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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
FORM 10-K
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required) for the fiscal
year ended January 31, 1995.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required) for the
transition period from _________ to __________.
Commission file number: 15116
SIGMA DESIGNS, INC.
(Exact name of Registrant as specified in its charter)
California 95-2848099
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
46501 Landing Parkway
Fremont, California 94538
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 770-0100
Securities registered pursuant to Section 12(g) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $31.8 million as of April 6, 1995 based upon the
closing price on the NASDAQ National Market System reported for such date.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded
in that such persons may under certain circumstances be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Number of Shares of Common Stock outstanding as of April 6, 1995:
7,511,472
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference to Part III of
this Form 10-K report: Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held June 2, 1995.
2
SIGMA DESIGNS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 1995
INDEX
PAGE
----
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . 5
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . 10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . 11
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . 11
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . 11
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . 12
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PART I
ITEM 1. BUSINESS
The Company designs, manufactures (using subcontractors) and markets
multimedia products and imaging display systems for use with personal
computers. The emergence of multimedia technology in the personal computer
market has dramatically changed the way 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 MPEG (Moving Picture Experts Group)
technology, Sigma Designs has made itself a leader in this emerging market.
Prior to MPEG's introduction, video on personal computers suffered from
serious drawbacks. Motion was jerky and video was confined to small window
sizes. MPEG, a defined ISO (International Standards Organization) standard for
compression, eliminated 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 MPEG compression technique can store up to 72 minutes of
full-motion video and audio.
Because of MPEG technology, producers could now create (and users enjoy)
an interactive, television-like experience right on the desktop PC. The result
was a significant new visual impact and the birth of many possibilities for a
wide range of entertainment, education, training and business presentation
applications.
THE REALMAGIC MPEG STANDARD
Since its first shipment in November 1993, RealMagic technology has
received widespread support from PC industry leaders, software developers as
well as OEM and retail customers.
Partnership with PC Industry Leaders: Sigma has received endorsement for
its RealMagic technology from companies such as Microsoft, IBM, Novell and
Starlight Networks. On the operating system side, RealMagic is being supported
by Microsoft NT and O/S 2 2.0 WARP. Additionally, Novell and Starlight
Networks are both compatible with RealMagic in a network environment.
Widespread Support from Software Developers: Support for Sigma's
RealMagic MPEG standard has grown rapidly in the software development
community. One year ago the Company listed 50 authorized RealMagic software
developers; by the end of fiscal 1995, Sigma's roster of developers rose to
more than 950, including such prominent names as Activision, Tsunami Media,
Mindscape, Virgin Interactive Entertainment, Time Warner, and Interplay. This
widespread developer support has led to the introduction of more than 50
interactive software titles in the RealMagic format and many more currently
under development. The RealMagic DOS MPEG API (Application Programming
Interface) has also become the de facto standard for MPEG software development,
further evidence of widespread support from the software development community.
With its robust functionality, the RealMagic API is so far the only technology
available that allows the creation of fully interactive MPEG software titles.
Support from OEMs: In the U.S., Digital Equipment Corporation began
private labeling RealMagic and selling it under Digital's FullVideo brand name.
Additionally IBM has begun taking shipments of RealMagic boards for systems
targeted at vertical kiosk applications. In the Far East, where the popularity
of Karaoke and videoCD has made RealMagic a very well received product, the
Company's OEM customers include NEC and Midori in Japan, and Hyundai in Korea.
4
Acceptance by Retail Channel: In 1994, Sigma secured distribution of its
RealMagic family of products in major superstores such as CompUSA, Computer
City. In addition, national distributors such as Ingram Micro D and Tech Data
are also carrying RealMagic, further evidence of the channel's acceptance and
interest in MPEG technology.
REALMAGIC BUSINESS STRATEGIES
Sigma's corporate objective is to continue to be the leading provider of
multimedia products that enable full-screen, full-motion, TV-like quality video
on standard PC and other desktop platforms. To accomplish this goal, the
Company intends to promote the widespread acceptance of the RealMagic
technology. The key parts of this strategy include:
Encourage Continued Development of Software Utilizing the RealMagic
Technology: The Company continues to encourage widespread software title
development by providing free technical support and licensing its comprehensive
API free of charge to all developers who wish to publish RealMagic-compatible
software titles. In addition, the Company has begun shipping RealMagic
Producer, the industry's first low-cost MPEG authoring system. It enables
compression of MPEG video and audio in order to create high-quality multimedia
presentation and titles. The Company expects that the availability of
RealMagic producer will lead to the development of more RealMagic MPEG titles,
and therefore increase the demand for RealMagic playback cards.
Win more OEM partnerships and further penetrate retail channel: To
establish RealMagic as a true standard, the Company will continue to seek
design wins with major PC manufacturers worldwide in which the OEMs will
factory-install the RealMagic card or chip set inside personal computers. On
the retail side, the Company plans to expand its network of national and
regional distributors as well as computer superstores. In Europe and Asia, the
Company will continue to expand its relationship with distributors as well as
OEMs and VARs.
Offer RealMagic at Attractive Prices and Continually Reduce Product
Costs: The current RealMagic card has a suggested retail price of $399, the
RealMagic Lite $299, the RealMagic MPEG CD-ROM Kit $699. The Company plans to
continue the cost reduction program so that it can go on lowering the price to
expand the market demand for RealMagic products.
Introduce New Generations of RealMagic: A significant aspect of the
Company's product strategy is to continue developing newer versions and
generations of the RealMagic products for both playback and compression
markets. The general direction is to continue to offer consumers with
better-features and lower price products over time. The intention is to stay
one step ahead of competition.
REALMAGIC PRODUCTS
The Company now offers a complete family of RealMagic product line
including:
(1) RealMagic: a combination of 16-bit sound plus MPEG full-motion
Video and MPEG audio playback card.
(2) RealMagic Lite: an MPEG Video and audio playback card for users
with existing sound card.
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(3) RealMagic CD-ROM Upgrade Kit: a full featured kit including
RealMagic, a CD-ROM drive, a pair of speakers and several of the best selling
MPEG and DOS software titles.
While many MPEG cards are being introduced by competitors, RealMagic
remains the only MPEG playback card capable of playing the existing interactive
MPEG software titles. The ability to play interactive titles distinguishes
RealMagic from the many new MPEG cards soon to be introduced to the market
place.
(4) RealMagic Producer: It enables compression of MPEG video and audio
in order to create high-quality multimedia presentations and titles. RealMagic
producer takes advantage of AVI Editable MPEG, a new file format co-defined
between Sigma and Microsoft, which permits the product to edit MPEG files using
any off-the-shelf AVI editing software package.
