Back to GetFilings.com
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
Commission File No. 0-15116
Sigma Designs, Inc.
(Exact name of Registrant as specified in its charter)
California 95-2848099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
46501 Landing Parkway, Fremont, California 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 770-0100
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
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 $38,147,312 as of April 9, 1997 based on the
closing price of the Common Stock as reported on the Nasdaq National Market for
that date.
There were 11,095,786 of the Registrant's Common Stock issued and outstanding on
April 9, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of Sigma Designs, Inc.'s definitive Proxy Statement for the
1997 Annual Meeting of Shareholders to be held on June 6, 1997 are incorporated
by reference in Part III of this Form 10-K to the extent stated herein.
PART I
ITEM 1. BUSINESS
Overview
The following business section contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements s 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.
Sigma Designs, Inc. ("Sigma" or the "Company") designs, manufactures (using
subcontractors), and markets 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 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 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 an effort to complement its current technologies, the Company entered into an
agreement and plan of reorganization (Agreement) with Active Design Corporation
in April 1996 under which the Company was the surviving entity in a merger
transaction accounted for as a pooling of interests. Active Design was a
development stage company with primary activity in the development of
semiconductor chips for use in PC graphics applications. Under the Agreement,
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 .22 shares (exchange ratio) of
the Company's stock. 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.
The REALmagic MPEG Standard
Since its first shipment in November 1993, REALmagic technology has received
widespread support from PC industry leaders, software developers, and OEM and
retail customers.
Partnership with PC Industry Leaders
Sigma has received endorsement for its REALmagic technology from
companies such as Hewlett-Packard, Hughes Network Systems, IBM, Microsoft,
Oracle Corporation, Novell, Silicon Graphics, Starlight Networks, and Sun
Microsystems. On the operating system side REALmagic is supported by Microsoft
Windows 95 and IBM O/S 2. Additionally, both Novell and Starlight Networks have
products that are compatible with REALmagic in a network environment.
1
Widespread Support from Software Developers
Support for Sigma's REALmagic MPEG standard has grown rapidly in the
software development community. Three years ago, the Company listed fifty
authorized REALmagic software developers; by the end of fiscal 1996, Sigma's
roster of developers rose to more than 1,200, including Activision, Tsunami
Media, Mindscape, Time Warner, and Interplay. This widespread developer support
has led to the introduction of more than 500 off-the-shelf business applications
in the REALmagic format.
The REALmagic DOS MPEG Applications Programming Interface (API) has become the
industry standard for MPEG software development, further evidence of widespread
support from the software development community. With its robust functionality,
the REALmagic API is currently the preferred technology available for creating
fully interactive MPEG software titles.
Support from OEMs
In the U.S., Zenith Data Systems, Zenon Technology, Inc., and PREMIO
Express, the direct marketing arm of Compu Trend Systems, Inc., have purchased
REALmagic Maxima boards for installation inside their multimedia PCs.
Additionally, many VARs have taken shipments of REALmagic boards for systems
targeted at vertical kiosk, business training, and presentation applications. In
the Far East where the popularity of karaoke and videoCD has made REALmagic a
well received product, the Company's OEM customers include NEC in Japan and
Hyundai in Korea.
Acceptance by the Retail Channel
In addition to international distributors, national U.S. distributors
such as Ingram Micro, Inc. and Tech Data are carrying REALmagic
products--further evidence of the channel's acceptance of and interest in MPEG
technology.
REALmagic Business Strategies
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 the Company
intends to promote widespread acceptance of REALmagic technology. The key parts
of this strategy include:
Encourage Continued Development of Software Utilizing 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.
Win More OEM Partnerships and Further Penetrate the 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 REALmagic boards or chipsets inside their multimedia PCs. On the
retail side, the Company's systems integration sales team will
2
continue to work with its network of national distributors and special VARs to
distribute its high-end REALmagic playback card. In Europe and Asia Pacific, the
Company will continue to expand its relationship with distributors as well as
OEMs and VARs. In addition, the Company will seek to sell to add-on card
manufacturers who will, in turn, market to owners of 486 and Pentium PCs.
Introduce New Generations of REALmagic, Offer REALmagic products at
Competitive Prices, and Continually Reduce Product Costs
A significant aspect of the Company's product strategy is to include
the sale of REALmagic chipsets in its product line and continue developing newer
versions and generations of REALmagic products, including chipsets for both
desktop and notebook PCs. The general direction is to continue to offer
consumers with better-featured and lower-priced products over time. The
intention is to stay at least one step ahead of competition.
REALmagic Products
The Company offers a complete family of REALmagic products including:
o REALmagic Maxima--An MPEG playback card designed to eliminate compatibility
issues with graphics cards by using Analog Overlay Technology. The Maxima
accelerates MPEG video to a guaranteed 30 frames per second playback rate
with high-quality CD sound at resolutions of up to 1280 x 1024, which is in
compliance with the MPC3 industry standard for MPEG video playback. The
REALmagic drivers guarantee compatibility with all interactive MPEG titles
available today and all future titles that are OM-1 compatible.
o REALmagic Pro Chipset--In October 1995, the Company announced the
availability for sale of the REALmagic Pro chipset. This chipset has the
following distinctive features:
o Very high quality MPEG playback through 16 million color MPEG video;
horizontal and vertical bilinear interpolation; digital brightness,
contrast, and saturation adjustment
o The use of Sigma's REAL Overlay chip, enabling mixing MPEG video and PC
graphics at resolutions up to 1600 x 1200 with an 85 Hz non-interlaced
refresh rate
o 100% Windows 95 and MPC3 compliance
o 100% OM-1 and REALmagic compatibility
o Direct interface for NTSC/PAL decoder to support TV tuner input
o REALmagic Explorer--In November 1995, the Company announced the
introduction of the REALmagic Explorer chipset. This chipset puts MPEG-1
digital video playback in ZV port PC cards for the new generation of
notebook computers. The main features of this chipset include:
o MPEG-1 video playback with 16 million colors
o MPEG-1 audio layers I and II n 100% REALmagic and OM-1 standard
compatibility n MPC3 standard compliance
o Windows 95 Plug and Play
o REALmagic64/GX video and graphics accelerator chip--In July 1996, the
Company announced the introduction of this chip for the commercial and home
desktop PC market. The REALmagic 64/GX includes an optimized 64-bit
graphics accelerator engine, unique motion-video acceleration hardware, and
a highly-tuned memory interface. This chip has the following distinctive
features:
3
o The 64-bit architecture supporting REALmagic 64/GX yields 20% faster
GUI acceleration than competitive products.
o The video engine includes a YUV to RGB color-space converter to
accelerate decompression and a hardware scaler to provide smooth
horizontal and vertical scaling.
o DRAM support of 1 MB to 4 MB enables the accelerator to be integrated
with machines at a variety of price/performance levels.
