiver for the quarter ended January 31, 1999. We may need
another waiver for the quarter ending April 30, 1999 or for future
periods. We cannot assure you that Silicon Valley Bank will grant these
waivers. If we do not meet this covenant, and if we do not obtain
waivers, the loans may be in default. If we are in default, then the
lender could accelerate payments on the Notes and we could suffer serious
harm to our business, financial condition and prospects.
Marketing Risks and Volatility of OEM Customer Sales and Resale Distribution
Our ability to increase sales, achieve profitability and maintain
REALmagic as a personal computer ("PC") industry multimedia standard
depends substantially on our ability to achieve a sustained high level of
sales to new Original Equipment Manufacturer ("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 PC
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, 28% of our net sales were derived from one customer in fiscal
1999; any reductions in those sales could seriously harm us. Based on
our experience in the PC 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 sustained 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 collection problems. This could contribute to
fluctuations in our results of operations. We cannot assure you that we
will be successful in maintaining a significant market for our REALmagic
products.
Our Market May Undergo Rapid Technological Change and Our Future Success
Will Depend on Our Ability to meet the Changing Needs of Our Industry
The market for multimedia PC products is characterized by the
following:
o rapidly changing technology and user preferences;
o evolving formats for compression of video and audio data; and
o frequent new product introductions.
Even though REALmagic products and related software titles have
gained initial market acceptance, 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:
o compatibility with emerging standards and multiple platforms;
o improvements to the REALmagic architecture; and
o enhancements to the REALmagic application programming interface.
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 obsolescence. 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
The market for multimedia PC products is highly competitive and is
driven by faster processors provided by Intel Corporation and other
companies. Intel 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 on the PC platform. These competitors include:
o SGS Thompson Microelectronics;
o C-Cube Microsystems;
o IBM Corporation;
o Zoran Corporation; and
o LSI Logic.
In addition, Intel processors are becoming more powerful, so that
video decoding could eventually 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. 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 Net Sales Are Dependent on Market Demand for Multimedia Products
Our business strategy is, and has been, to focus on REALmagic
products by investing heavily in PC-based MPEG technology. In the fiscal
year ended January 31, 1999, sales of multimedia products accounted for
virtually all of our net sales. A decline in market demand for
multimedia products will seriously harm our operating results. Our
present reliance on REALmagic products is further affected by the fact
that multimedia product sales are concentrated in the PC industry. A
decline in demand for PCs could seriously harm our operating results and
financial condition. In addition, one international customer accounted
for 28%, 39% and 22% of revenues in fiscal 1999, 1998 and 1997.
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:
o our new product introductions and product introductions by
our competitors;
o market acceptance of our products by OEMs, software developers
and end users;
o the success of our promotional programs;
o gains or losses of our significant customers;
o reductions in selling prices;
o inventory obsolescence;
o an interrupted or inadequate supply of semiconductor chips;
o our ability to protect our intellectual property; and
o loss of our key personnel.
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 may cause our
operating results to be difficult to predict. Currently, we place
noncancellable orders to purchase semiconductor products from our
foundries with a long lead time. Consequently, 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 could require significant
working capital and harm our operating results.
We Rely Heavily on Certain Manufacturers and Suppliers
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:
o the absence of adequate capacity;
o the unavailability of, or interruptions in access to, certain
process technologies; and
o reduced control over delivery schedules, manufacturing yields
and costs.
We obtain some of our components from a single source. 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 multimedia card 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 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.
We Depend on Key Personnel
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 do not have "keyperson" life
insurance policies on any of our employees.
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 ten 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 noninfringing 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 the fiscal years ended January 31, 1999, 1998 and 1997,
sales to international customers accounted for approximately 72%, 64%
and 72% of our net sales, respectively. We anticipate that sales to
international customers, including sales of REALmagic products, will
continue to account for a substantial percentage of our net sales. 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 the Company to obtain
price reductions from its 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 is 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:
o our announcement of the introduction of new products;
o our competitors' announcements of the introduction of new
products; and
o market conditions in the technology, entertainment and
emerging growth company sectors.
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.
There Is A Potential for Dilution From Conversion of Our Series C
Preferred Stock
Series C Preferred Stock. As of April 14, 1999, 1,400 shares of
our Series C Convertible Preferred Stock were issued and outstanding.
The shares of Series C Preferred Stock are convertible at the option of
the holders into that number of shares of our Common Stock as determined
by the following formula:
o Multiply the stated value ($1,000) of the Series C Preferred Stock
by the number of outstanding shares of Series C Preferred Stock,
and divide the product by the then current Conversion Price (set
forth below).
o The Conversion Price is based on the average of the closing sale
trading market price of our Common Stock over the five trading-day
period ending one day prior to the date of conversion of the
Series C Preferred Stock; provided, however, that no share of
Series C Preferred Stock may be converted into shares of our Common
Stock if the Conversion Price is less than $4.00. Furthermore, the
maximum Conversion Price for the Series C Preferred Stock is fixed
at $7.00. Thus, if the Series C Preferred Stock had been converted
on April 14, 1999, the Conversion Price would have been $5.43.
Based on this formula, if the remaining outstanding Series C
Preferred Stock was converted on April 14, 1999, it would have been
convertible into approximately 257,827 shares of Common Stock.
Purchasers of our common stock will experience dilution of their
investment upon conversion of the Series C Preferred Stock. Because the
Conversion Price of the Series C Preferred Stock is capped at $7.00, the
minimum number of shares of Common Stock that the remaining outstanding
shares of Series C Preferred Stock may be converted into is 200,000
shares. And, because the Series C Preferred Stock cannot be converted at
a Conversion Price that is less than $4.00, the maximum number of Common
Stock that the remaining outstanding shares of Series C Preferred Stock
may be converted into is 350,000 shares.
In addition, the Series C Preferred Stock receives payment of
dividends upon conversion into shares of our Common Stock. Dividends at
the rate of eight percent (8%) of the stated value ($1,000) of the
Series C Preferred Stock accrue daily on the basis of a 360-day year
beginning on January 22, 1999. At our option, we can pay the dividend by
issuing shares of our Common Stock or, if funds are legally available, by
cash. In the event we pay the dividends in cash, purchasers of our
Common Stock will suffer less dilution. Our election to pay cash,
however, will divert our available cash from other potential uses. The
shares of Series C Preferred Stock are not registered and may be sold
only if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as Rule 144.
As of April 14, 1999, warrants to purchase 95,000 shares of Common
Stock issued to the purchasers of the Series C Preferred Stock and
exercisable for a period of two years following January 22, 1999 at a
price of $5.16 (as may be adjusted from time to time under certain
antidilution provisions) were outstanding.
Year 2000 Issues Could Affect Our Business
We are aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000
problem" is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit year value
to 00. The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data
or cause a system to fail.
We have tested our products and believe our products are year 2000
compliant. Our management has also conducted a review of our exposure to
the year 2000 problem, including working with computer systems and
software vendors. We currently believe that our internal systems are
year 2000 compliant. We do not expect to further incur any significant
operating expenses or invest in additional computer systems to resolve
issues relating to the year 2000 problem, with respect to both our
information technology and product and service functions.
However, significant uncertainty remains concerning the effects of
the year 2000 problem, including uncertainty regarding assurances made by
vendors. In addition, we have not investigated year 2000 compliance of
other entities that are not our vendors or that are vendors or purchasers
of our product. For example, we do not have control over the compliance
of our distributors, partners, banks, stock markets or systems in which
our products are used.
We cannot assume that third parties will be year 2000 compliant,
and if they are not, we cannot assume that we will not be subject to
actions, liabilities or damages associated with these failures.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company and their ages
as of April 1, 1999 are as follows:
Name Age Position
- -------------------------- ---- ---------------------------------------------
Thinh Q. Tran 45 Chairman of the Board, President, and Chief
Executive Officer
Silvio Perich 50 Senior Vice President, Worldwide Sales
Jacques Martinella 43 Vice President, Engineering
William Wong 51 Vice President, Marketing
Kit Tsui 49 Director of Finance, Chief Financial Officer,
and Secretary
William J. Almon(1)(2) 66 Director
William Wang(1)(2) 35 Director
--------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Tran, a founder of the Company, has served as President, Chief
Executive Officer, and Chairman of the Board of Directors since February
1982. Prior to joining the Company, 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 the Company in September 1985 as Director, Sales.