MARKETING AND SALES
Sigma Designs currently distributes its products through sales to
national and regional distributors and computer superstores. The Company also
intends to expand the sales of its products to OEMs and VARs. However, there
can be no assurance that the Company will achieve significant sales so as to
achieve profitability in the near term, if at all. The Company's national
distributors include Ingram Micro D and Tech Data and computer superstores
include CompUSA and Computer City. The Company's international OEMs include
NEC and Midori in Japan, Hyundai in Korea; its many international distributors
are strategically located in many countries throughout the world.
The Company generally acquires and maintains products for distribution
through retail channels based on forecasts rather than firm purchase orders.
Additionally, the Company generally only acquires products for sales to its OEM
customers after receiving purchase orders from such customers, such purchase
orders are typically cancelable without substantial penalty from such OEM
customers. The Company currently places noncancelable orders to purchase
semiconductor products from its suppliers on a twelve to sixteen-week lead time
basis. Consequently, if, as a result of inaccurate forecasts or canceled
purchase orders, anticipated sales and shipments in any quarter do not occur
when expected, expenses and inventory levels could be disproportionately high,
requiring significant working capital resulting in severe pressure on the
Company's financial condition.
RESEARCH AND DEVELOPMENT
The Company had a staff of 33 research and development personnel, which
conducts all the Company's product development, as of January 31, 1995. The
Company is focusing its development efforts primarily on multimedia products,
including new and improved versions of RealMagic, new software titles, low-cost
compression technology and cost reduction processes.
To achieve and maintain its technological leadership, the Company must
continue to make technological advancements in the areas of MPEG video and
audio compression, decompression. These advancements include compatibility
with emerging standards and multiple platforms, improvements to the RealMagic
architecture, enhancements to RealMagic API. There can be no assurance that
the Company will be able to make any of such advancements to the RealMagic MPEG
technology or, if they are made, that the Company will be able to market such
advancements to achieve profitability and maintain its technological
leadership.
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During fiscal 1995, 1994 and 1993, the Company's research and development
expenses were approximately $4.3 million, $12.0 million (including $8.1 million
of acquired research and development relating to the acquisition of EMI), and
$5.0 million respectively. The Company plans to continue to devote substantial
resources to the research and development of the future generation of MPEG
compression and decompression products.
COMPETITION
The market for Multimedia PC products is highly competitive. While the
Company does not believe that any product currently sold by a third party is in
direct competition with the RealMagic playback controller 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. The Company believes that many
computer product manufacturers are developing MPEG products that will compete
directly with the RealMagic products in the near future.
The Company believes that the principal competitive factors in the market
for multimedia hardware products include time to market for new product
introductions, product performance, compatibility to industry standards, price,
and marketing and distribution resources. The Company believes that it
competes most favorably with respect to time to market, product performance and
price of RealMagic products. Moreover, the Company believes that the
establishment of RealMagic API as a software development standard could provide
a significant competitive advantage for the Company. However, there can be no
assurance that the Company's lead time in product introduction will be
sustained.
Sales to distributors and sometimes even to OEMs 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 the
Company's operating results.
LICENSES, PATENTS AND TRADEMARKS
The Company is seeking patent protection for the basic low-cost
architecture of the RealMagic products, as well as certain software and
hardware features used in current and future versions of RealMagic. The
Company currently has eight (8) pending patent applications for its RealMagic
technology. One (1) patent has been issued to the Company and there can be no
assurance that more patents will be issued, or, if issued, will provide
adequate protection for the Company's competitive position. The Company also
attempts to protect its trade secrets and other proprietary information through
agreements with customers, suppliers and employees and other security measures.
Although the Company intends to protect its rights vigorously, there can be no
assurance that these measures will be successful.
MANUFACTURING
To reduce overhead expenses, capital and staffing requirements, the
Company currently uses third-party contract manufacturers to fulfill its
manufacturing needs. The Company's RealMagic playback controller card contains
four chips, all of which are manufactured by outside suppliers or foundries.
Each of these suppliers is a sole source of supply to the Company of the
respective chip produced by such supplier.
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The Company's reliance on independent suppliers involves several risks,
including the absence of adequate capacity, reduced control over delivery
schedules, manufacturing yields and costs. Any delay or interruption on the
supply of any of the components required for the production of the RealMagic
multimedia card could have a material adverse impact on the sales of RealMagic
products by the Company and thus on the Company's business.
BACKLOG
Because the Company's customers typically expect quick deliveries, the
Company seeks to ship products within a few weeks of receipt of a purchase
order. The customer may reschedule delivery of products or cancel the purchase
order entirely without significant penalty. Historically, the Company's
backlog has not been reflective of future sales. The Company also expects that
in the near term its backlog will continue to be not indicative of future
sales.
EMPLOYEES
As of January 31, 1995, the Company had 138 full-time employees,
including 33 in research and development, 50 in marketing, sales and support,
28 in manufacturing and 27 in finance and administration. The Company's future
success will depend, in part, on its ability to continue to attract, retain and
motivate highly-qualified technical, marketing, engineering and management
personnel, who are in great demand. The Company's employees are not
represented by any collective bargaining unit, and the Company has never
experienced a work stoppage. The Company believes that its employee relations
are satisfactory.
FACTORS AFFECTING EARNINGS AND STOCK PERFORMANCE
The Company has incurred losses and had negative cash flow in the last
three years. There can be no assurance that the Company will achieve
profitable operations in the future or that if profitable operations are
achieved, that they will be sustained. The Company's business is critically
dependent on the sell-through of RealMagic products. Delays in market
acceptance of RealMagic products will have material adverse impact on the
Company's earnings and price of the Company's Common Stock.
To date, the Company has not been successful in generating sufficient
demand for its RealMagic products from either the retail channel or OEM
customers to enable the Company to achieve profitable opeations. The Company
will continue to seek to market amd sell its RealMagic products through both
channels, but there can be no assurance that the Company will ever be
successful in achieving a sustained market for its products in either channel.
The cost of marketing and sales related to the introduction of RealMagic has
required the Company to continue to maintain a high level of expenses. The
Company believes that it must continue to invest significant resources in
research and development and sales and marketing if it is ever to achieve
sustained market demand for its RealMagic product line.
Should the Company fail to establish increased demand for its RealMagic
products during 1995 and beyond, the Company will continue to experience
substantial losses. The Company does not expect to experience a significant
improvement in operating results during the first half of fiscal 1996. Moreover,
the Company will require additional financing to enable it to address its
business objectives. There can be no assurance that such financing will be
available on attractive terms.
As a result of the foregoing factors, an investment in the Company's
securities is speculative and involves a high degree of risk. Investors in the
Company's common stock must be willing to bear such risk.