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. The
company's U.S. distributors include Ingram Micro, Inc. and Tech Data, and its
OEMs include Zenith Data Systems, Zenon Technology, and PREMIO Express. The
Company's international distributors are strategically located in many countries
around the world. Although the Company was profitable throughout all four
quarters of fiscal 1997, there can be no assurance that the Company will achieve
sufficient sales so as to maintain profitability in fiscal 1998.
The Company generally acquires and maintains products for distribution through
retail channels based on forecasts rather than firm purchase orders.
Additionally, the Company generally acquires for sale to its OEM customers only
after receiving purchase orders from such customers, which purchase orders are
typically cancellable without substantial penalty from such OEM customers. The
Company currently places noncancellable 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 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 the
Company's financial condition.
Research and Development
As of January 31, 1997, the Company had a staff of 43 research and development
personnel, which conducts all the Company's product development. The Company is
focusing its 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, the Company must continue to
make technological advancements in the areas of MPEG video and audio compression
and decompression. These advancements include compatibility with emerging
standards and multiple platforms, improvements to the REALmagic architecture,
and enhancements to the REALmagic API. There can be no assurance that the
Company will be able to make any such advancements in the REALmagic MPEG
technology of, if they are made, that the Company will be able to market such
advancements to maintain profitability and its technological leadership.
During fiscal 1997, fiscal 1996, and fiscal 1995, the Company's research and
development expenses were $ 4,688,000, $4,499,000, and $4,349,000, respectively.
The Company plans 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. Although the
Company does 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. The Company believes that many computer product manufacturers are
developing MPEG products that
4
will compete directly with REALmagic products in the near future.
The Company believes that the principal competitive factors in the market for
MPEG multimedia hardware products include time for 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
its REALmagic products. Moreover, the Company believes that the acceptance of
the REALmagic API as an industry standard for software development 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 architecture of the
REALmagic Producer (the Company's video encoding product), as well as certain
software and hardware features in current and future versions of REALmagic. The
Company currently has eight pending patent applications for its REALmagic
technology. Four patents have been issued to the Company. There can be no
assurance that more patents will be issued or that such patents, even 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, along with capital and staffing requirements, the
Company currently uses third-party contract manufacturers to fulfill its
manufacturing needs. All of the chips used by the Company to make its decoding
products are manufactured by outside suppliers and foundries. Each of these
suppliers is a sole source of supply to the Company of the respective chips
produced by such supplier.
The Company's 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 have a material adverse impact on the sales of the Company's
products and, thus, on the Company's operating results.
Backlog
Since 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, 1997, the Company had 86 full-time employees, including 43 in
research and development, 22 in marketing, sales, and support, 7 in operations,
and 14 in finance and administration.
5
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.
Certain Factors Affecting Business, Operating Results, and Financial Condition
In the interest of providing the Company's shareholders and potential investors
with certain Company information, including management's assessment of the
Company's future potential, certain statements set forth herein relate to
management's future plans and objectives or to the Company's future economic
performance. Such statements are "forward-looking statements" within the meaning
of Section 27 A(I) of the Securities Act of 1933, as amended, and in Section
21E(I) of the Securities Act of 1934, as amended. Although any forward-looking
statements contained herein or otherwise expressed by or on behalf of the
Company are, to the knowledge and in the judgment of the officers and directors
of the Company, expected to prove true and to come to pass, the Company is not
able to predict such events with absolute certainty. Accordingly, shareholders
and potential investors are hereby cautioned that certain events or
circumstances could cause actual results to differ materially from those
projected or predicted. In addition, forward-looking statements are based on the
Company's knowledge and judgment as of the date hereof, and the Company does not
intend to update any forward-looking statements to reflect events occurring or
circumstances existing hereafter. In particular, the Company believes the
following facts could affect forward-looking statements made herein or in future
written or oral releases and by hindsight, prove such statements to be overly
optimistic and unachievable.
History of Operating Losses
The Company incurred significant losses in fiscal 1993, 1994, 1995, and
1996 and had substantial negative cash flow in fiscal 1992, 1993, 1994, 1995,
and 1996. Since the introduction of the Company's REALmagic MPEG product line in
November 1993, the Company has invested heavily in marketing and technological
innovation for its REALmagic products. As a result, the Company experienced
significant losses through fiscal 1996. Fiscal 1994, 1995, and 1996 also
included significant losses associated with products other than those related to
the REALmagic technology. Since inception, the Company's total accumulated
deficit is $33,114,000. There can be no assurance that the Company will continue
to sell its new REALmagic products in substantial quantities or generate
significant revenues from such sales. Although the Company was profitable in
fiscal 1997, there can be no assurance that the Company will continue to achieve
profitable operations in any future fiscal quarter or fiscal year or that
profitable operations, if achieved, will be sustainable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Marketing Risks
The Company's ability to increase its sales, achieve profitability, and
maintain REALmagic as a PC industry multimedia standard depends substantially on
the Company's ability to achieve a sustained high level of sales to new OEM
customers. To date, the Company has successfully shipped its REALmagic products
to certain OEM customers, including NEC and Toshiba in Japan, Hyundai in Korea,
and Zenon Technology, PREMIO Express, and Zenith Data Systems in the U.S. The
Company has not executed volume purchase agreements with any of the Company's
customers, and these customers are not under any obligation to purchase any
minimum quantity of the Company's products. Although the Company is continually
engaged in marketing efforts directed to sales of REALmagic products to
additional U.S. and international OEMs and has achieved a number of design wins,
the Company has not achieved bundling agreements with OEM customers to ensure
success of the REALmagic product line. Moreover, even if the Company continues
to achieve new design wins, there can be no assurance that PC manufacturers will
purchase the Company's products in substantial volumes. Sales to any particular
OEM customer are
6
subject to significant variability from quarter to quarter and to severe price
pressures by competitors. Based on its experience in the personal computer
industry, the Company expects that its actual sales to OEM customers will
experience significant fluctuations, and estimates of future sales with respect
to any particular customer or groups of customers are inherently uncertain.