In September 1992, Mr. Perich became Senior Vice President, Worldwide
Sales of the Company. Mr. Perich was a co-founder of Costar
Incorporated, a manufacturer's 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 the Company 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. Wong joined the Company in June 1998. as Vice President,
Marketing. From 1995 to 1998 Mr. Wong served as Business Development
Director at National Semiconductor Corporation. From 1993-1995 Mr. Wong
served as Vice President of Marketing for Diamond Multimedia Systems.
Prior to 1993, Mr. Wong held several senior marketing and sales
management positions at Intel Corporation for 18 years.
Ms. Tsui joined the Company 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 and became
Chief Financial Officer in July 1997.
Mr. Almon has served as Director of the Company since April 1994.
In May 1994, he became Chairman of the Board and Chief Executive Officer
of StorMedia, Inc., a manufacturer of thin film disks. StorMedia filed
for protection under Chapter 11 of the federal bankruptcy laws in October
1998. 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.
From 1958 until 1987, Mr. Almon held various management positions with
IBM Corporation, most recently as Vice President, Low End Storage
Products. Mr. Almon also serves as a Director of Read Rite Corporation.
Mr. Wang became a Director of the Company 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 company that acts as the international sales
representative for MAG Technology Co., Ltd. of Taiwan, a supplier of
computer monitors. From 1986 until 1990, Mr. Wang worked at Tatung
Company of America in the Video Display Division.
ITEM 2. FACILITIES
The Company currently leases a 25,000 square foot facility in
Milpitas, California that is used as the Company's headquarters. The
lease will expire in September 2002. The Company also leases facilities
for sales offices in Hong Kong. The Company believes that it has
adequate facilities to accommodate the Company's operations in the near
term.
ITEM 3. LEGAL PROCEEDINGS
In February 1998, two putative class action complaints were filed
in the United States District Court for the Northern District of
California, Romine, et al. v. Sigma Designs, Inc., et al., No. C-98-0537-
TEH (N.D.Cal.) and Shah, et al. v. Sigma Designs, Inc., et al., No C-98-
0582-MHP (N.D.Cal.). The federal court complaints allege that Sigma
Designs, Inc. and certain of its officers and/or directors, issued false
or misleading statements regarding the Company's business prospects
during the period October 24, 1995 through February 13, 1997. The
complaints do not specify the amount of damages sought by the plaintiffs.
The plaintiffs have filed a consolidated complaint. The parties have
stipulated that defendants will not move to dismiss the complaint until
after the United States Court of Appeals for the Ninth Circuit renders
its decision in In re Silicon Graphics Securities Litigation, which
decision is expected to delineate the standards for pleading a securities
fraud action under the provisions of the Private Securities Litigation
Reform Act of 1995. The Company believes that it has meritorious
defenses to the allegations made in the complaint and intends to conduct
a vigorous defense.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Sigma Designs' Common Stock has been traded under the Nasdaq symbol
"SIGM" since the Company's initial public offering on May 15, 1986.
The table below sets forth the high and low closing prices in the Nasdaq
Stock Market for the quarters indicated.
Fiscal 1999 Fiscal 1998
---------------- ---------------
High Low High Low
- ---------------------------------- ------- -------- ------- -------
First quarter ended April 30..... 4 5/16 2 29/32 9 5/8 2 5/16
Second quarter ended July 31..... 4 3/8 2 1/2 5 5/8 2 9/16
Third quarter ended October 31... 2 9/16 31/32 9 1/4 4 9/16
Fourth quarter ended January 31.. 5 3/4 1 31/32 6 3
As of April 14, 1999, the Company had 258 shareholders of record.
The Company has not paid cash dividends on its common stock and does not
plan to pay cash dividends to its common shareholders in the near future.
The Company is obligated to pay certain dividends on its outstanding
preferred stock. In 1999, the Company paid $93,112 in dividends on such
stock.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data and number of employees)
Selected Financial Five-Year Data
Year ended January 31, 1999 1998 1997 1996 1995
- ------------------------- -------- -------- -------- -------- --------
Net sales............. $43,540 $36,982 $41,214 $26,374 $43,700
Net income (loss)
applicable to
common shareholders.. (2,690) (5,648) 1,529 (14,708) (8,773)
Diluted net income
(loss) applicable to
common shareholders
per share............ (0.21) (0.51) 0.14 (1.88) (1.20)
Working capital....... 23,578 18,960 20,164 11,461 17,446
Total assets.......... 44,220 38,329 37,915 24,843 33,387
Shareholders' equity.. 24,771 20,312 21,017 12,581 18,721
Number of employees... 78 71 86 60 138
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
For the fiscal year ended January 31, 1999, the Company's net sales
increased 18% to $43.5 from $37.0 million reported for fiscal 1998. The
Company reported a net loss applicable to common shareholders of $2.7
million, or $0.21 per share, for fiscal 1999 compared to a net loss
applicable to common stockholders of $5.6 million, or $0.51 per share in
fiscal 1998. Included in the net loss of $2.7 million in fiscal 1999 were
$2.5 million in dividends on preferred stock. The dividends on preferred
stock included cash dividends (including the effect of repurchase of
certain shares of Series B preferred stock at an amount in excess of
their carrying amount) and deemed dividends resulting from the conversion
feature of the preferred stock, which provided for a conversion price at
a discount to the common stock market value on the date of conversion.
The deemed dividends had no effect on the Company's cash flow and total
shareholders' equity. Excluding the dividends on preferred stock, the
Company had a net loss of $151,000 in fiscal 1999 as compared to a net
loss of $5,076,000 in fiscal 1998. The net loss for fiscal 1998 included
a charge of $3.6 million to write down older MPEG and graphics products
and associated receivables.
The following table shows certain items as percentage of net sales,
which are included in the Company's Consolidated Statement of Operations:
Fiscal Fiscal Fiscal
1999 1998 1997
---------- ---------- ----------
Net sales............................... 100% 100% 100%
Cost of sales........................... 72% 77% 64%
---------- ---------- ----------
Gross profit............................ 28% 23% 36%
Operating expenses:
Research and development.............. 13% 13% 12%
Sales and marketing................... 9% 12% 13%
General and administrative............ 7% 14% 7%
Benefit from income taxes............... -- 2% --
---------- ---------- ----------
Net income (loss)....................... -- -14% 4%
Dividends on preferred stock............ -6% -1% --
---------- ---------- ----------
Net income (loss) available to
common shareholders................ -6% -15% 4%
Sales
Sales of the Company's products are affected by short product life
cycles, uncertainties including the lack of product standards, and the
rate of adoption of new technologies associated with markets for new and
emerging products. The Company is also affected by the economic climate
in Asia. The following discussion of sales trend reflects the effects of
these uncertainties. The following table sets forth the Company's net
sales in each of the product groups for the last three years (in thousands):
Fiscal Fiscal Fiscal
1999 1998 1997
---------- ---------- ----------
Multimedia products:
Boards............................. $19,592 $18,264 $16,295
Chipsets........................... 22,066 15,723 23,111
Other................................... 1,882 2,995 1,808
---------- ---------- ----------
TOTAL NET SALES....................... $43,540 $36,982 $41,214
The multimedia products category includes MPEG playback solutions
for both desktop and notebook computers as well as high performance
graphics acceleration for PC manufacturers and add-on card makers. The
board level product line is targeted at OEM customers and system
integrators to address the computer-based training, kiosks, and corporate
video-on-demand markets. The chipsets are targeted toward manufacturers
and large volume OEM customers building interactive multimedia products
for business and consumer markets. The "other" category includes CD
titles, DVD ROM drives, video conferencing products and contract revenue.
The Company's net sales increased 18% in fiscal 1999, as compared
to a 10% decrease in fiscal 1998. The increase in sales in fiscal 1999
primarily reflected an increase in demand for the Company's proprietary
DVD MPEG 2 decoding chipsets due to increased market acceptance of DVD
technology. The company's net sales in chipsets increased 40% to $22.1
million in fiscal 1999 from $15.7 million in fiscal 1998. The decrease in
sales in fiscal 1998 as compared to 1997 was primarily due to the
elimination of the Company's graphics business, and slower than expected
growth in the DVD personal computer market caused by delays in developing
industry standards. The Company's board level products primarily consist
of two market groups: intranet/internet video streaming and DVD MPEG 2
decoding applications. Video streaming board products accounted for 17%
and 31% of the company's net sales respectively, in fiscal 1999 and
fiscal 1998. DVD board products accounted for 28% and 19% of the
Company's net sales respectively, in fiscal 1999 and fiscal 1998.