ITEM 2. PROPERTIES
The Company currently leases a 50,000 square foot facility in Fremont,
California that is used as the Company's headquarters. The lease will expire in
August 1998. The Company believes that it has adequate facilities to
accommodate the Company's operations in the near term.
On February 16, 1994, the Company entered into a sublease agreement
with Media Vision Technology, Inc. (Media Vision) whereby Media Vision
subleased the Company's old executive offices located at 47900 Bayside Parkway,
Fremont, California 94538. The difference between the Company's total lease
commitment of that facility and the total lease commitment from Media Vision
has been included in the accrued facilities as of January 31, 1995.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings which it believes
will materially and adversely affect its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Sigma Designs' common stock has been traded in the over-the-counter
market under the Nasdaq symbol SIGM since the Company's initial public offering
on May 15, 1986. The price per share represents the range of high and low
closing prices in the Nasdaq National Market System, for the quarter indicated.
Fiscal 1995 Fiscal 1994
--------------- ---------------
High Low High Low
----------------------------------------
First quarter ended April 30 14 8 7 1/2 5 1/4
Second quarter ended July 31 9 5/16 6 3/8 5 3/4 3 1/4
Third quarter ended October 31 8 1/2 4 7/8 18 3 1/2
Fourth quarter ended January 31 8 5 3/8 19 1/2 12 7/8
As of March 16, 1995, the Company had approximately 311 shareholders of
record. The Company has not paid any cash dividends on its common stock and
does not plan to pay cash dividends to its shareholders in the near future.
The Company presently intends to retain its earnings to finance the future
growth of its business.
ITEM 6. SELECTED FINANCIAL DATA
Years ended January 31
(In thousands, except per share amounts and number of employees)
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Net sales $ 43,700 $ 34,989 $ 27,058 $ 27,567 $ 35,968
Net income (loss) (8,773) (29,546) (7,166) (3,443) 1,788
Net income (loss)
per common
and equivalent share (1.20) (5.15) (1.37) (.67) .32
Working capital 17,446 15,117 33,696 41,515 44,684
Total assets 33,387 26,639 44,267 49,049 51,818
Shareholders' equity 18,721 16,499 37,788 44,755 47,816
Number of employees 138 151 195 197 220
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In the year ended January 31, 1995, the Company recorded net sales of
$43.7 million and a net loss of $8.8 million ($1.20 per share) which resulted
primarily from lower than expected sales, reserves recorded by its subsidiary,
Sigma Designs Imaging Systems, Inc. ("SDIS") and Sigma, increased marketing
expenses to promote and market RealMagic products worldwide and significant R&D
expenses related to the cost of supporting third-party software title
developers in the development of RealMagic compatible titles.
SALES
The following table set forth the Company's net sales in each of its
product groups for the last three years.
(In thousands)
Fiscal 1995 Fiscal 1994 Fiscal 1993
----------- ----------- -----------
Multimedia products $ 30,345 $ 8,022 $ 681
Display systems 7,887 17,825 16,250
CPU boards 2,050 4,353 6,831
Graphics controller boards -- 494 2,720
Other 3,418 4,295 576
------ ------ ------
Net Sales $ 43,700 $ 34,989 $ 27,058
======== ======== ========
The multimedia product group includes RealMagic playback controller card,
RealMagic Lite designed for those who already owned a sound card, and RealMagic
Upgrade Kit which consists of the RealMagic card, a double-speed CD-ROM drive,
a pair of speakers, and an array of popular MPEG software titles. The display
systems group includes a variety of color and monochrome high-resolution
monitors designed to be used with special applications such as document imaging
or computer-aided designs. The other product group consists primarily of sales
of surplus and obsolete inventories and sales of components to service centers.
The Company's net sales increased 25% in fiscal 1995 and increased 29% in
fiscal 1994. In fiscal 1995, net sales of multimedia products increased 278%
while net sales of all other categories decreased, which is consistent with the
Company's strategy to emphasize its RealMagic product line and to continue to
invest in MPEG technology for the PC platform.
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The following table sets forth the Company's net sales by domestic
distribution channels and export sales for each of the last three years:
(In thousands)
Fiscal 1995 Fiscal 1994 Fiscal 1993
Domestic Sales :
Retail sales $ 17,722 $ 17,234 $ 7,456
OEMs and VARs 10,070 6,349 10,745
---------- ---------- ----------
Total domestic sales 27,792 23,583 18,201
---------- ---------- ----------
Export Sales:
Asia 10,222 1,883 505
Europe 5,415 9,163 8,097
Canada 271 360 255
---------- ---------- ----------
Total export sales 15,908 11,406 8,857
---------- ---------- ----------
Net Sales $ 43,700 $ 34,989 $ 27,058
========== ========== ==========
The percentage of the Company's net sales attributable to domestic retail
sales was 41% in fiscal 1995, 49% in fiscal 1994, and 28% in fiscal 1993. The
percentage of the Company's net sales attributable to domestic OEM and VAR
sales was 23% in fiscal 1995, 18% in fiscal 1994, and 40% in fiscal 1993. The
percentage of the Company's net sales attributable to export sales was 36% in
fiscal 1995, 33% in fiscal 1994, and 33% in fiscal 1993.
In fiscal 1995, domestic sales increased 18% over fiscal 1994 while
export sales increased 39%. Export sales in Asia increased 443% in fiscal 1995
while export sales in both Europe and Canada decreased. The significant
increase in export sales in Asia was due to the wide-acceptance of RealMagic
products for use with Karaoke applications. The decrease in export sales in
Europe occurred because the current progress of the development of the
RealMagic market in Europe has not been sufficient to offset reduced sales of
those products which the Company will not be emphasizing in the future.
GROSS MARGIN
The Company's gross margin as a percentage of net sales was approximately
15%, 21%, and 15% in fiscal 1995, 1994, and 1993, respectively. The decrease in
gross margin in fiscal 1995 was primarily due to fourth quarter increases in
inventory reserves in SDIS and Sigma which increased annual cost of sales by
$3.7 million, and reduced the annual gross margin to 15% from 23% prior to the
impact of these reserves. Such inventory reserves were required in connection
with the Company's decision to withdraw support of certain imaging products,
difficulties in developing a new product design for applications in China that
would have incorporated certain display systems, and changes in computer design
by computer manufacturers that were not anticipated and that created excess
supplies of certain inventories. The increase in gross margin in fiscal 1994
was due to discontinuance of certain products with low margins and increased
sales of multimedia products which had higher margins.