The Company's ability to achieve sustained profitability also depends on a
substantial increase in sales of REALmagic products through domestic and
international distributors for resale through retail channels. In fiscal 1997,
Ingram Micro, Inc. was the only customer to which sales comprised over 10% of
consolidated revenue. Sales to such distributors are typically subject to
contractual rights of inventory rotation or price protection. Regardless of
particular contractual rights, however, the failure of Ingram Micro, Inc. or
other distributors to achieve sustained sell-through of REALmagic products could
result in product returns or collection problems, contributing to fluctuations
in the Company's results of operations. There can be no assurance that the
Company will be successful in maintaining a significant market for its REALmagic
products.
Dependence on Development of Software Titles by Third Parties
The Company depends on third-party content developers to create,
produce, and market software titles that will operate in the REALmagic format.
No software developer is contractually obligated to produce a
REALmagic-compatible title. There can be no assurance that third-party software
developers will continue to produce a substantial number of software titles, or
that they will produce enough software titles to develop and sustain a
significant market in REALmagic products. Moreover, there can be no assurance
that any individual software titles will be of high quality or that they will
achieve market acceptance. There can also be no assurance that current popular
software titles will be introduced in the REALmagic format. Because the Company
has no control over the content of the titles produced by software developers,
the software titles developed may represent only a limited number of software
categories and are likely to be of varying quality.
Currently, more than 500 interactive MPEG off-the-shelf business applications
are available in the MPEG format. The Company has licensed the REALmagic API to
over 1,200 software developers for development of REALmagic-compatible programs.
However, the number of software titles to be developed by such software
companies cannot be predicted. There can be no assurance that any software
develop who develops a REALmagic-compatible title will actively promote the
product or develop follow-on titles. Moreover, there can be no assurance that
any published title will have the quality or price characteristics required to
be commercially successful or that titles compatible with the REALmagic format
will be allotted retail shelf space. Future sales of REALmagic products will
likely depend on retailers' carrying compatible software titles on the shelf.
To further establish the Company's technology as a standard, the Company
announced in October 1995 its strategic direction of selling chipsets to add-on
card and computer manufacturers. The REALmagic Pro chipset became available in
January 1996. This chipset will enable other companies to manufacture 100% OM-1
and REALmagic-compatible MPEG playback cards capable of playing the growing
number of MPEG software titles on the market. In addition, the Company announced
the REALmagic Explorer chipset in November 1995, which will enable OEM customers
to build type II ZVport-compatible PC cards for MPEG-1 video and audio playback,
bringing MPEG technology to notebook computers for the first time. In July 1996,
the Company entered the graphics market with announcement of its 2D VGA chip. In
December 1996, the Company announced a 2D/3D graphics chip. Any production delay
or failure to bring any of the chipsets to market could adversely affect the
Company's market position by limiting chipset acceptance by computer
manufacturers.
7
Technological Change
The market for multimedia PC products is characterized by rapidly
changing technology and user preferences, evolving formats for compression of
video and audio data, and frequent new product introductions. Even though
REALmagic products and related software titles have gained initial market
acceptance, the Company's success will depend, among other things, on the
Company's ability to achieve and maintain technological leadership and to remain
competitive in terms of price and product performance.
To achieve and maintain technological leadership, the Company must continue to
make technological advancements in the area of MPEG video and audio decoding.
These advancements include compatibility with emerging standards and multiple
platforms, improvements to the REALmagic architecture, enhancements to the
REALmagic API, and the achievement of these enhancements. There can be no
assurance that the Company will be able to make any such advancements to its
REALmagic technology or that, if such advances are made, the Company will be
able to achieve and maintain technological leadership. Any material failure of
the Company or OEMs and software developers to develop or incorporate any
required improvement could adversely affect the continued acceptance of the
Company's technology and the introduction and sale of future products based on
the Company's technology. There can be no assurance that products or
technologies developed by others will not render obsolete the Company's
technology and the products based on the Company's technology.
To remain competitive, the Company must anticipate the needs of the market and
successfully develop and introduce innovative new products in a timely fashion.
No assurance can be given that the Company will be able to successfully complete
the design of its 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, contributing to fluctuations in operating results from quarter to
quarter. The introduction of new products also requires the Company to carefully
manage its inventory to avoid inventory obsolescence. In addition, new products
typically have higher initial component costs than more mature products,
possibly resulting in downward pressures on the Company's gross margins.
Competition
The market for multimedia PC products is highly competitive. While the
Company does not believe that any product sold by a third party is directly
competitive with REALmagic products at this time in terms of price and
performance, the possibility that other companies with more experience and
financial resources may develop a competitive product may inhibit continued
acceptance and future growth of REALmagic technology. REALmagic has earned its
position as a leading product for the PC largely because of its affordable
consumer price point. 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
include S3, Cirrus Logic, ATI, Windbond, and SGS Thompson. Also, several OEMs
and microprocessor companies possess proprietary video compression technology
that may compete with MPEG-based products. These include IBM, Intel,
Mediamatics, and ESS Technology. Most of these companies have substantial
experience and expertise in audio, video, and multimedia technology and in
producing and selling consumer products through retail distribution, as well as
substantially greater engineering, marketing, and financial resources than the
Company. Competitors of the Company may form cooperative relationships, which
could present formidable competition to the Company. There can be no assurance
that 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.
8
Reliance on a Single Line of Products
The Company's business strategy has been to focus on REALmagic products
by investing heavily in PC-based MPEG technology. In the fiscal year ended
January 31, 1997, sales of multimedia products accounted for virtually all of
net sales. A decline in market demand for multimedia products would adversely
affect the Company's operating results. The Company's present reliance on
REALmagic products is exacerbated by the fact that multimedia product sales are
concentrated in the personal computer industry. A decline in demand for PCs
could have a material adverse effect on the Company's operating results and
financial condition.
Variability of Operating Results
The Company's operating results have fluctuated in the past and may
continue to fluctuate in the future due to a number of factors, including but
not limited to new product introductions by the Company and its competitors;
market acceptance of the Company's products by OEMs, software developers, and
end users; the success of the Company's promotional programs; gains or losses of
significant customers; reductions in selling prices; inventory obsolescence; an
interrupted or inadequate supply of semiconductor chips; the Company's ability
to protect its intellectual property; and loss of key personnel. In addition,
sales to OEM customers are subject to significant variability from quarter to
quarter, depending on OEMs' timing and release of products incorporating
REALmagic technology, experience with sell-through of such products, and
inventory levels.