The table below sets forth the Company's sales by domestic and
international sales for each of the last fiscal years (in thousands):
Fiscal Fiscal Fiscal
1999 1998 1997
---------- ---------- ----------
Domestic Sales.......................... $12,389 $13,349 $11,636
---------- ---------- ----------
International Sales:
Asia............................... 26,706 20,833 26,708
Europe............................. 3,926 2,429 2,400
Canada............................. 519 371 470
---------- ---------- ----------
Total International.............. 31,151 23,633 29,578
---------- ---------- ----------
TOTAL NET SALES......................... $43,540 $36,982 $41,214
The Company's domestic sales as a percentage of total net sales
were 28% in fiscal 1999, 36% in fiscal 1998, and 28% in fiscal 1997. The
percentages of the Company's net sales attributable to international
sales including Canada were 72% in fiscal 1999, 64% in fiscal 1998, and
72% in fiscal 1997. The Company's international sales were made
predominantly to customers in Asia-Taiwan and Hong Kong. In fiscal 1999,
Taiwan and Hong Kong accounted for 43% and 8% of the company's net sales
respectively, as compared to 40% and 9% in fiscal 1998. In fiscal 1999
and 1998, one Taiwanese customer contributed 28% and 39 % to the
Company's total net sales respectively. Total international sales
increased 32% to $31.2 million in fiscal 1999 from $23.6 million in
fiscal 1998. The increase was primarily attributable to the increased
sales of the Company's MPEG decoding chipsets to computer board
manufacturers in Asia.
Gross Margin
The Company's gross margin as a percentage of net sales was
approximately 28% in fiscal 1999, 23% in fiscal 1998 and 36% in fiscal
1997. The increase in gross margin in fiscal 1999 was largely due to the
comparatively low margin in fiscal 1998 primarily caused by an inventory
charge of $1.7 million. The decrease in gross margin in fiscal 1998 was
attributable to the decrease in sales in multimedia chipsets, which
traditionally have higher gross margin than board products, and a $ 1.7
million write-down of inventories. For the Company's board level
products, video streaming products generally have higher margin than DVD
products. Consequently, changes in the product mix of sales could
significantly affect the Company's gross margin.
Operating Expenses
Sales and marketing expenses decreased $299,000, or 7%, in fiscal
1999 over fiscal 1998. The decrease was primarily due to reduction in
trade show and product sample expenses and the amount of commissions paid
to outside sales representatives. The same expenses decreased $1.2
million, or 21%, in fiscal 1998 over fiscal 1997; the reduction was
primarily attributable to reduction in sales support personnel, less
sales commission as a result of lower net sales, and reduction in media
and cooperative advertising programs as the Company continued to shift
from retail distribution to OEM sales.
Research and development expenses increased $730,000, or 15%, in
fiscal 1999 over fiscal 1998. The increase was largely due to increase in
technical development support, depreciation associated with research and
development equipment, and engineering personnel expenses. The increase
in research and development expenses in fiscal 1999 was primarily the
result of the Company's continued efforts in the development of its
proprietary DVD/MPEG 2 based products. Research and development expenses
increased $260,000, or 6%, in fiscal 1998 over fiscal 1997; the increase
was primarily due to an increase in engineering personnel expenses.
The Company's general and administration expenses decreased 42% or
$2.2 million to $3.0 million during fiscal 1999 as compared to fiscal
1998. The significant reduction in general and administration expenses
was largely attributable to a charge of $1.9 million in accounts
receivable reserves in connection with the write-off of assets associated
with graphics products during fiscal 1998. Excluding the effect of the
write-off, general and administration expenses decreased by $281,000 in
fiscal 1999 over fiscal 1998. The decrease was primarily due to less
accounts receivable reserves and outside professional services as a
result of the improvement of accounts receivable. The same expense
increased $2.2 million in fiscal 1998, or 73%, over fiscal 1997. The
increase was primarily attributable to $2.2 million accounts receivable
reserves, of which, $1.9 million was set aside in connection with the
write-off of assets associated with graphics products.
Liquidity and Capital Resources
The Company had cash, cash equivalents, and short-term investments
of $18.1 million at January 31, 1999, compared with $16.7 million at
January 31, 1998. The primary sources of cash in fiscal 1999 came from
$6.4 million (net of expenses) proceeds from the sale of convertible
preferred stock (Series B and C). The primary uses of cash included $3.2
million used by operations, and $2.0 million used to repurchase all
outstanding shares of Series A and B preferred stock. As of January 31,
1999, the Company had $12 million outstanding under a $12 million bank
revolving line of credit that expires in October 1999 and is
collateralized by funds on deposit in accounts that have been assigned to
the lender. The Company also has a $6 million bank line of credit
available that expires in October 1999, and is collateralized by the
Company's accounts receivable, inventories, equipment, and intangibles.
This asset-based line of credit had an outstanding balance of $1.7
million as of January 31, 1999. Under the existing loan agreement, the
company is subject to certain financial covenants, including a net income
covenant. Since July 1997, the Company has, on occasion, been in
violation of the net income covenant and has obtained waivers releasing
the Company from obligation to meet this covenant. The Company was
granted such a waiver for the quarter ended January 31, 1999. The Company
may need such waivers for future periods, and there is no assurance such
waivers will be granted by the lender. The Company may become in default
in the future under the current loan agreement with its lender if it does
not meet this covenant and the Company does not obtain waivers.
During fiscal 1999, the Company issued 5,000 shares of Series B and
1,900 shares of Series C convertible preferred stock at $1,000 par value
per share through private placements. Proceeds from the sale of preferred
stock were used for general corporate purposes. As of January 31, 1999,
no shares of Series A and B preferred stock were outstanding.
The Company's primary sources of funds to date have been to date
have been cash generated from operations, proceeds from preferred and
common stock issuances, and bank borrowings under lines of credit. The
Company believes that its current reserve of cash and equivalents and
short-term investments and the availability of funds under its existing
asset-based banking arrangements will be sufficient to meet anticipated
operating and capital requirements for the next twelve months. Beyond the
next twelve-month period, the Company believes that to the extent it does
not generate cash from operations, it may have to raise additional
capital through either public or private offerings of its common stock or
preferred stock or from additional bank financing. There is no assurance
that such capital or bank financing will be available to the Company.
Factors Affecting Future Operating Results
The Company's 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 the Company and its
competitors; market acceptance of the technology embodied in the
Company's products generally and the Company's products in particular;
shifts in demand for the technology embodied in the Company's products
generally and the Company's products in particular and/or those of the
Company's 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; the Company's inability to protect its
intellectual property; loss of key personnel; technical problems in the
development, rampup, and manufacture of products causing shipping delays;
and availability of third-party manufacturing capacity for production of
certain of the Company's products. The Company derives a substantial
portion of its 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 the Company's future international sales. Any adverse change in
the foregoing or other factors could have a material adverse effect on
the Company's business, financial condition, and results of operations.
Due to the factors noted above, the Company's 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 the Company's common stock.
Additionally, the Company 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 the Company's common stock. Further, the
Company operates in a highly dynamic industry, which often results in
volatility of the Company's common stock price.
Impact of the Year 2000 Issue
The Company is aware of the issues associated with the programming
code in existing computer systems as the year 2000 approaches. The "year
2000 problem" is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit
year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.
The Company has tested its products and believes its products are
year 2000 compliant. Our management has also conducted a review of our
exposure to the year 2000 problem, including working with computer
systems and software vendors. The Company currently believes that our
internal systems are year 2000 compliant. The Company does not expect to
further incur any significant operating expenses or invest in additional
computer systems to resolve issues relating to the year 2000 problem,
with respect to both its information technology and product and service
functions. However, significant uncertainty remains concerning the
effects of the year 2000 problem, including uncertainty regarding
assurances made by vendors. In addition, the Company has not investigated
year 2000 compliance of other entities that are not its vendors or that
are vendors or purchasers of its product. For example, the Company does
not have control over the compliance of its distributors, partners,
banks, stock markets or systems in which its products are used. The
Company cannot assume that third parties will be year 2000 compliant, and
if they are not, the Company cannot assume that it will not be subject to
actions, liabilities or damages associated with these failures. The
Company will develop appropriate contingency plans in the event that a
significant exposure arises relative to any such third parties.