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OPERATING EXPENSES
Sales and marketing expenses decreased $426,000 (5%) in fiscal 1995 over
fiscal 1994. The small reduction reflected the more focused approach to
marketing which concentrates on RealMagic product line. These same expenses
increased $1,972,000 (26%) in fiscal 1994 over fiscal 1993. This increase was
consistent with higher sales and the added expenses needed to launch multimedia
products.
Research and development expenses in fiscal 1995 increased $498,000 (13%)
over fiscal 1994, excluding $8,137,000 of in-process research and development
expenses in fiscal 1994 related to the acquisition of E-Motions, Inc. ("EMI").
This increase reflected the necessary expenses needed to develop the next
generation of RealMagic products and the added costs needed to support
third-party software title developers in the development of RealMagic
compatible titles. These same expenses decreased $1,192,000 (24%) in fiscal
1994 over fiscal 1993, excluding the impact of the acquisition of EMI. This
decrease was due to general cost reduction efforts, the discontinuation of
development efforts in non-multimedia products and related headcount reductions
which occurred in conjunction with a restructuring in the second quarter of
fiscal 1994.
The Company's general and administrative expenses in fiscal 1995
increased $803,000 (30%) over fiscal 1994. This increase reflected added costs,
primarily related to increased headcount, necessitated by the Company's
decision to combine its remaining display systems business with the imaging
products offered by Docupoint subsidiary, into a separate entity, SDIS, in the
first quarter of fiscal 1995, and to support the higher level of sales. These
same expenditures increased $767,000 (39%) in fiscal 1994 over fiscal 1993.
This increase reflected added expenses to manage Docupoint and higher salary
expenses related to the transfer of certain personnel to the general and
administrative function.
In the second quarter of fiscal 1994, the Company recorded a $13.7
million restructuring charge in connection with the Company's decision to focus
attention on its new multimedia products. Related to this decision, the
Company eliminated certain product lines, moved to smaller facilities at the
end of the first quarter of fiscal 1995 and discontinued certain internal
manufacturing and assembly. The restructuring charge primarily consisted of
reserves for inventories ($8.2 million) and accruals of lease commitments for
excess facilities ($4.1 million) as well as other accruals for liabilities
incurred and writedowns of impaired assets. In the third quarter of fiscal
1995, the Company refined its remaining estimate of reserves and accruals
related to the restructuring and, as a result of the finalization of the terms
and circumstances related to the subleasing of the Company's excess facilities,
recorded a $517,000 recovery in that quarter. The remaining facilities accrual
of approximately $1.9 million relates to the excess of the Company's lease
commitment over expected sublease income for the term of the lease.
LOSS PER SHARE
The Company's $1.20 loss per share in fiscal 1995 was due primarily to
lower than expected sales, reserves recorded by its subsidiary, SDIS, and
Sigma, increased marketing expenses in Sigma to promote and market RealMagic
products worldwide and significant R&D expenses related to the cost of
supporting third-party software title developers in the development of
RealMagic compatible titles. The Company's $5.15 and $1.37 loss per share in
fiscal 1994 and 1993 were due primarily to sales levels which were not high
enough to generate sufficient gross profits to offset operating expenses and
the negative impact on margin from competitive pricing pressures. The $5.15
loss per share in fiscal 1994 also included $3.80 for restructuring and
in-process research and development expenses.
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FINANCIAL CONDITION
The Company had cash and marketable securities of $8.2 million at January
31, 1995, as compared with $5.3 million at January 31, 1994. The increase in
cash and marketable securities was due primarily to $13.2 million raised in the
first quarter of fiscal 1995 through the sale of common stock in a public
offering and $1.7 million of cash borrowed under a bank line of credit, offset
by cash used for operations of $7.7 million, a $1.9 million payment to former
shareholders of EMI in settlement of contingencies related to the purchase
price of EMI, and approximately $1.0 million invested in the development of
RealMagic compatible software titles by third parties.
The Company's primary sources of funds to date have been cash generated
from operations prior to 1993, proceeds from public offerings of its common
stock and bank borrowings under lines of credit. The Company believes that its
current reserve of cash and marketable securities and the availability of an
additional $3.1 million under its existing banking arrangements will be
sufficient to satisfy its needs for the next twelve months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the report of the independent
auditors appear on pages F-1 through F-15 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-10-
13
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant filed its definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") with the Securities and Exchange Commission on
April 25, 1995, and certain information included therein is incorporated herein
by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and certain executive
officers required by this Item is incorporated by reference to the Proxy
Statement under the heading "Election of Directors."
The information concerning certain executive officers required by this
Item is incorporated by reference to the Proxy Statement under the heading
"Other Information."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Information Concerning Solicitation and
Voting--Record Date and Share Ownership" and under the heading "Other
Information--Share Ownership by Principal Shareholders and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation--Compensation
Committee Interlocks and Insider Participation."
-11-
14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this Report:
1. Financial Statements. The following Consolidated Financial
Statements of Sigma Designs, Inc. are filed as part of this report:
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of January 31, 1995 and F-2
1994
Consolidated Statements of Operations for the Years F-3
Ended January 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for F-4
the Years Ended January 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flow for the Years F-5
Ended January 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedule. The following financial
statement schedule of Sigma Designs, Inc. for the years ended January 31,
1995, 1994 and 1993 are filed as part of this Report and should be read in
conjunction with the Consolidated Financial Statements of Sigma Designs, Inc.:
-12-
15
Schedule Page
-------- ----
Independent Auditors' Report on
Financial Statement Schedules . . . . . F-1
II Valuation and Qualifying Accounts . . . F-15
Schedules not listed above have been omitted because they are
not applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes thereto.
3. Exhibits. The following exhibits are filed as part of, or
incorporated by reference into, this Report:
Exhibit
Number
---------
3.1(1) Restated Articles of Incorporation, as amended.
3.2(2) By-Laws of Registrant, as amended.
4.1(1) Article IV of the Articles of Incorporation of Registrant
(see Exhibit 3.1).
10.1(3) Distribution Agreement dated September 10, 1985 between
Registrant and Softsel Computer Products, Inc. and Amendment
to Distribution Agreement dated September 10, 1985.
10.2(4) Registrant's 1986 Employee Stock Purchase Plan, as amended,
and form of Subscription Agreement.
+10.3(2) Distributor Agreement dated May 24, 1988 between Registrant
and Micro D, Inc.
10.4(5) Lease dated October 31, 1990 between Registrant and Renco
Investment Company.
10.5(6) Contract Manufacturing Agreement dated January 7, 1994 by
and between the Registrant and Digital Equipment
Corporation.
10.6 Industrial Space Lease dated February 16, 1994 by and
between the Registrant and Renco Bayside Investors.
10.7 Sublease dated February 16, 1994 by and between the
Registrant and Media Vision Technology, Inc.