The market for consumer electronics products is characterized by significant
seasonal swings in demand, which typically peak in the fourth calendar quarter
of each year. Since the Company expects to derive a substantial portion of its
revenues from the sales of REALmagic products in the future and the demand for
such products will depend in part on the emergence of digital video technology,
the Company's revenues may vary with the availability of and demand for DVD
titles. Such 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 operating results. Based on the Company's experience, the
Company believes that a substantial portion of its 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 the Company's operating
results to be difficult to predict. The Company currently places noncancellable
orders to purchase semiconductor products from its foundries on a long 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, inventory levels could be disproportionately high, requiring
significant working capital, negatively affecting operating results.
Manufacturing Risks
The REALmagic multimedia card is composed of four VLSI chips, each of
which is presently manufactured by an outside supplier or foundry. These
suppliers are Toshiba, IBM, Analog Devices, and Orbit Semiconductor, each of
which is a sole source supplier to the Company of their respective chip. The
Company does not have long-term contracts with such suppliers and conducts
business with its suppliers on a written purchase order basis. The Company's
reliance on independent suppliers involves several risks, including the absence
of adequate capacity, the unavailability of, or interruptions in access to,
certain process technologies, and reduced control over delivery schedules,
manufacturing yields, and costs. Although delays or interruptions have not
occurred to date, an delay or interruption in the supply of any of the
components required for the production of the REALmagic multimedia card
currently obtained from a single source could have a material adverse impact on
sales of REALmagic products by the Company and, thus, on the Company's business.
9
The Company must provide its suppliers with sufficient lead time to meet
forecasted manufacturing objectives. Any failure to properly forecast such
quantities could materially adversely affect the Company's ability to produce
REALmagic products in sufficient quantities. No assurance can be given that the
Company's forecasts regarding new product demand will be accurate, particularly
since the Company sells REALmagic products on a purchase order basis.
Manufacturing the REALmagic chipsets is a complex process, and the Company may
experience short-term difficulties in obtaining timely deliveries, which could
affect the Company's ability to meet customer demand for its products. Any such
delay in delivering products in the future could materially and adversely affect
the Company's operating results. In addition, should any of the Company's major
suppliers be unable or unwilling to continue to manufacture the Company's key
components in required volumes, the Company would have to identify and qualify
acceptable additional suppliers. This qualification process could take up to
three months or longer. No assurances can be given that any additional sources
of supply could be in a position to satisfy the Company's requirements on a
timely basis.
In the past, the Company has experienced production delays and other
difficulties, and the Company could experience similar problems in the future.
In addition, there can be no assurance that a product defect will not escape
identification at the factory, possibly resulting in unanticipated costs,
cancellations, or deferrals of purchase orders or costly recall of products from
customer sites.
Dependence on Key Personnel
The Company's future success depends in large part on the continue
service of its key technical, marketing, sales, and management personnel. Given
the complexity of REALmagic technology, the Company is dependent on its ability
to retain and motivate highly skilled engineers involved in the ongoing hardware
and software development of REALmagic products who will be required to refine
the existing hardware system and API and to introduce enhancements in future
applications. The multimedia PC industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. There can be
no assurance that the Company's current employees will continue to work for the
Company or that the Company will be able to obtain the services of additional
personnel necessary for the Company's growth. The Company does not have "key
person" life insurance policies on any of its employees.
Limited Intellectual Property Protection
The Company's ability to compete may be affected by its ability to
protect its proprietary information. The Company currently holds four patents
covering the technology underlying the REALmagic products, and the Company has
filed certain patent applications and is in the process of preparing others.
There can be no assurance that any additional patents for which the Company has
applied will be issued or that any issued patents will provide meaningful
protection of its product innovations. The Company, like other emerging
multimedia companies, relies primarily on trade secrets and technological
know-how in the conduct of its business. In addition, the Company is relying in
part on copyright law to protect its proprietary rights with respect to
REALmagic technology.
The electronics industry is characterized by frequent litigation regarding
patent and intellectual property rights. Any such litigation could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not the outcome of such
litigation is favorable to the Company. Moreover, in the event of an adverse
result in any such litigation, the Company 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. There can be no
assurance that the Company would be successful in such development or that any
such licenses would be available on acceptable terms, if at all. In addition,
patent disputes in the electronics industry have often been settled through
cross-licensing arrangements. Because the Company does not yet have a large
portfolio of issued patents, the Company may not be able to settle an alleged
patent infringement claim through a cross-licensing arrangement.
10
Change in Business Plan
The Company altered its business plan with the acquisition of Active
Design and the elimination of all product lines other than multimedia REALmagic
products. As a result of the change in business strategy, the Company
experienced significant alteration in the its number and organization of
employees. This change will continue to place a substantial strain on the
Company's management, operational, financial, and accounting resources. The
Company must be evaluated in light of the costs, delays, and other difficulties
frequently encountered in a rapidly changing business enterprise.
The integration of Active Design into the Company's business is requiring the
Company to compete in a new market segment that is highly competitive. If larger
companies that possess significantly greater development resources and budgets
than the Company compete in this marker segment, the ability of the Company to
achieve market acceptance for its products could be materially and adversely
affected. Additionally, there can be no assurance that the products expected to
be introduced in this market segment will be successfully developed on time, or
free from significant errors or programming errors, or that the Company will
obtain significant purchase orders for these products. If the Company does
achieve a material market share, there can be no assurance that the Company will
be able to sustain or increase such market share of that the Company will be
able to maintain acceptable gross margins for the products. Failure to achieve
significant commercial revenues or profitability could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
International Operations
During the fiscal years ended January 31, 1997, 1996. and 1995, sales
to international customers accounted for approximately 72%, 63%, and 36% of the
Company's net sales, respectively. The Company anticipates that sales to
international customers, including sales of REALmagic products, will continue to
account for a substantial percentage of net sales. In addition, some of the
foundries that manufacture the Company's 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, the Company is 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 the Company's products in international markets or
make it difficult for the Company to obtain price reductions from its foundries.
The Company does not currently engage in any hedging activities to mitigate
exchange rate risks. To the extent that the Company increases its transactions
in foreign currencies, the Company's results of operations could be adversely
affected by exchange rate fluctuations.