Recently Issued Accounting Standards
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Accounting," was
issued which defines derivatives, requires all derivatives be carried at
fair value, and provides for hedging accounting when certain conditions
are met. This statement is effective for all fiscal quarters of fiscal
year beginning after June 15, 1999. Although the Company has not fully
assessed the implications of this new statement, the Company does not
believe adoption of this statement will have an material impact on the
Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk
disclosures involves forward-looking statements. Actual results could
differ materially from those projected in the forward-looking statements.
The Company faces exposure to market risk from adverse movements in
interest rates and foreign currency exchange rates, which could impact
its operations and financial condition. The Company does not use
derivative financial instruments for speculative purposes.
Interest Rate Sensitivity. At January 31, 1999, the Company held
$15.1 million 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, 1999, the fair market value of the short-term
investments would decline by an immaterial amount. The Company generally
expects to have the ability to hold its 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, 1999, the Company had $12,000,000 outstanding under
a $12,000,000 variable interest rate bank line of credit and $1,716,000
outstanding under a $6,000,000 variable interest rate bank 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 the Company' net income and cash flows.
Foreign Currency Exchange Rate Sensitivity. The Hong Kong dollar
is the financial currency in the Company's subsidiary in Hong Kong. The
Company does not currently enter into foreign exchange forward looking
contracts to hedge certain balance sheet exposures and intercompany
balances against future movements in foreign exchange rates. However,
the Company does maintain cash balances denominated in the Hong Kong
dollar. 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, 1999, the fair value of these foreign currency amounts would
decline by an immaterial amount.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Sigma's financial statements, the notes thereto, and the
independent auditors' report appear on pages F-1 through F-21 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 the Company's
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 the Company's Proxy Statement
relating to the 1999 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year pursuant to General Instruction G(3) of Form 10-K
(the "Proxy Statement"). Certain information required by this item
concerning the executive officers of the Company 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
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1. Financial Statements
The following documents are filed as part of this report:
Independent Auditors' Report
Consolidated Balance Sheets as of January 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
January 31, 1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity for the years
ended January 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended
January 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
2. Financial Statement 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
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, 1999.
(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.
Exhibit
Number Exhibit Description
------- -----------------------------------------------------------------
2.1(7) Agreement and Plan of Reorganization by and among the Registrant,
Sigma Acquisition Corporation and Active Design Corp. dated as of
April 23, 1996.
3.1(1) Restated Articles of Incorporation, as amended.
3.2(8) Certificate of Determination of Preferences of Series A Preferred
Stock.
3.3(9) Certificate of Determination of Preferences of Series B Preferred
Stock.
3.4(10) Certificate of Determination of Preferences of Series C Preferred
Stock.
3.5(2) Bylaws of Registrant, as amended.
4.1(10) Form of Subscription Agreement by and between the Company and the
purchasers of the Series C Preferred Stock and warrants.
4.2(10) Form of Registration Rights Agreement by and between the Company
and the purchasers of the Series C Preferred Stock and warrants.
4.3(10) Form of Stock Purchase Warrant.
10.1(3) Distribution Agreement dated September 10, 1985.
10.2(4) Registrant's 1986 Employee Stock Purchase Plan, as amended, and
form of Subscription Agreement.
10.6 Sublease between the Registrant and Sun Microsystems, Inc.
10.7(5) Registrant's 1994 Stock Plan and form of Stock Option Agreement.
10.8(6) Registrant's 1994 Director Stock Option Plan and form of Director
Option Agreement.
10.9(11) Registrant's 1995 Business Loan Agreement with Silicon Valley
Bank, as amended.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney (See page 22).
27 Financial Data Schedule.
--------------------------
(1) Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31,
1988.
(2) Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31,
1989.
(3) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-4131) filed March 19,
1986, Amendment No. 1 thereto filed April 28, 1986 and Amendment
No. 2 thereto filed May 15, 1986, which Registration Statement
became effective May 15, 1986.
(4) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (No. 333-61549) filed August
14, 1998.
(5) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (No. 33-81914) filed July 25,
1994.
(6) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 33-74308) filed on January
28, 1994, Amendment No. 1 thereto filed February 24, 1994,
Amendment No. 2 thereto filed March 3, 1994, Amendment No. 3
thereto filed March 4, 1994 and Amendment No. 4 thereto filed
March 8, 1994.
(7) Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31,
1996.
(8) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 333-33147) filed on August
7, 1997.
(9) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 333-47835) filed on March
12, 1998.
(10) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 333-_________) filed on
May 3, 1999.
(11) Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31,
1998.
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 30th day of April,
1999.
SIGMA DESIGNS, INC.
By: /s/ Thinh Q. Tran
----------------------------------
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 Chairman of the Board, President, April 30, 1999
- -------------------- and Chief Executive Officer
Thinh Q. Tran (Principal Executive Officer)
/s/ Kit Tsui Director of Finance, Chief April 30, 1999
- -------------------- Financial Officer and Secretary
Kit Tsui (Principal Financial and Accounting
Officer)
/s/ William J. Almon Director April 30, 1999
- --------------------
William J. Almon
/s/ William Wang Director April 30, 1999
- --------------------
William Wang
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, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended
January 31, 1999. 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 generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three
years in the period ended January 31, 1999 in conformity with generally
accepted accounting principles. 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
February 25, 1999
SIGMA DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1999 and 1998
(Dollars in thousands)
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and equivalents....................................... $2,946 $697
Short-term investments..................................... 15,112 15,951
Accounts receivable (net of allowances
of $3,306 and $3,332).................................... 13,648 12,395
Inventories - net.......................................... 10,418 7,314
Prepaid expenses and other assets.......................... 629 592
--------- ---------
Total current assets 42,753 36,949
EQUIPMENT - Net............................................. 1,311 1,241
OTHER ASSETS................................................ 156 139
--------- ---------
TOTAL........................................................ $44,220 $38,329
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit........................................ $13,716 $13,316
Accounts payable........................................... 4,109 3,014
Accrued liabilities........................................ 1,132 1,567
Current portion of capital lease obligations............... 218 93
--------- ---------
Total current liabilities......................... 19,175 17,990
--------- ---------
CAPITAL LEASE OBLIGATIONS.................................... 274 27
COMMITMENTS AND CONTINGENCIES (Notes 10 and 13)
SHAREHOLDERS' EQUITY:
Preferred stock - no par value: 2,000,000 shares
authorized; shares outstanding: 1999, 1,900; 1998, 26,550. 1,536 2,715
Common stock - no par value: 20,000,000
shares authorized; shares outstanding:
1999, 15,435,094; 1998, 11,645,876........................ 64,699 56,419
Shareholder notes receivable............................... (12) (63)
Accumulated other comprehensive income..................... -- 3
Accumulated deficit........................................ (41,452) (38,762)
--------- ---------
Shareholders' equity 24,771 20,312
--------- ---------
TOTAL........................................................ $44,220 $38,329
========= =========
See notes to consolidated financial statements.
SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
(In thousands, except per share amounts)
1999 1998 1997
---------- ---------- ----------
NET SALES............................... $43,540 $36,982 $41,214
COSTS AND EXPENSES:
Cost of sales......................... 31,259 28,296 26,531
Research and development.............. 5,678 4,948 4,688
Sales and marketing................... 4,072 4,371 5,541
General and administrative............ 2,985 5,166 2,987
---------- ---------- ----------
Total costs and expenses..... 43,994 42,781 39,747
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (454) (5,799) 1,467
Interest income....................... 935 820 594
Interest expense...................... (946) (927) (540)
Other income (expense), net........... (7) 6 8
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....... (472) (5,900) 1,529
BENEFIT FROM INCOME TAXES............... 321 824 --
---------- ---------- ----------
NET INCOME (LOSS)....................... (151) (5,076) 1,529
DIVIDEND ON PREFERRED STOCK............. (2,539) (572) --
---------- ---------- ----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS.......................... ($2,690) ($5,648) $1,529
========== ========== ==========
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS PER SHARE:
Basic................................. ($0.21) ($0.51) $0.16
========== ========== ==========
Diluted............................... ($0.21) ($0.51) $0.14
========== ========== ==========
SHARES USED IN COMPUTATION:
Basic................................. 12,899 11,012 9,853
========== ========== ==========
Diluted............................... 12,899 11,012 11,259
========== ========== ==========
See notes to consolidated financial statements.
SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
(Dollars in thousands)
Accumu-
lated
Share- Other
Deferred holder Compre- Compre-
Preferred Stock Common Stock Stock Notes hensive Accumu- hensive
------------------ --------------------- Compen- Receiv- Income lated Income
Shares Amount Shares Amount sation able (Loss) Deficit Total (Loss)
-------- --------- ----------- --------- --------- -------- -------- ---------- --------- ---------
Balances, February 1, 1996.. -- $-- 9,847,921 $47,575 ($164) ($80) $19 ($34,769) $12,581
Net income.................. -- -- -- -- -- -- -- 1,529 1,529 $1,529
Unrealized loss on
short-term investments.... -- -- -- -- -- -- (19) -- (19) (19)
---------
Comprehensive income......... $1,510
=========
Common stock issued under
stock plans............... -- -- 827,221 3,719 -- -- -- -- 3,719
Adjustment of E-Motions,
Inc. purchase price....... -- -- 21 -- -- -- -- 21
Exercise of warrants........ 415,920 3,011 3,011
Amortization of deferred
stock compensation........ -- -- -- (15) 64 -- -- -- 49
Active Design, Inc. net
loss for the month ended
February 29, 1996......... -- -- -- -- -- -- -- 126 126
-------- --------- ----------- --------- --------- -------- -------- ---------- ---------
Balances, January 31, 1997.. -- -- 11,091,062 54,311 (100) (80) -- (33,114) 21,017
Net loss.................... -- -- -- -- -- -- -- (5,076) (5,076) ($5,076)
Unrealized gain on
short-term investments.... -- -- -- -- -- -- 3 -- 3 3
---------
Comprehensive loss.......... ($5,073)
=========
Common stock issued under
stock plans............... -- -- 150,220 239 -- -- -- -- 239
Amortization of deferred
stock compensation........ -- -- -- -- 25 -- -- -- 25
Cancellation of stock
options................... -- -- -- (75) 75 -- -- -- --
Issuance of Series A
preferred stock, net of
issuance costs of $368.... 45,000 4,132 10,000 44 -- -- -- -- 4,176
Accretion of discount for
Series A preferred
stock..................... -- 500 -- -- -- -- -- (500) --
Conversion of Series A
preferred stock........... (18,450) (1,917) 445,745 1,917 -- -- -- -- --
Dividends on Series A
preferred stock........... -- -- -- -- -- -- -- (72) (72)
Cancellation of Active
Designs shares............ -- -- (51,151) (17) -- 17 -- -- --
-------- --------- ----------- --------- --------- -------- -------- ---------- ---------
Balances, January 31, 1998.. 26,550 2,715 11,645,876 56,419 -- (63) 3 (38,762) 20,312
Net loss.................... -- -- -- -- -- -- -- (151) (151) ($151)
Unrealized loss on
short-term investments.... -- -- -- -- -- -- (3) -- (3) (3)
---------
Comprehensive loss.......... ($154)
=========
Common stock issued under
stock plans............... -- -- 111,057 237 -- -- -- -- 237
Issuance of Series B
preferred stock, net of
issuance costs of $390.... 5,000 4,610 5,000 18 -- -- -- -- 4,628
Issuance of Series C
preferred stock, and
common stock warrants,
net of issuance costs
of $364................... 1,900 1,536 -- 259 -- -- -- -- 1,795
Conversion of Series A
preferred stock........... (24,550) (2,489) 1,417,984 2,489 -- -- -- -- --
Conversion of Series B
preferred stock........... (3,400) (3,143) 2,325,241 5,293 -- -- -- (2,150) --
Repurchase of Series A
preferred stock........... (2,000) (215) -- -- -- -- -- -- (215)
Repurchase of Series B
preferred stock........... (1,600) (1,478) -- -- -- -- -- (322) (1,800)
Dividends on Series A
preferred stock........... -- -- -- -- -- -- -- (63) (63)
Dividends on Series C
preferred stock........... -- -- -- -- -- -- -- (4) (4)
Cancellation of Active
Designs shares............ -- -- (70,064) (16) -- 16 -- -- --
Forgiveness of shareholder
notes receivable.......... -- -- -- -- -- 35 -- -- 35
-------- --------- ----------- --------- --------- -------- -------- ---------- ---------
Balances, January 31, 1999.. 1,900 $1,536 15,435,094 $64,699 $-- ($12) $-- ($41,452) $24,771
======== ========= =========== ========= ========= ======== ======== ========== =========
See notes to financial statements.
SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
(In thousands)
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... ($151) ($5,076) $1,529
Active Design net loss for the one month
ended February 29, 1996....................... -- -- 126
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization................. 571 519 1,021
Forgiveness of shareholder notes receivable... 35 -- --
Loss on disposal of assets.................... 11 -- --
Amortization of deferred stock compensation... -- 25 49
Changes in assets and liabilities:
Accounts receivable......................... (1,253) 82 (7,688)
Inventories................................. (3,104) (2,434) (2,836)
Prepaid expenses and other.................. (37) (29) (285)
Accounts payable............................ 1,095 (272) 417
Accrued liabilities......................... (409) (1,160) (22)
--------- --------- ---------
Net cash used for operating activities..... (3,242) (8,345) (7,689)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed asset additions........................... (34) (553) (345)
Proceeds from sale of equipment................. 50 -- --
Purchases of short-term investments............. (19,312) (15,948) (11,801)
Maturity of short-term investments.............. 20,148 11,801 10,947
Other assets.................................... (17) (6) 7
--------- --------- ---------
Net cash provided by (used for)
investing activities...................... 835 (4,706) (1,192)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank line of credit borrowings, net............. 400 2,485 4,439
Proceeds from sale of common stock.............. 237 239 6,751
Proceeds from sale of preferred stock and
warrants, net of issuance costs............... 6,423 4,176 --
Dividends paid.................................. (93) (23) --
Repurchase of preferred stock................... (2,015) -- --
Repayment of capital lease obligations.......... (296) (74) (11)
--------- --------- ---------
Net cash provided by financing activities... 4,656 6,803 11,179
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.. 2,249 (6,248) 2,298
CASH AND EQUIVALENTS:
Beginning of year............................... 697 6,945 4,647
--------- --------- ---------
End of year..................................... $2,946 $697 $6,945
========= ========= =========
CASH PAID FOR INTEREST............................ $880 $956 $511
========= ========= =========
CASH PAID FOR INCOME TAXES........................ $ -- $ -- $ --
========= ========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases......... $668 $92 $113
========= ========= =========
Issuance costs for preferred stock paid in
common stock.................................. $18 $ -- $ --
========= ========= =========
Accretion of discount for Series A preferred
stock......................................... $ -- $500 $ --
========= ========= =========
Adjustment of E-Motions, Inc. purchase price.... $ -- $ -- $21
========= ========= =========
Dividends on Series A preferred stock........... $14 $49 $ --
========= ========= =========
Dividends on Series B preferred stock........... $2,150 $ -- $ --
========= ========= =========
Dividends on Series C preferred stock........... $4 $ -- $ --
========= ========= =========
Conversion of Series A preferred stock into
common stock.................................. $2,489 $1,917 $ --
========= ========= =========
Conversion of Series B preferred stock into
common stock.................................. $3,143 $ -- $ --
========= ========= =========
Cancellation of notes receivable and related
common stock.................................. $16 $ -- $ --
========= ========= =========
See notes to consolidated financial statements.
SIGMA DESIGNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
-------------------------------------------------------------------------------
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.
Principles 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
January 30, 1999, January 31, 1998 and February 1, 1997, respectively.
Fiscal 1999, 1998 and 1997 included 52, 52 and 53 weeks, respectively.
Pervasiveness of Estimates - The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Such estimates include accruals, reserves and the valuation allowance on
deferred tax assets. 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 include 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 Equivalents - The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Short-Term Investments - 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. 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.
Investments in 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.
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 - Sales are recognized upon shipment.
Allowances for sales returns, price protection and warranty costs are
recorded at the time that sales are recognized.
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
APB No. 25, "Accounting for Stock issued to Employees."