10.8(7) Registrant's 1994 Stock Plan and form of Stock
Option Agreement.
10.9(7) Registrant's 1994 Director Option Plan and form of Director
Stock Option Agreement.
11.1 Statement Regarding Computation of Per Share Earnings.
-13-
16
Exhibit
Number
---------
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney (included on page 17).
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 Annual Report on Form 10-K for the fiscal year
ended January 31, 1992.
(5) Incorporated by reference to exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year
ended January 31, 1991.
(6) Incorporated by reference to exhibit filed with 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 Registrant's
Registration Statement on Form S-8 (No. 33-81914) filed
July 25, 1994.
---------------
+ Pursuant to Rule 406(b) under the Securities Act, confidential
treatment has been granted to portions of this exhibit, which
portions have been deleted and filed separately with the
Securities and Exchange Commission.
B. Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of fiscal 1995.
-14-
17
C. Exhibits.
See Item 14(a)(3) above.
D. Financial Statement Schedule.
See Item 14(a)(2) above.
-15-
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGMA DESIGNS, INC.
By: /s/ Thinh Q. Tran
-------------------------------------
Thinh Q. Tran,
President and Chief Executive Officer
Dated: April 28, 1995
-16-
19
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thinh Q. Tran and Q. Binh Trinh, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------- ------------------------------------- --------------
/s/ Thinh Q. Tran President and Chief Executive Officer April 28, 1995
- ------------------------- (Principal Executive Officer)
(Thinh Q. Tran) and Director
/s/ Q. Binh Trinh Vice President, Finance and Chief April 28, 1995
- ------------------------- Financial Officer (Principal
(Q. Binh Trinh) Financial and Accounting Officer)
and Director
/s/ Julien Nguyen Director April 28, 1995
- -------------------------
(Julien Nguyen)
Director April __, 1995
- -------------------------
(Alexander Au)
Director April __, 1995
- -------------------------
(William P. Almon)
-17-
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sigma Designs, Inc.:
We have audited the consolidated financial statements of Sigma Designs,Inc.
and subsidiaries as of January 31, 1995 and 1994, and for each of the
three years in the period ended January 31, 1995, and have issued our report
thereon dated March 10, 1995. Our audits also included the financial statement
schedule of Sigma Designs, Inc. listed in Item 14. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on it based on our audits. 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
DELOITTE & TOUCHE LLP
San Jose, California
March 10, 1995
21
CONSOLIDATED BALANCE SHEETS
JANUARY 31, (DOLLARS IN THOUSANDS)
1995 1994
---- ----
ASSETS:
Current Assets:
Cash and equivalents $ 881 $ 1,808
Short-term investments 7,349 3,514
Accounts receivable (net of allowances: $1,101 and
$885, respectively) 11,958 7,246
Inventories 9,736 10,602
Prepaid expenses and other 1,086 569
--------- ---------
Total current assets 31,010 23,379
Equipment-net 1,343 1,200
Other assets 1,034 1,700
--------- ---------
Total $ 33,387 $ 26,639
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit $ 1,710 $ --
Accounts payable 9,333 4,207
Accrued liabilities 1,748 2,313
Accrued facilities 773 2,102
--------- ---------
Total current liabilities 13,564 8,622
--------- ---------
Accrued facilities-long term 1,102 1,518
Commitments (Notes 9 and 10)
Shareholders' equity:
Preferred stock-no par value: 2,000,000 shares
authorized; no shares outstanding -- --
Common stock-no par value: 20,000,000 shares
authorized; shares outstanding: 1995,
7,479,943; 1994, 6,228,060 38,820 27,544
Accumulated deficit (20,036) (11,045)
Unrealized loss on securities available for sale (63) --
--------- ---------
Shareholder's equity 18,721 16,499
--------- ---------
Total $ 33,387 $ 26,639
========= =========
- -------------------------
See notes to consolidated financial statements.
F-2
22
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended January 31, (dollars in thousands, except per share amounts)
1995 1994 1993
--------- --------- ---------
Net sales $ 43,700 $ 34,989 $ 27,058
Costs and expenses:
Cost of sales 36,980 27,538 23,045
Research and development 4,349 11,988 5,043
Sales and marketing 9,022 9,448 7,476
General and administrative 3,521 2,718 1,951
Restructuring charges (517) 13,654 --
--------- --------- ---------
Total costs and expenses 53,355 65,346 37,515
--------- --------- ---------
Loss from operations (9,655) (30,357) (10,457)
Interest income-net 336 699 1,207
Minority interest in loss of subsidiary -- 4 21
Gain (loss) from investment 546 (43) (88)
--------- --------- ---------
Loss before income taxes (8,773) (29,697) (9,317)
Credit for income taxes -- 151 2,151
--------- --------- ---------
Net loss $ (8,773) $ (29,546) $ (7,166)
========= ========= =========
Net loss per common share $ (1.20) $ (5.15) $ (1.37)
========= ========= =========
Shares used in computation $ 7,307 $ 5,733 $ 5,234
========= ========= =========
- -------------------------
See notes to consolidated financial statements.
F-3
23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Unrealized
Loss on
Common Stock Retained Securities
------------ Earnings Available
Shares Amount (Deficit) for Sale Total
------ ------ --------- ---------- -----
Balances, February 1, 1992 5,210,419 $ 19,088 $ 25,667 $ -- $ 44,755
Common stock issued under stock plans 78,250 312 -- -- 312
Common stock repurchased (22,600) (113) -- -- (113)
Net loss -- -- (7,166) -- (7,166)
--------- ------- -------- ----- --------
Balances, January 31, 1993 5,266,069 19,287 18,501 -- 37,788
Common stock issued under stock plans 101,991 493 -- -- 493
Common stock issued and options
assumed in acquisition of E-Motions, Inc. 860,000 7,764 -- -- 7,764
Net loss -- -- (29,546) -- (29,546)
--------- ------- -------- ----- --------
Balances, January 31, 1994 6,228,060 27,544 (11,045) -- 16,499
Sale of common stock 1,130,000 12,959 -- -- 12,959
Common stock issued under stock plans 121,883 242 -- -- 242
Payment to E-Motions Inc., shareholders -- (1,925) -- -- (1,925)
Buy-back of Docupoint minority interest -- -- (218) -- (218)
Current year change in unrealized loss on
securities available for sale -- -- -- (63) (63)
Net loss -- -- (8,773) -- (8,773)
--------- -------- -------- ------ --------
Balances, January 31, 1995 7,479,943 $ 38,820 $(20,036) $ (63) $(18,721)
========= ======== ======== ====== ========
- -------------------------
See notes to consolidated financial statements.