Volatility of Stock Price
The market of the Company's Common Stock has been subject to
significant volatility, which is expected to continue. Factors such as
announcements of the introduction of new products by the Company or its
competitors and market conditions in the technology, entertainment, and emerging
growth company sectors may have a significant impact on the market price of the
Company's Common Stock. Further, the stock market has experienced volatility
that has particularly affected the market prices of equity securities of many
high technology and development stage companies such as those in the electronics
industry. Such volatility has often been unrelated or disproportionate to the
operating performance of such companies. These fluctuations, as well as general
economic and market conditions, may adversely affect the price of the Common
Stock.
ITEM 2. FACILITIES
The Company currently leases a 50,000 square feet facility in Fremont,
California that is used as the Company's headquarters. The lease will expire in
March 1999. The Company believes that it has adequate facilities to accommodate
the Company's operations in the near term.
11
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings that 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
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company and their ages as of April
1, 1997 are as follows:
Name Age Position
----- ---- ---------
Thinh Q. Tran 43 Chairman of the Board, President, and
Chief Executive Officer
Silvio Perich 48 Senior Vice President, Worldwide Sales
Jacques Martinella 41 Vice President, Engineering
Dan Chen 47 Senior Vice President, Technology
Prem Talreja 43 Vice President, Marketing
Kit Tsui 47 Director of Finance, Acting Chief Financial
Officer, and Secretary
Julien Nguyen 39 Director
William J. Almon(1)(2) 63 Director
William Wang(1)(2) 33 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 1979 until September
1985, Mr. Perich served in several sales management roles at Siliconix Inc., a
specialty semiconductor manufacturer. In addition, Mr. Perich was the founder of
Mondix Corporation, an international sales management consultant firm, where he
served as President from December 1979 to October 1983.
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 1092 to June
1990.
Dr. Chen joined the Company in June1996 as Senior Vice President, Technology.
From May 1995 to May 1996, Dr. Chen was President of Active Design Corp., a
private PC graphics company. From August 1994 to My 1995, Dr. Chen was Vice
President of ASIC technology at Advance Logic, a custom chip design company.
From May 1991 to August 1994, Dr. Chen was Technical Director in charge of the
Windows
12
graphics accelerator product line at Trident Microsystems, Inc., a graphics chip
design company. From August 1985 to April 1991, Dr. Chen was a Technical
Director at GM Hughes Electronics, a defense electronics company. From 1978 to
1985, Dr. Chen held various senior engineering positions at Mattel Electronics
and Xerox Corporation.
Mr. Talreja joined the Company in March 1996 as Vice President, Marketing. From
June 1994 to February 1996, Mr. Talreja was Director, Marketing of OPTi, Inc.,
an ASIC design company. From April 1991 to May 1994, Mr. Talreja was Marketing
Manager of Cirrus Logic Inc., a diversified semiconductor company. From June
1988 to March 1991, Mr. Talreja was Vice President, Marketing of Able
Communications, a private telecommunications company. From January 1984 to May
1988, Mr. Talreja was Marketing Manager of Siemens Semiconductor, a
semiconductor company. From January 1979 to April 1988, Mr. Talreja was Product
Marketing Manager of Inmos Corporation, an ASIC design company.
Ms. Tsui joined the Company in November 1982 as its Accounting Manager. Ms. Tsui
was promoted to Director of Finance in February 1990 and became Acting Chief
Financial Officer and Secretary in December 1996.
Mr. Nguyen has served as a Director since October 1993. Since November 1996, Mr.
Nguyen has served as Chairman and Chief Executive Officer of Novita
Communications, Inc., a private Java software company. From February 1995 to
October 1996, he served as Co-Chairman and Chief Technical Officer of the
Company. From August 1993 until January 1995, he served as the Vice President,
Engineering and Chief Technical Officer of the Company. From May 1992 until
October 1993, Mr. Nguyen was President and Chief Executive Officer of EMI. From
June 1991 to May 1992, Mr. Nguyen served as the Chairman of Photon Machines.
From 1986 to 1991, Mr. Nguyen worked at Radius, Inc. as Director of Product
Development.
Mr. Almon has served as a 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. 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 Diva Technology 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.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER 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 table below sets forth the high and low closing prices in the Nasdaq
National Market for the quarters indicated.
Fiscal 1997 Fiscal 1996
----------- ------------
High Low High Low
---- --- ---- ----
First quarter ended April 30 11 5/8 8 1/16 7 4 1/2
Second quarter ended July 31 13 1/2 7 1/4 6 7/8 4 1/4
Third quarter ended October 31 9 7/8 7 1/4 6 5/8 4 3/8
Fourth quarter ended January 31 11 5/8 7 3/8 8 7/8 4 3/4
As of March 31, 1997, the Company had 265 shareholders of record. The Company
has not paid 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
The following table summarizes certain selected financial data derived from the
audited financial statements for the years ended January 31, 1993, 1994, 1995,
1996, and 1997.
Selected Financial Five-Year Data
Year ended January
(In thousands, except 1997 1996 1995 1994 1993
per share data -------------------------------------------------------
and number of employees)
Net revenues $ 41,214 $ 26,374 $ 43,700 $ 34,989 $ 27,058
Net income (loss) 1,529 (14,708) (8,773) (29,546) (7,166)
Net income (loss) per share 0.14 (1.88) (1.20) (5.15) (1.37)
Working capital 20,164 11,461 17,446 15,117 33,696
Total assets 37,915 24,843 33,387 26,639 44,267
Shareholders' equity 21,017 12,581 18,721 16,499 37,788
Number of employees 86 60 138 151 195
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
During the fiscal year ended January 31, 1997, the Company acquired Active
Design Corporation, a development stage company with primary activity in the
development of semiconductor chips for use in PC graphics applications. This
acquisition complemented the Company's plan to focus on multimedia products. For
the fiscal year ended January 31, 1997, the Company's net sales reached $41.2
million, up 56 percent from $26.4 million reported in fiscal 1996. This increase
in sales was primarily attributable to increased sales of MPEG boards and
chipsets to OEMs, in accordance with the Company's plans to focus on chipsets
and place more emphasis on OEM sales for the next generation of its MPEG-based
REALmagic product line. Net income for the fiscal year ended January 31, 1997
was $1.5 million as compared to a net loss of $14.7 million from the prior
fiscal year.