Comprehensive Loss - In fiscal year 1999, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in net assets during the
period from nonowner sources. Statements of comprehensive income (loss)
for fiscal 1999, 1998, and 1997 have been included with the statements of
shareholders' equity.
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. Common share equivalents including stock options, warrants and
convertible preferred stock have been excluded for fiscal 1999 and 1998
as their effect would be antidilutive.
Fair Value of Financial Instruments - In accordance with the
provisions of SFAS No. 107 "Disclosure About Fair Value of Financial
Instruments," which requires the disclosure of fair value information
about both on and off balance sheet financial instruments where it is
practicable to estimate the value, the Company has estimated the fair
value of its financial instruments. The Company believes that carrying
amounts reported in the balance sheet for cash and cash equivalents and
short-term investments as of January 31, 1999 approximate fair market
value.
Geographic Operating Information - In fiscal year 1999, the Company
adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes 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 segments (Note 12).
Recently Issued Accounting Standards - In June 1998, SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was
issued which defines derivatives, requires all derivatives be carried at
fair value, and provides for hedging accounting when certain conditions
are met. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Although the Company has not fully
assessed the implications of this new statement, the Company does not
believe adoption of this statement will have a material impact on the
Company's financial statements.
Reclassifications - Certain items in the 1998 and 1997 financial
statement have been reclassified to conform with the 1999 presentation.
Such reclassifications had no impact on net income (loss) or
shareholders' equity.
2. SHORT-TERM INVESTMENTS
The fair value and the cost of short-term investments at
January 31, 1999 and 1998 are presented below. 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. The
tables present the unrealized holding gains and losses related to each
category of investment security (in thousands).
Unrealized Unrealized
Loss on Gain on
Invest- Invest- Market
Cost ment ment Value
--------- ---------- ---------- ---------
January 31, 1999:
U.S. government securities. $12,155 $ -- $ -- $12,155
Corporate debt securities.. 2,957 -- -- 2,957
--------- ---------- ---------- ---------
Total........................ $15,112 $ -- $ -- $15,112
========= ========== ========== =========
January 31, 1998:
Certificates of deposit.... $12,001 $ -- $ -- $12,001
Corporate debt securities.. 3,947 -- 3 3,950
--------- ---------- ---------- ---------
Total........................ $15,948 $ -- $ -- $15,951
========= ========== ========== =========
Certificates of deposit at January 31, 1999 includes $12,000,000
which is restricted as to use because it is security for a bank line of
credit (Note 7).
3. ACQUISITION OF ACTIVE DESIGN CORPORATION
On May 3, 1996, the Company acquired Active Design Corporation
(Active Design) in a transaction accounted for as a pooling of interests.
Active Design exchanged all of its outstanding common and preferred stock
into approximately 1,124,000 shares of the Company's common stock, based
on the exchange ratio of one share of Active Design into 0.22 share
(exchange ratio) of the Company. The Company also assumed all 1,042,000
outstanding options to acquire shares of common stock of Active Design at
the exchange ratio, resulting in 229,240 options to acquire the Company's
common stock. Active Design was incorporated on May 17, 1995 and was a
development stage company in the business of developing products for the
multimedia market. As the merger has been accounted for as a pooling of
interests, the consolidated financial statements have been restated to
reflect the combined operations of the two companies. As the Company and
Active Design had different year ends at the time of the acquisition, the
consolidated statements of operations combine the Company's year ended
January 31, 1997 and January 31, 1996 with Active Design's year ended
January 31, 1997 and the period from May 17, 1995 (inception) through
February 29, 1996, respectively. From its inception, through the date of
the acquisition, Active Design did not generate any revenues and its net
loss was $463,000 for the period from February 1, 1996 through May 3,
1996 (the date of merger).
The following table shows the effect on the results of operations
for the years presented herein prior to the acquisition discussed above
(in thousands):
Net
Net Income
Sales (Loss)
---------- ---------
Year ended January 31, 1997:
Active Design.................................. $ -- ($463)
Sigma Designs (year ended January 31, 1997).... 41,214 1,992
---------- ---------
Combined...................................... $41,214 $1,529
========== =========
4. INVENTORIES
Inventories at January 31 consist of (in thousands):
1999 1998
---------- ----------
Raw materials................................. $3,604 $3,165
Work in process............................... 3,086 2,532
Finished goods................................ 3,728 1,617
---------- ----------
Inventory - net............................... $10,418 $7,314
========== ==========
5. EQUIPMENT
Equipment at January 31 consists of (in thousands):
1999 1998
---------- ----------
Computers and equipment....................... $2,644 $2,128
Furniture and fixtures........................ 1,279 1,240
Other......................................... 409 390
---------- ----------
Total......................................... 4,332 3,758
Accumulated depreciation and amortization..... (3,021) (2,517)
---------- ----------
Equipment - net............................... $1,311 $1,241
========== ==========
At January 31, 1999 and 1998, equipment with a net book value of
$506,000 and $83,000 (net of accumulated amortization of $162,000 and
$30,000, respectively), has been leased under capital leases.
6. ACCRUED LIABILITIES
Accrued liabilities at January 31 consist of (in thousands):
1999 1998
---------- ----------
Accrued salary and benefits................... $499 $485
Facilities accrual............................ -- 243
Other accrued liabilities..................... 633 839
---------- ----------
Total......................................... $1,132 $1,567
========== ==========
The facilities accrual of approximately $243,000 as of January 31,
1998 related to the excess of the Company's lease commitment over the
sublease income for the term of the lease. The lease term ended and the
facilities accrual was paid during fiscal 1999.
7. BANK LINES OF CREDIT
The Company has $12,000,000 outstanding at January 31, 1999 under a
$12,000,000 bank line of credit that expires in October 1999, bears
interest at the U.S. Treasury Bill rate (5.34% at January 31, 1999) plus
1.0%, and is collateralized by funds on deposit in accounts which have
been assigned to the lender.
The Company also has $1,716,000 outstanding at January 31, 1999
under a $6,000,000 bank line of credit that expires in October 1999,
bears interest at the bank's prime rate (7.75% at January 31, 1999) plus
1.25%, is collateralized by the Company's accounts receivable,
inventories, equipment and intangibles. Borrowings under this line of
credit are generally limited to 70% of eligible accounts receivable (as
defined).
The lines of credit contain certain covenants that, among other
things, require the Company to maintain tangible net worth plus
subordinated debt of at least $15,000,000, quarterly net income, and
certain financial ratios. At January 31, 1999, the Company was not in
compliance with the quarterly net income covenants and subsequently
received a waiver for the covenant for fiscal 1999.
8. SHAREHOLDERS' EQUITY
Preferred Stock
In July 1997, the Company issued 45,000 shares of Series A
nonvoting convertible preferred stock and warrants to purchase 64,285
shares of the Company's common stock for net proceeds of approximately
$4,176,000 (net of issuance costs of approximately $324,000). The
warrants are exercisable at $5.16 per share beginning in January 1998 and
expire in January 2001. In February 1998, 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 expire on
April 30, 2001.
In January 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. The warrants
are exercisable at $5.16 per share and expire on January 22, 2001.
Subsequent to January 31, 1999, 500 shares of Series C nonvoting
convertible preferred stock were converted into 103,225 shares of common
stock.
The significant terms of the Series A, Series B and Series C
convertible preferred stock are as follows:
o Each share of Series A preferred stock is convertible into common
stock at a 10% discount from the low reported market price of the
Company's common stock for the five days preceding the date of
conversion (subject to certain limitations as defined in the
Agreement). Under certain conditions, the Company may elect to
repurchase the Series A preferred stock for a cash amount
equivalent to the value of the converted common stock that would
have been obtained upon conversion as described above.
o Each share of Series B preferred stock is convertible into common
stock based on the average of the lowest six daily market prices
of the Company's common stock during the twenty-day trading period
preceding the date of conversion (subject to certain limitations
as defined in the Agreement). Under certain conditions, the
Company may elect to repurchase the Series B preferred stock for a
cash amount equivalent to the value of the converted common stock
that would have been obtained upon conversion as described above.
o Each share of Series C preferred stock is convertible into common
stock based on the lesser of $7.00 and the average of the market
prices of the Company's common stock during the five-day trading
period preceding the date of conversion, but in no event less than
$4.00 (subject to certain limitations as defined in the
Agreement). Under certain conditions, the Company may elect to
repurchase the Series C preferred stock for a cash amount
equivalent to the value of the converted common stock that would
have been obtained upon conversion as described above. Any shares
of Series C preferred stock outstanding on the anniversary of
their original issuance date will automatically convert into
shares of the Company's common stock at the conversion rate
described above, except when the conversion price is below $4.00;
the expiration date will then be extended to such time when the
conversion price is equal to or greater than $4.00.
o The holders of Series A and C preferred stock are entitled to
receive quarterly dividends in cash or common stock of the Company
at a rate of 3% and 8% per annum of the original issuance price,
respectively. Series B preferred stock does not bear dividends.
o In the event of any liquidation, dissolution, or winding up of the
Company "an Event," either voluntarily or involuntarily, the
holders of Series C preferred stock shall be entitled to an amount
equal to the original purchase price of the Series C preferred
stock plus eight percent per annum of the original issuance price.