F-4
24
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended January 31,
-----------------------
(in thousands)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net loss $ (8,773) $ (29,546) $ (7,166)
Adjustment to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 774 1,169 1,566
Deferred income taxes -- -- (496)
Minority interest in loss of subsidiary -- (4) (21)
Loss (gain) from investments (205) 43 88
Provision (credit for restructuring costs) (517) 13,654 --
Write-off of research and development
in progress in connection with the
purchase of E-Motions, Inc. -- 8,137 --
Changes in assets and liabilities:
Accounts receivable (4,712) (775) (3,484)
Inventories 866 (6,512) (2,209)
Prepaid expenses and other 351 (340) 72
Income taxes receivable and payable -- 2,201 846
Accounts payable 5,126 (758) 3,107
Accrued liabilities (1,793) (930) (128)
--------- --------- ---------
Net cash used for operating activities (8,883) (13,661) (7,825)
--------- --------- ---------
Cash flow from investing activities:
Purchases of short-term investments (10,472) (14,535) (25,367)
Maturity of short-term investments 6,574 25,348 30,578
Sales of long-term investment 844 -- --
Equipment additions (721) (612) (801)
Software development costs -- (233) (551)
Title development costs (950) -- --
Other (305) (261) (399)
Cash from purchase of E-Motions, Inc. -- 183 --
--------- --------- ---------
Net cash provided by (used for)
investing activities (5,030) 9,890 3,460
--------- --------- ---------
Cash flows from financing activities
Bank line of credit 1,710 -- --
Common stock sold 13,201 493 312
Common stock repurchased -- -- (113)
Payment to E-Motion shareholders (1,925) -- --
Other -- -- (31)
--------- --------- ---------
Net cash provided by financing
activities 12,986 493 168
--------- --------- ---------
F-5
25
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended January 31,
-----------------------
(in thousands)
1995 1994 1993
---- ---- ----
Decrease in cash and equivalents (927) (3,278) (4,197)
Cash and equivalents:
Beginning of period 1,808 5,086 9,283
------- --------- ---------
End of period $ 881 $ 1,808 $ 5,086
======= ========= =========
Cash paid for interest $ 136 $ -- $ 2
======= ========= =========
Cash (received) paid for income taxes $ -- $ (2,201) $ (2,500)
======= ========= =========
Noncash investing activities:
Purchase of E-Motions, Inc.:
Common stock issued and options assumed $ -- $ 7,764 $ --
Net investment in E-Motions, Inc.
prior to purchase -- 636 --
Fair value of assets acquired -- (295) --
Liabilities assumed -- 32 --
------- --------- ---------
Acquired research and development in progress $ -- $ 8,137 $ --
======= ========= =========
- -------------------------
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(For years ended January 31, 1995, 1994, and 1993)
1. DESCRIPTION OF BUSINESS
Sigma Designs, Inc. (the Company) develops, manufactures and markets
multimedia products, including graphics boards, display products and other
board-level products for use with IBM, IBM-compatible and Apple Macintosh
personal computers. The Company sells its products to computer manufacturers
and to retail chains, distributors and value-added resellers. Its principal
subsidiary, Sigma Designs Imaging Systems, Inc. (formerly Docupoint, Inc.), is
in the document image system technology business.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation -- The consolidated financial statements
include Sigma Designs, Inc. and subsidiaries. Intercompany balances and
transactions are eliminated.
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 represent government and corporate obligations
with maturities at the date of acquisition of more than three months.
Effective February 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and
F-6
26
Equity Securities." Adoption of SFAS 115 had no material impact on the
Company's consolidated financial position or results of operations. At January
31, 1995, short-term investments are carried as available for sale securities,
are reported at fair-market value and are classified as current assets as all
maturities are within one year as follows:
Cost Market Value Unrealized Loss
---- ------------ ---------------
(in thousands)
Corporate obligations $ 4,461 $ 4,440 $ (21)
U.S. government obligations 2,951 2,909 (42)
(primary U.S. Treasury Notes)
------- ------- ------
$ 7,412 $ 7,349 $ (63)
======= ======= ======
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Title development costs -- Beginning in fiscal 1995, the Company
initiated a program to support the external development of software titles that
are compatible with its multimedia products. The Company capitalizes these
costs ($950,000 in fiscal 1995) and amortizes over the shorter of 12 months
from the introduction of the title or pro-rata over the estimated unit sales of
the title (amortization in fiscal 1995 was not significant). The Company
evaluates the recoverability of these costs based on the on-going viability of
specific titles and the anticipated net realizable value from related product
sales. Amounts determined not to be realizable are expensed in the period of
determination. The net book value of $883,000 at January 31, 1995 is included
in prepaid expenses and other assets.
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. Such investments are included in other assets. See Note 3 for
discussion of E-Motions, Inc.
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.
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.
Income tax -- The Company accounts for income taxes under statement of
Financial Accounting Standard No. 109 which uses an asset liability approach to
comprehensive intraperiod tax accounting. Deferred income taxes are provided
for temporary differences between financial statement and income tax reporting.
Accounting period -- For convenience, the financial statements are shown
as ending January 31, although the fiscal years ended on January 29, 1995,
January 28, 1994 and January 29, 1993, respectively. Fiscal 1995, 1994 and 1993
each included 52 weeks.
Net loss per common share is computed using the weighted average number
of common shares outstanding. Because there was a net loss in each year
presented, common stock equivalents were not included in the calculation of net
loss per share as their impact would be anti- dilutive.
F-7
27
3. PURCHASE OF E-MOTIONS, INC.
On July 29, 1993, the Company acquired all remaining outstanding shares
of E-Motions, Inc. (E-Motions). This acquisition was accounted for using the
purchase method of accounting. E-Motions was a development stage company in
the business of developing products for the multimedia market, and its
technology consisted primarily of in-process development of integrated circuit
designs and related software technology. Prior to this transaction, the
Company owned slightly less than 50% of the outstanding shares of E-Motions on
a fully diluted basis.
As part of this transaction, the Company issued 860,000 shares of common
stock and assumed options to acquire 217,529 shares of its common stock. In
addition, the Company was required to make a cash payment of $1.9 million based
on the average trading price of its common stock in July 1994. The maximum
amount of this contingent payment (approximately $4 million) was included in
the cost of the acquired company and in shareholders' equity. Shareholders'
equity was reduced by $1.9 million at the time of the actual payment.
The cost of the acquired company, which includes the consideration
related to this transaction and the Company's previous investment in E-Motions,
is as follows (in thousands):
Cost $ 8,400
Assets acquired (295)
Liabilities 32
--------
Excess of cost over net assets acquired $ 8,137
========
Based on the stage of E-Motion's development, the nature of its business
and the absence of other identifiable intangible assets, the cost in excess of
net assets acquired is acquired research and development in process and,
accordingly, has been charged to research and development expense in the period
acquired.