SALES
The following table sets forth the Company's net sales in each of its product
groups for the last three fiscal years:
(In thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995
- ---------------------------------------------------------------------
Multimedia products:
MPEG Boards $ 16,295 $ 24,661 $ 30,345
Chipsets 23,111 -- --
Accessories 1,026 -- --
Display systems -- 1,554 7,887
CPU boards -- 52 2,050
Other 782 107 3,418
---------------------------------------------
TOTAL NET SALES $ 41,214 $ 26,374 $ 43,700
---------------------------------------------
The multimedia product group includes chipsets for high performance 2D and 3D
graphics acceleration for PC manufacturers and add-on card makers, as well as
complete MPEG playback solutions for both desktop and notebook computers. The
"other" sales category consists primarily of sales of surplus and obsolete
inventories, sales of components to service centers, and contract revenue. The
Company completely eliminated its non-multimedia businesses in fiscal 1997,
including display systems and CPU boards.
The Company's net sales increased 56 % in fiscal 1997, as compared to a 40%
decrease in fiscal 1996. The increase in sales in fiscal 1997 was primarily
attributable to the Company's efforts to increase OEM sales. The reduction of
sales in 1996 was primarily attributable to the elimination of non-multimedia
product lines and the Company's transition to the next generation of MPEG
products.
The following table sets forth the Company's sales by domestic distribution
channels and international sales for each of the last three fiscal years:
15
(In thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995
- ------------------------------------------------------------------------------
Domestic Sales
Retail $ 9,139 $ 7,736 $ 17,722
OEMs 2,497 1,906 10,070
---------------------------------------------
Total Domestic Sales 11,636 9,642 27,792
---------------------------------------------
International Sales
Asia Pacific 26,708 13,274 10,222
Europe 2,400 3,243 5,415
Canada 470 215 271
---------------------------------------------
Total International Sales 29,578 16,732 15,908
---------------------------------------------
---------------------------------------------
TOTAL NET SALES $ 41,214 $ 26,374 $ 43,700
---------------------------------------------
The percentages of the Company's net sales attributable to domestic retail sales
were 22% in fiscal 1997, 29% in fiscal 1996, and 41% in fiscal 1995. The
percentages of the Company's net sales attributable to domestic OEM sales were
6% in fiscal 1997, 7% in fiscal 1996, and 23% in fiscal 1995. Although domestic
OEM sales increased in absolute dollars in fiscal 1997, the increase was
negligible in terms of the Company's overall revenue increase, which caused the
percentage of domestic OEM sales to decrease slightly in fiscal 1997. The
percentages of the Company's net sales attributable to international sales were
72% in fiscal 1997, 63% in fiscal 1996, and 36% in fiscal 1995. In fiscal 1997,
the Company's international sales concentrated on three Asian countries--Taiwan,
Hong Kong, and Japan. Taiwan accounted for 42% of the Company's net sales in
fiscal 1997, Hong Kong accounted for 9%, and Japan accounted for 7%.
In fiscal 1997, domestic sales increased 21% over fiscal 1996, and international
sales increased almost 77%, with a significant portion of the increase coming
from sales to overseas OEMs. The increase in international sales was due to the
popularity of full-motion video in international markets, resulting in a higher
product demand.
GROSS MARGIN
The Company's gross margin as a percentage of net sales was approximately 36%,
3%, and 15% in fiscal 1997, 1996, and 1995, respectively. The increase in gross
margin in fiscal 1997 was largely attributable to the higher gross margin in
multimedia chipset products. In fiscal 1997, the gross margin of MPEG boards and
chipsets was recorded at 30% and 47%, respectively. The comparatively low gross
margin in fiscal 1996 and 1995 was primarily the result of inventory reserves
and write-offs in connection with the Company's strategic move away from
non-multimedia products and the transition to a new generation of MPEG-based
products. Excluding the impact of such reserves and write-offs, the Company's
annual gross margin was 36%, 26%, and 23% in fiscal 1997, 1996, and 1995,
respectively. Although the Company attempts to minimize the impact of such
product transitions, the market for the Company's products is volatile and
subject to the impact of changes in technology and other competitive factors
(see "Factors Affecting Future Operating Results") and, as a result, there is no
assurance that the Company will not have similar reserves and write-offs in the
future.
16
OPERATING EXPENSES
Sales and marketing expenses decreased $2.4 million, or 30%, in fiscal 1997 over
fiscal 1996. The reduction was primarily due to (i) the elimination of SDIS, the
Company's monitor subsidiary in fiscal 1997; (ii) a change in sales strategy,
emphasizing less retail distribution and more chipset and OEM sales, resulting
in a reduction in media advertising and trade show expenses; and (iii) a
reduction in software development to promote the use of customized MPEG-based
products. Sales and marketing expenses decreased $1.1 million, or 12% in fiscal
1996 over fiscal 1995, reflecting a more focused approach to marketing
concentrated on chipset and OEM sales.
Research and development expenses increased $189,000, or 4%, in fiscal 1997 over
fiscal 1996. The increase was largely due to research and development expenses
incurred in connection with the acquisition of Active Design Corporation and the
development of graphics chips. Research and development expenses increased
$150,000, or 3%, in fiscal 1996 over fiscal 1995. This increase was attributable
to a combination of the elimination of display system research and development
efforts associated with the display systems product line and the absorption of
R&D expenses in connection with the acquisition of Active Design Corporation.
The Company's general and administration expenses in fiscal 1997 decreased
$1,221,000, or 29%, over fiscal 1996. The decrease was primarily due to the
elimination of SDIS, the Company's display systems subsidiary, and general cost
reduction efforts by the Company. The Company completed its acquisition of
Active Design Corporation in fiscal 1997, which resulted in a $230,000
non-recurring merger expense charged to general and administration expenses. The
same expenses increased $687,000, or 20%, in fiscal 1996 over fiscal 1995. The
increase was largely attributable to $1,500,000 of accounts receivable reserves
recorded in fiscal 1996 in connection with the write-down of certain assets of
SDIS to net realized value.
EARNINGS PER SHARE
The Company reported net income per share $0.14 in fiscal 1997, as compared to a
loss per share of $1.88 in fiscal 1996. The turnaround was due to a combination
of higher sales, improved gross margin, and reduction in operating expenses as
the Company continued to place its focus on chipset and OEM sales. The loss of
$1.88 per share in fiscal 1996 was primarily attributable to a low level of
sales inadequate to cover operating expenses and reserves recorded in connection
with the elimination of SDIS. In fiscal 1995, the Company reported a loss per
share of $1.20 due primarily to lower than expected sales, reserves recorded by
the SDIS subsidiary, increased marketing expenses to promote REALmagic products
worldwide, and significant R&D expenses related to the cost of supporting
third-party software developers in their development of REALmagic-compatible
titles.