The 10% discount on conversion of Series A preferred stock into
common stock as described above is considered a deemed preferential
dividend to the holders of Series A preferred stock and, accordingly, a
$500,000 deemed dividend has been accreted which for purposes of
computing earnings per share increases the loss applicable to common
shareholders over the minimum conversion period of seven months.
During fiscal 1999, holders of Series A preferred stock converted
24,550 shares of preferred stock into 1,417,984 shares of common stock.
During fiscal 1999, holders of Series B preferred stock converted 3,400
shares of preferred stock into 2,325,241 shares of common stock resulting
in a deemed dividend of $2,150,000.
During fiscal 1999, the Company repurchased 2,000 shares of
Series A preferred stock with a carrying amount of $215,000 for $215,000.
During fiscal 1999, the Company repurchased 1,600 shares of Series B
preferred stock with a carrying amount of $1,478,000 for $1,800,000,
resulting in a deemed dividend of $322,000.
Common Stock
Each share of common stock incorporates a purchase right which
entitles the shareholder to buy, under certain circumstances, one newly
issued share of the Company's common stock at an exercise price per share
of $75. The rights become exercisable if a person or group acquires 20%
or more of the Company's common stock or announces a tender or exchange
offer for 30% or more of the Company's common stock under certain
circumstances. In the event of certain merger or sale transactions, each
right will then entitle the holder to acquire shares having a value of
twice the right's exercise price. The Company may redeem the rights at
$.01 per right prior to the earlier of the expiration of the rights on
November 27, 1999 or at the time that 20% or more of the Company's common
stock has been acquired by a person or group. Until the rights become
exercisable, they have no dilutive effect on the earnings of the Company.
Net Income (Loss) Per Share
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,
--------------------------------
1999 1998 1997
---------- ---------- ----------
Net income (loss)(numerator)-
Net income (loss) applicable to
common shareholders, basic
and diluted......................... ($2,690) ($5,648) $1,529
---------- ---------- ----------
Shares (denominator):
Weighted average common shares
outstanding........................ 12,957 11,215 10,152
Common shares outstanding subject
to repurchase...................... (58) (203) (299)
---------- ---------- ----------
Shares used in computation, basic....... 12,899 11,012 9,853
Effect of dilutive securities:
Common shares subject to repurchase... -- -- 299
Stock options......................... -- -- 1,107
---------- ---------- ----------
Shares used in computation, diluted..... 12,899 11,012 11,259
---------- ---------- ----------
Net income (loss) applicable to
common shareholders per share:
Basic................................. ($0.21) ($0.51) $0.16
========== ========== ==========
Diluted............................... ($0.21) ($0.51) $0.14
========== ========== ==========
The Company excluded certain potentially dilutive securities each
year 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 derivative securities as of the
end of each fiscal year follows (in thousands):
Years Ended January 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
Common shares subject to repurchase..... 58 203 --
Stock options........................... 3,019 2,275 487
Stock warrants.......................... 209 64 --
Convertible preferred srock.............. 2 27 --
---------- ---------- ----------
3,288 2,569 487
========== ========== ==========
Stock Option Plan
The Company's 1994 stock option plan provides for the granting of
options to purchase up to 3,400,000 shares of common stock at the fair
market value on the date of grant. Of this amount, 1,000,000 shares were
authorized for grant by the Board of Directors in both fiscal year 1997
and fiscal year 1998. Generally, options granted under the 1994 plan
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, 1999
expire six to ten years from date of grant). The Company repriced
1,167,779 options to purchase common stock to $2.31, the market price on
April 22, 1997. The repriced options are treated as canceled and
regranted; however, they retain their original vesting terms.
Stock option activity under the plan is summarized as follows:
Weighted
Average
Exercise
Number Price
of Per
Shares Share
----------- ----------
Balances, February 1, 1996 (701,938 exercisable
at a weighted-average price of $4.17)......... 2,224,424 $3.97
Granted (weighted-average fair value of $4.22).. 326,000 7.71
Canceled........................................ (144,509) 4.78
Exercised....................................... (813,536) 4.21
-----------
Balances, January 31, 1997 (441,362 exercisable
at a weighted-average price of $4.17)......... 1,592,379 4.57
Granted (weighted-average fair value of $1.37)
(includes repricing of 1,167,779 options)..... 2,235,779 2.38
Canceled........................................ (1,441,776) 5.01
Exercised....................................... (111,554) 0.98
-----------
Balances, January 31, 1998 (663,709 exercisable
at a weighted-average price of $2.34)......... 2,274,828 2.34
Granted (weighted-average fair value of $1.32).. 1,124,000 2.07
Canceled........................................ (303,709) 2.07
Exercised....................................... (65,224) 1.85
-----------
Balances, January 31, 1999...................... 3,029,895 $2.25
=========== ==========
At January 31, 1999, options to purchase 85,819 shares were
available for future grant.
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 1999 Life Price 1999 Price
- --------------------- ----------- ----------- ---------- ----------- ----------
$0.0875 14,572 3.88 $0.0875 14,572 $0.0875
$1.0000 500,000 9.75 1.0000 -- --
$2.3100 - $3.0600 2,471,460 8.50 2.4800 1,043,227 2.3300
$3.5000 - $5.0200 41,363 5.48 4.4100 30,864 4.4800
$6.3800 2,500 6.42 6.3800 1,875 6.3800
----------- -----------
$0.0875 - $6.3800 3,029,895 8.64 $2.2500 1,090,538 $2.3600
=========== ===========
The Company uses the intrinsic value method specified by Accounting
Principles Board Opinion No. 25 to calculate compensation expense
associated with issuing stock options and, accordingly, has recorded no
such expense through January 31, 1999 as such issuances have been at the
fair value of the Company's common stock at the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," (SFAS 123) 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 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 the years ended
January 31, 1999, 1998 and 1997, respectively: expected life, 14, 14 and
13 months following vesting; stock volatility, 91%, 89% and 87%; risk
free interest rates, 5.7%, 5.6% and 5.6%; 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 in fiscal 1999, 1998 and 1997 had been
amortized to expense over the vesting period of the awards, pro forma net
income (loss) applicable to common shareholders would have been
$(3,993,000) ($0.31 per share), $(7,283,000) ($0.66 per share), and
$347,000 ($0.03 per share). However, the impact of outstanding non-
vested stock options granted prior to February 1, 1995 has been excluded
from the pro forma calculation; accordingly, the pro forma adjustments
for the years ended January 31, 1999, 1998 and 1997 are not indicative of
future period pro forma adjustments, when the calculation will apply to
all applicable stock options.
Employee Stock Purchase Plan
The Company's 1986 Employee Stock Purchase Plan (1986 ESPP)
provides for the sale of up to 300,000 (increased by 100,000 in fiscal
year 1999) shares of common stock. 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 1999, 1998 and
1997, 45,833, 38,666 and 13,685 shares were purchased at an average price
of $2.50, $3.35 and $7.63 per share, respectively. At January 31, 1999,
78,398 shares remain available for issuance under 1986 ESPP.