The following information for fiscal 1994, the year of the transaction,
and fiscal 1993 is being presented on a pro forma basis, as if the transaction
had taken place on August 21, 1992 (date of E-Motions' inception) (in
thousands, except per share data):
Year ended January 31,
1994 1993
--------- ---------
Pro forma revenue $ 34,989 $ 27,058
Pro forma net loss $ (21,772) $ (7,295)
Pro forma net loss per share $ (3.30) $ (1.31)
Shares used in computation 6,593 5,592
For purposes of this pro forma information, the $8.1 million of acquired
research and development has been excluded from the results of operations.
4. RESTRUCTURING
In July 1993, the Company made a decision to discontinue certain
manufacturing operations and product lines and to focus attention on its new
multimedia products. As a result of this decision, the Company recorded
restructuring charges of $13,654,000. As a result of the finalization of the
terms and circumstance related to the subleasing of the Company's excess
facilities, the Company recorded a reversal
F-8
28
of $517,000 in fiscal 1995. The remaining accrual from this restructuring is a
facilities accrual of approximately $1.9 million related to the excess of the
Company's lease commitment over the expected sublease income for the term of
the lease.
Restructuring charges (reversal) for the years ended January 31, 1995 and
1994 consist of the following:
(In thousands)
1995 1994
---- ----
Excess and obsolete inventories $ -- $ 8,222
Excess facilities (517) 4,100
Excess property and leasehold improvements -- 465
Severance accruals -- 300
Capitalized software and other assets -- 270
Other costs -- 297
------ --------
Total $ (517) $ 13,654
====== ========
5. INVENTORIES
Inventories at January 31 consist of:
(In thousands)
1995 1994 1993
---- ---- ----
Finished goods $ 3,787 $ 1,667 $ 1,765
Work in process 4,590 7,486 4,305
Raw materials 6,979 5,919 7,660
Less reserves (5,620) (4,470) (1,455)
-------- -------- --------
Inventory-net $ 9,736 $ 10,602 $ 12,275
======== ======== ========
Inventory reserves at January 31, 1995 and costs of sales for the year
ended January 31, 1995 include fourth quarter adjustments of $3.7 million
related to the Company's decision to withdraw support of certain imaging
products, difficulties in developing a new product design for application in
China that would have incorporated certain display systems, and changes in
computer design by computer manufacturers that were not anticipated and that
created excess supplies of certain inventories.
6. EQUIPMENT
Equipment at January 31 consists of:
(In thousands)
1995 1994 1993
---- ---- ----
Computers and equipment $ 3,767 $ 3,602 $ 3,500
Furniture and fixtures 1,607 1,745 1,585
Other 344 141 143
------- ------- -------
Total 5,718 5,492 5,228
Accumulated depreciation
and amortization (4,375) (4,292) (3,602)
------- ------- -------
Equipment-net $ 1,343 $ 1,200 $ 1,626
======= ======= =======
F-9
29
7. ACCRUED LIABILITIES
Accrued liabilities at January 31 consist of:
(In thousands)
1995 1994 1993
---- ---- ----
Accrued salary and benefits $ 712 $ 575 $ 809
Accrued income taxes 166 619 --
Other 870 1,119 737
------- ------- -------
Total $ 1,748 $ 2,313 $ 1,546
======= ======= =======
8. BANK LINES OF CREDIT
The Company has $941,000 outstanding at January 31, 1995 under a
$6,000,000 bank line of credit that expires in June 1996 and bears interest at
the bank's prime rate (8.5% at January 31, 1995). The Company's wholly owned
subsidiary, SDIS, has $769,000 outstanding at January 31, 1995 under a
$1,000,000 bank line of credit that expires in June 1995 and bears interest at
the bank prime rate (8.5% at January 31, 1995).
9. LEASES
The Company leases its primary facility under a noncancelable lease which
expires in August 1998. Total future minimum lease payments under the Company's
operating leases are $6,208,000 at January 31, 1995, due $1,589,000 in fiscal
1996, $1,614,000 in fiscal 1997, $1,644,000 in fiscal 1998, $1,279,000 in
fiscal 1999 and $82,000 in fiscal 2000. Approximately $1,875,000 of this
commitment has been included in accrued facilities as of January 31, 1995.
Rent expense was $1,475,797, $962,000 and $1,010,000 for fiscal 1995,
1994 and 1993, respectively.
10. COMMITMENTS
The Company pays royalties for the right to sell certain products under
various license agreements. During the years ended January 31, 1995, 1994 and
1993, the Company recorded royalty expense of $508,040, $181,405 and $275,000,
respectively.
The Company sponsors a 401(k) savings plan in which most employees are
eligible to participate. The Company is not obligated to make contributions to
the plan and no contributions have been made by the Company.
11. SHAREHOLDERS' EQUITY
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
F-10
30
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.
During fiscal 1991, the Board of Directors of the Company approved a
program to repurchase up to 1,000,000 shares of the Company's common stock in
the open market. In fiscal 1993, 22,600 shares were repurchased for $113,000.
No shares were repurchased in fiscal 1994 or fiscal 1995.
Stock Option Plans -- The Company's Stock Option Plans provide 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. Generally options granted under the
plan become exercisable over a five year period and expire not more than ten
years from the date of grant.
A summary of stock option activity follows:
Outstanding Options
--------------------------------------
Number of Shares Price per share
---------------- ---------------
Balances, January 31, 1992 707,734 $3.38--$8.50
Granted 481,000 4.25--6.00
Exercised (63,100) 3.38--6.13
Cancelled (418,934) 3.38--8.50
--------- ---------------
Balances, January 31, 1993 706,700 4.25--8.50
Granted 604,500 3.50--13.75
Exercised (92,938) 0.09--8.50
Cancelled (391,060) 3.50--8.50
Assumed in acquisition
of E-Motions (Note 3) 217,529 0.0875--1.75
--------- ---------------
Balances, January 31, 1994 1,044,731 0.0875--13.75
Granted 910,000 4.88--8.00
Exercised (110,451) 0.0875-6.50
Cancelled (200,939) 0.0875--13.75
--------- ---------------
Balances, January 31, 1995 1,643,341 $0.0875--$13.50
========= ===============
At January 31, 1995 options to purchase 470,514 shares of common stock
were exercisable and 1,003,133 shares were available for future grants under
the Plans.