FINANCIAL CONDITION
The Company had cash, cash equivalents, and short-term investments of $18.8
million at January 31, 1997, compared with $15.6 million at January 31, 1996.
This increase was primarily attributable to $6.8 million (net of expenses)
raised from the exercise of warrants and the exercise of options by employees
under the Company's ISO plans, in addition to $4.4 million of cash borrowed
under bank lines of credit; offset by net cash used for operations of $7.5
million. The Company also experienced significant increases in its accounts
receivable and inventory during fiscal 1997, largely due to a higher sales
volume and longer customer payment terms common in the OEM market, as compared
to revenue patterns in fiscal 1996.
The Company's primary sources of funds to date have been cash generated from
operations, proceeds from 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 cash and asset-based banking arrangements will be sufficient to satisfy
its cash needs for the next
17
twelve months. As of January 31, 1997, the Company had $10.8 million outstanding
under a $12 million bank line of credit that expires in September 1997 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 September 1997 and is secured by the Company's accounts receivable,
inventories, equipment, and intangibles. 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 from additional bank financing. There
is no assurance that such capital 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 Company's products: shifts in demand for the Company's
products; gains or losses of significant customers; reduction in selling prices;
inventory obsolescence; an interrupted or inadequate supply of semiconductor
chips; the Company's inability to protect its intellectual property; or loss of
key personnel. Any unfavorable 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.
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-17 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item concerning the Company's directors 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 1997 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
"Management--Officer 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 "Management--Security Ownership of
Certain Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain relationships and
related transactions is incorporated by reference from the information set forth
in the section entitled "Management--Certain Transactions" in the Proxy
Statement.
19
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: Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of January 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended
January 31, 1997, 1996, and 1995 F-3
Consolidated Statements of Shareholders' Equity for the years
ended January 31, 1997, 1996, and 1995 F-4
Consolidated Statements of Cash Flows for the years ended
January 31, 1997, 1996, and 1995 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedules
The following financial statement schedule is filed as part
of this report:
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
All other schedules have been omitted as they are not required, not applicable,
or the required information is otherwise included.
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 10, 1997, announcing the resignation,
for personal health reasons, of Q. Binh Trinh, Vice President, Finance and Chief
Financial Officer.
(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.
20
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 Fremont, State of
California, on the 30th day of April 1997.
SIGMA DESIGNS, INC.
By /s/ Thinh Q. Tran
------------------------------------
Chairman of the Board,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thinh Q. Tran and Kit Tsui, and each of them,
jointly and severally, his true and lawful attorneys-in-fact, each with full
power of substitution and resubstitution, for him in any and all capacities, to
sign any or all amendments to this Annual Report on Form 10-K, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do if personally present,
hereby ratifying and confirming all that each said attorney-in-fact and agent,
or his or her substitute or substitutes or any of them, may lawfully do or cause
to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS ANNUAL REPORT
ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
Signature Title Date
/s/ Thinh Q. Tran Chairman of the Board, President, April 30, 1997
and Chief Executive Officer
(Principal Executive Officer)
/s/ Kit Tsui Director of Finance, Acting Chief April 30, 1997
Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
/s/ Julien Nguyen Director April 30, 1997
/s/ William J. Almon Director April 30, 1997
/s/ William Wang Director April 30, 1997
21
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, 1997 and 1996, and the related
consolidated statements of operations shareholders' equity and cash flows for
each of the three years in the period ended January 31, 1997. Our audits also
included 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended January 31,
1997 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.
DELOITTE & TOUCHE LLP
San Jose, California
February 28, 1997
F-1
CONSOLIDATED BALANCE SHEETS
January 31, 1997 and 1996 (dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and equivalents $ 6,945 $ 4,647
Short-term investments 11,801 10,966
Accounts receivable (net of allowances:
$892 in each year) 12,477 4,789
Inventories - net 4,880 2,044
Prepaid expenses and other assets 581 760
-------- --------
Total current assets 36,684 23,206
Equipment - net 1,098 1,497
Other assets 133 140
-------- --------
Total $ 37,915 $ 24,843
======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Bank line of credit $ 10,831 $ 6,392
Accounts payable 3,286 2,869
Accrued liabilities 2,066 2,066
Accrued facilities 302 418
Current portion of capital lease 35 --
-------- --------
Total current liabilities 16,520 11,745
-------- --------
Accrued facilities - long term 311 517
Capital Lease - long term 67
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:
1997, 11,091,062; 1996, 9,847,921 54,311 47,575
Accumulated deficit (33,114) (34,769)
Deferred stock compensation (100) (164)
Shareholder note receivable (80) (80)
Unrealized gain on securities available for sale -- 19
-------- --------
Shareholders equity 21,017 12,581
-------- --------
Total $ 37,915 $ 24,843
======== ========
See notes to consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended January 31, 1997, 1996, and 1995
(dollars in thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------
Net Sales $ 41,214 $ 26,374 $ 43,700
Costs and Expenses:
Cost of sales 26,531 25,492 36,980
Research and development 4,688 4,499 4,349
Sales and marketing 5,541 7,952 9,022
General and administrative 2,987 4,208 3,521
Restructuring charges (credit) -- (350) (517)
-------- -------- --------
Total costs and expenses 39,747 41,801 53,355
-------- -------- --------
Income (loss) from operations 1,467 (15,427) (9,655)
Interest income 594 449 474
Interest expense (540) (396) (138)
Gain (loss) from sale of investments -- 666 546
Other income/expense 8 -- --
-------- -------- --------
Income (loss) before income taxes 1,529 (14,708) (8,773)
Provision for income taxes -- -- --
-------- -------- --------
Net income (loss) $ 1,529 $(14,708) $ (8,773)
======== ======== ========
Net income (loss) per common share $ 0.14 (1.88) $ (1.20)
======== ======== ========
Shares used in computation 11,259 7,822 7,307
======== ======== ========
See notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Unrealized
Gain (Loss)
Deferred Shareholder on Securities
Years ended January 31, 1997, 1996 and 1995 Common Stock Accumulated Stock Note Available
(Dollars in thousands) Shares Amount Deficit Compensation Receivable for Sale Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, February 1, 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)
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
Common stock issued under stock plans 549,655 411 -- -- (80) -- 331
Conversion of subordinated notes
and issuance of warrants 1,134,323 6,276 -- -- -- -- 6,276
Adjustment of E-Motions, Inc.