9. INCOME TAXES
As a result of net operating loss carryforwards and net losses in
fiscal 1999 and 1998, respectively, the Company recorded no income tax
provision for any of the 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,
-------------------
1999 1998
--------- ---------
Deferred tax assets:
Net operating losses and tax credit carryforwards. $20,913 $18,904
Reserves not currently deductible................. 1,204 2,118
Capitalized R&D expenditures...................... 334 147
Other............................................. 111 170
--------- ---------
22,562 21,339
Valuation allowance................................. (22,562) (21,339)
--------- ---------
Net deferred taxes.................................. $ -- $ --
========= =========
SFAS 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,
1999 are as follows (in thousands):
Expiration
Amount Years
--------- --------------------
Net operating losses, federal.... $49,000 2009 - 2018
Net operating losses, state...... 24,700 1999 - 2003
Tax credits, federal............. 1,059 2006 - 2010
Tax credits, state............... 709 2002 - 2006
Net operating losses, foreign.... 1,311 -
The Company's benefit from income taxes reconciled to the amount
computed by applying the federal statutory rate to income (loss) before
income taxes is as follows (in thousands):
1999 1998 1997
--------- --------- ---------
Computed at 35%................... ($165) ($2,053) $535
Valuation allowance............... 446 1,895 (144)
Other............................. (281) 158 (391)
Refund of state taxes from
prior years..................... (321) -- --
Benefit of net operating loss
carryback refund................ -- (824) --
--------- --------- ---------
Total............................. ($321) ($824) $ --
========= ========= =========
10. COMMITMENTS AND LEASES
Leases - The Company's primary facilities are leased under a
noncancelable lease which expires through September 2002. 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
------------------------------- ---------- ----------
2000..................................... $256 $354
2001..................................... 222 332
2002..................................... 74 359
2003..................................... -- 239
---------- ----------
Total minimum lease payments.................. 552 $1,284
Amount representing interest at a rate ==========
of 10.5%.................................... (60)
----------
Present value of minimum lease payments....... 492
Current portion............................... 218
----------
Long-term portion............................. $274
==========
Rent expense was $235,000, $266,000 and $351,000 for fiscal 1999,
1998 and 1997, respectively.
Royalties - The Company pays royalties for the right to sell
certain products under various license agreements. During the years
ended January 31, 1999, 1998 and 1997, the Company recorded royalty
expense of $405,000, $425,000 and $742,000, 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 have been made by the Company.
11. MAJOR CUSTOMERS
No domestic customer accounted for more than 10% of net sales in
fiscal 1999 and 1998, while one domestic customer accounted for 11% of
net sales in fiscal 1997. In fiscal 1999, one international customer
accounted for 28% of net sales. In fiscal 1998, one international
customer accounted for 39% of net sales. In fiscal 1997, two
international customers accounted for 23% and 20% of net sales,
respectively.
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 and Hong Kong. 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, 1999, 1998 and 1997, the Company recorded sales from
customers throughout the United States and Canada, Taiwan, Hong Kong,
Singapore; Germany, Belgium, Denmark, Finland, The Netherlands, Norway,
Sweden, The United Kingdom, France, Italy, Spain (collectively referred
to as "Europe"); Japan, Korea, China, Thailand, New Zealand
(collectively "Rest of Asia/New Zealand"). The following table summarizes
total net sales and long-lived assets attributed to significant countries
as of and for the years ended January 31 (in thousands):
1999 1998 1997
--------- --------- ---------
Total net sales:
Taiwan............................... $18,674 $14,564 $18,400
United States........................ 12,389 13,349 11,636
Hong Kong............................ 3,659 3,497 3,852
Singapore............................ 3,384 626 733
Europe............................... 3,926 2,429 2,400
Rest of Asia/New Zealand............. 989 2,146 3,723
Canada............................... 519 371 470
--------- --------- ---------
Total net sales*....................... $43,540 $36,982 $41,214
========= ========= =========
Long-lived assets:
United States........................ $1,444 $1,347 $1,165
Hong Kong............................ 23 33 66
--------- --------- ---------
Total long-lived assets................ $1,467 $1,380 $1,231
========= ========= =========
* Net sales are attributed to countries based on invoicing location of customer.
13. CONTINGENCY (LITIGATION)
In February 1998, two putative class action complaints were filed
in the United States District Court for the Northern district of
California, Romine, et al. v. Sigma Designs, Inc., et al., No. C-98-0537-
TEH (N.D.Cal.) and Shah, et al. v. Sigma Designs, Inc., et al., No C-98-
0582-MHP (N.D.Cal.). The federal court complaints allege that Sigma
Designs, Inc. and certain of its officers and/or directors, issued false
or misleading statements regarding the Company's business prospects
during the period October 24, 1995 through February 13, 1997. The
complaints do not specify the amount of damages sought by the plaintiffs.
The plaintiffs have filed a consolidated complaint. The parties have
stipulated that defendants will not move to dismiss the complaint until
after the United States Court of Appeals for the Ninth Circuit renders
its decision in In re Silicon Graphic Securities Litigation, which
decision is expected to delineate the standards for pleading a securities
fraud action under the provision of the Private Securities Litigation
Reform Act of 1995. The Company believes that it has meritorious
defenses to the allegations made in the complaint and intends to conduct
a vigorous defense.
The Company is also party to various claims against it. Although
the ultimate outcome of these matters is not presently determinable,
management believes that the resolution of all such pending matters will
not have a material adverse effect on the Company's financial position or
results of operations.
* * * * *
SIGMA DESIGNS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance Deductions: Balance
at Write at
Beginning Offs of End of
Classification of Year Additions Accounts(1) Year
- ----------------------------- ------------ ----------- ------------ -----------
Allowance for returns and
doubtful accounts, price
protection, and sales
returns:
Year ended January 31,
1999...................... $3,332,000 $395,000 $421,000 $3,306,000
1998...................... 892,000 2,600,000 160,000 3,332,000
1997...................... 892,000 165,000 165,000 892,000
Inventory reserves:
Year ended January 31,
1999...................... $3,792,000 $655,000 $2,504,000 $1,943,000
1998...................... 2,455,000 1,753,000 416,000 3,792,000
1997...................... 3,454,000 41,000 1,040,000 2,455,000
(1) Amount written off, net of recoveries.
INDEX TO EXHIBITS
Exhibit
Number Exhibit Description
- -------- -----------------------------------------------------------
2.1(7) Agreement and Plan of Reorganization by and among the Registrant,
Sigma Acquisition Corporation and Active Design Corp. dated as of
April 23, 1996.
3.1(1) Restated Articles of Incorporation, as amended.
3.2(8) Certificate of Determination of Preferences of Series A Preferred
Stock.
3.3(9) Certificate of Determination of Preferences of Series B Preferred
Stock.
3.4(10) Certificate of Determination of Preferences of Series C Preferred
Stock.
3.5(2) Bylaws of Registrant, as amended.
4.1(10) Form of Subscription Agreement by and between the Company and the
purchasers of the Series C Preferred Stock and warrants.
4.2(10) Form of Registration Rights Agreement by and between the Company
and the purchasers of the Series C Preferred Stock and warrants.
4.3(10) Form of Stock Purchase Warrant.
10.1(3) Distribution Agreement dated September 10, 1985.
10.2(4) Registrant's 1986 Employee Stock Purchase Plan, as amended, and
form of Subscription Agreement.
10.6 Sublease between the Registrant and Sun Microsystems, Inc.
10.7(5) Registrant's 1994 Stock Plan and form of Stock Option Agreement.
10.8(6) Registrant's 1994 Director Stock Option Plan and form of Director
Option Agreement.
10.9(11) Registrant's 1995 Business Loan Agreement with Silicon Valley
Bank, as amended.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney (See page 22).
27 Financial Data Schedule.
(1) Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31,
1988.
(2) Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31,
1989.
(3) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-4131) filed March 19,
1986, Amendment No. 1 thereto filed April 28, 1986 and Amendment
No. 2 thereto filed May 15, 1986, which Registration Statement
became effective May 15, 1986.
(4) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (No. 333-61549) filed August
14, 1998.
(5) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (No. 33-81914) filed July 25,
1994.
(6) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 33-74308) filed on January
28, 1994, Amendment No. 1 thereto filed February 24, 1994,
Amendment No. 2 thereto filed March 3, 1994, Amendment No. 3
thereto filed March 4, 1994 and Amendment No. 4 thereto filed
March 8, 1994.
(7) Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31,
1996.
(8) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 333-33147) filed on August
7, 1997.
(9) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 333-47835) filed on March
12, 1998.
(10) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 333-_________) filed on
May 3, 1999.
(11) Incorporated by reference to exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31,
1998.