Employee Stock Purchase Plan -- The Company's 1986 Employee Stock
Purchase Plan provides for the sale of up to 100,000 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 1995,
1994 and 1993, 11,432, 9,053 and 15,150 shares were purchased at an average
price of $5.35, $2.98 and $4.42 per share, respectively.
F-11
31
12. INCOME TAXES
The credit for income taxes at January 31 includes:
(In thousands)
1995 1994 1993
---- ---- ----
Currently receivable:
Federal $ -- $ (151) $ (1,655)
State -- -- --
----- ------ --------
Total currently receivable -- (151) (1,655)
----- ------ --------
Deferred:
Federal -- -- (496)
State -- -- --
----- ------ --------
Total deferred -- -- (496)
----- ------ --------
Total credit $ -- $ (151) $ (2,151)
===== ====== ========
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), effective at the beginning of fiscal
1994. SFAS 109 uses an asset and liability approach to comprehensive
interperiod tax accounting. The impact of implementation of SFAS 109 was not
significant.
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 as of February 1, 1994 and January 31, 1995 are as follows:
(In thousands)
January 31, 1995 February 1, 1994
---------------- ----------------
Deferred tax assets:
Net operating losses and tax credit carryforwards $ 9,967 $ 6,779
Reserves not currently deductible 4,022 4,297
Capitalized R&D expenditures 638 558
Other 175 172
--------- ---------
14,802 11,806
Deferred tax liabilities:
Capitalized software and title development (228) (49)
Valuation allowance (14,574) (11,750)
--------- ---------
Net deferred taxes $ -- $ --
========= =========
F-12
32
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. The
valuation allowance increased by approximately $2.6 million in fiscal 1995
primarily as a result of an increase in net operating losses available to the
Company.
Net operating losses and tax credit carryforwards as of January 31, 1995
are as follows:
(In thousands) Expiration Years
-------------- ----------------
Net operating losses, Federal $ 25,800 2006-2010
Net operating losses, State 12,300 1998-1999
Tax credits, Federal 400 2006-2010
Tax credits, State 400 2008-2010
The Company's effective tax rate differs from the federal statutory rate
as follows:
(In thousands)
1995 1994 1993
---- ---- ----
Computed at 35% for 1995 $ (3,070) $ (10,047) $ (3,167)
and 1994, and 34% for 1993
Losses and reserves not 3,166 6,952 --
currently deductible
Acquired research and -- 2,856 --
development
Nondeductible losses of subsidiary -- -- 948
and affiliated company
Other (96) 88 68
-------- --------- --------
Total $ -- $ (151) $ (2,151)
======== ========= ========
F-13
33
13. CUSTOMER AND GEOGRAPHIC INFORMATION
One domestic customer accounted for 18% and 16% of net sales in fiscal
1995 and 1994, respectively. One international customer accounted for
approximately 13% and one domestic customer accounted for approximately 22% of
net sales in fiscal 1993, respectively. During 1992, no single customer
accounted for more than 10% of net sales. The Company markets its products
internationally through foreign distributors and OEMs. The following table
presents a summary of domestic and export sales by geographic region.
(In thousands)
1995 1994 1993
---- ---- ----
Net sales:
Domestic $ 27,792 $ 23,582 $ 18,201
Export sales:
Europe 5,415 9,163 8,097
Asia 10,222 1,884 505
Canada 271 360 255
----------- ---------- ----------
Total $ 43,700 $ 34,989 $ 27,058
=========== ========== ==========
F-14
34
SCHEDULE II
SIGMA DESIGNS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged in
Beginning Costs and
Description of Period Expenses Deductions(1) End of Period
----------- ---------- ---------- ------------- -------------
Allowance for doubtful accounts, price
protection and sales returns:
Year Ended January 31,
1995 $ 885,000 $ 351,000 $ 135,000 $ 1,101,000
1994 579,000 389,000 83,000 885,000
1993 441,000 168,000 30,000 579,000
Inventory reserves:
Year Ended January 31,
1995 $ 4,470,000 $ 4,425,000 $ 3,275,000 $ 5,620,000
1994 1,455,000 9,022,000 6,007,000 4,470,000
1993 121,000 1,879,000 545,000 1,455,000
- ------------------------
(1) Amount written off, net of recoveries.
F-15
35
SIGMA DESIGNS, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 1994
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
3.1(1) Restated Articles of Incorporation, as amended . . . . .
3.2(2) By-Laws of Registrant, as amended . . . . . . . . . . . .
4.1(1) Article IV of the Articles of Incorporation of Registrant
(see Exhibit 3.1) . . . . . . . . . . . . . . . . . . . .
10.1(3) Distribution Agreement dated September 10, 1985 between
Registrant and Softsel Computer Products, Inc. and
Amendment to Distribution Agreement dated September 10,
1985. . . . . . . . . . . . . . . . . . . . . . . . . . .
10.2(4) Registrant's 1986 Employee Stock Purchase Plan, as
amended, and form of Subscription Agreement. . . . . . .
+10.3(2) Distributor Agreement dated May 24, 1988 between
Registrant and Micro D, Inc . . . . . . . . . . . . . . .
10.4(5) Lease dated October 31, 1990 between Registrant and Renco
Investment Company . . . . . . . . . . . . . . . . . . .
10.5(6) Contract Manufacturing Agreement dated January 7, 1994 by
and between the Registrant and Digital Equipment
Corporation . . . . . . . . . . . . . . . . . . . . . . .
10.6 Industrial Space Lease dated February 16, 1994 by and
between the Registrant and Renco Bayside Investors . . .
10.7 Sublease dated February 16, 1994 by and between the
Registrant and Media Vision Technology Inc. . . . . . . .
10.8(7) Registrant's 1994 Stock Plan and form of Stock Option
Agreement . . . . . . . . . . . . . . . . . . . . . . . .
10.9(7) Registrant's 1994 Director Option Plan and form of
Director Stock Option Agreement. . . . . . . . . . . . .
11.1 Statement Regarding Computation of Per Share Earnings . .
21.1 Subsidiaries of Registrant . . . . . . . . . . . . . . .
23.1 Independent Auditors' Consent . . . . . . . . . . . . . .
24.1 Power of Attorney (included on page 17) . . . . . . . . .
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.
E-1
36
(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 Annual
Report on Form 10-K for the fiscal year ended January 31, 1992.
(5) Incorporated by reference to exhibit filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1991.
(6) Incorporated by reference to exhibit filed with 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 Registrant's Registration
Statement on Form S-8 (No. 33-81914) filed July 25, 1994.
- ------------
+ Pursuant to Rule 406(b) under the Securities Act, confidential treatment
has been granted to portions of this exhibit, which portions have been
deleted and filed separately with the Securities and Exchange Commission.
E-2