purchase price -- 74 -- -- -- -- 74
Deferred stock compensation -- 164 -- (164) -- -- --
Issuance of stock 684,000 1,830 (25) -- -- -- 1,805
Unrealized gain on securities
available for sale -- -- -- -- -- 82 82
Net Loss -- -- (14,708) -- -- -- (14,708)
--------- ------- -------- ----- ---- ---- -------
Balances, January 31, 1996 9,847,921 47,575 (34,769) (164) (80) 19 12,581
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
Unrealized loss on securities
available for sale -- -- -- -- -- (19) (19)
Active Design Corp. for the month ended
February 29, 1996 -- -- 126 -- -- -- 126
Net Income -- -- 1,529 -- -- -- 1,529
---------- ------- -------- ----- ---- ---- -------
Balances, January 31, 1997 11,091,062 $54,311 $(33,114) $(100) $(80) $ -- $21,017
========== ======= ======== ===== ==== ==== =======
See notes to consolidated financial statements
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 31, 1997, 1996, and 1995 (in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 1,529 $(14,708) $ (8,773)
Active Design net loss for the one month ended February 29, 1996 126 -- --
Adjustments to reconcile net loss to net cash provided by (used
for) operating activities:
Depreciation and amortization 1,054 1,346 774
Gain from sale of investment -- (666) (205)
Loss on disposal of assets -- 22 --
Amortization of deferred stock compensation 49 -- --
Reduction in restructuring costs previously reported -- (350) (517)
Changes in assets and liabilities:
Accounts receivable (7,688) 7,169 (4,712)
Inventories (2,836) 7,692 866
Prepaid expenses and other (130) (76) 351
Accounts payable 417 (6,464) 5,126
Accrued liabilities (22) (243) (1,793)
-------- -------- --------
Net cash used for operating activities (7,501) (6,278) (8,883)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (11,801) (10,947) (10,472)
Maturity of short-term investments 10,947 7,412 6,574
Sales of long-term investments -- 1,560 844
Equipment additions (345) (786) (721)
Title development costs (188) (296) (950)
Other assets 7 (1) (305)
-------- -------- --------
Net cash used for investing activities (1,380) (3,058) (5,030)
-------- -------- --------
Cash flows from financing activities:
Bank lines of credit borrowings, net 4,439 4,682 1,710
Common stock sold 6,751 2,136 13,201
Payment to E-Motions shareholders -- -- (1,925)
Proceeds from issuance of convertible debt and
warrants - net -- 6,276 --
Repayment of capital lease obligation (11) (3) --
Proceeds from shareholder advance -- 11 --
-------- -------- --------
Net cash provided by financing activities 11,179 13,102 12,986
-------- -------- --------
Increase (decrease) in cash and equivalents 2,298 3,766 (927)
Cash and equivalents:
Beginning of period $ 4,647 $ 881 $ 1,808
-------- -------- --------
End of period $ 6,945 $ 4,647 $ 881
======== ======== ========
Cash paid for interest $ 511 $ 388 $ 136
======== ======== ========
Cash paid for income taxes $ -- $ 3 $ --
======== ======== ========
Noncash investing and financing activities:
Equipment acquired under capital leases $ 113 $ 38 $ 38
======== ======== ========
Issuance of common stock for notes receivable $ -- $ 80 $ --
======== ======== ========
Accretion of redeemable preferred stock redemption value $ -- $ 25 $ --
======== ======== ========
Deferred stock compensation $ -- $ 164 $ --
======== ======== ========
Conversion of subordinated debt to common stock and
issuance of warrants $ -- $ 6,276 $ --
======== ======== ========
Adjustment of E-Motions, Inc. purchase price $ 21 $ 74 $ --
======== ======== ========
See notes to consolidated financial statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For years ended January 31, 1997, 1996, and 1995
1. DESCRIPTION OF BUSINESS
Sigma Designs, Inc. (the Company) develops, manufactures and markets multimedia
computer devices and products. The Company has also been in the business of
developing, manufacturing and marketing graphics boards, display products and
other board-level products for use with IBM, IBM-compatible and Apple Macintosh
personal computers; however, at January 31, 1997, substantially all business
activity related to multimedia devices and products. The Company sells its
products to computer manufacturers and to retail chains, distributors and
value-added resellers.
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.
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.
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
Equity Securities. Adoption of SFAS 115 had no material impact on the Companys
consolidated financial position or results of operations. 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 (in thousands):
Market Unrealized
January 31, 1997 (In thousands) Cost Value Gain (Loss)
- --------------------------------------------------------------------------------
Certificates of deposit $11,801 $11,801 $ --
Certificates of deposit at January 31, 1997 includes $10,830,000 which is
restricted as to use because it is security for a bank line of credit (Note 8).
Market Unrealized
January 31, 1996 (In thousands) Cost Value Gain (Loss)
- --------------------------------------------------------------------------------
Certificates of deposit $ 7,030 $ 7,030 $ --
Corporate obligations 1,965 1,979 $ 14
U.S. government obligations
(primarily U.S. Treasury notes) 1,952 1,957 5
------- ------- ------
$10,947 $10,966 $ 19
======= ======= ======
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Title development costs represent payments made to support the external
development of interactive MPEG compatible software titles, net of accumulated
amortization and write downs to net realizable value. Costs are capitalized
after technological feasibility is achieved. The Company amortizes these costs
over the shorter of 12 months from the introduction of the title or pro rata
over the estimated unit sales of the title. 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.
Title development costs of $172,000 and $481,000, net of accumulated
amortization of $51,000 and $91,000 were included in prepaids and other assets
as of January 31, 1997 and 1996, respectively. Amortization expense related to
title development costs was $497,000 and $71,000 in the year ended January 31,
1997 and 1996, respectively.
Investments in 20% to 50% owned companies are accounted for using the
equity method. 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.
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.
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 Companys cash and cash equivalents are on deposit
F-6
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 and such losses have been within management's
expectations.
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.
Accounting Period - The Company's fiscal year ends on the Saturday
closest to January 31. For convenience, the financial statements are shown as
ending January 31, although the fiscal years ended on February 1, 1997, January
27, 1996 and January 28, 1995, respectively. Fiscal 1997, 1996 and 1995 included
53, 52 and 52 weeks respectively.
Net income (loss) per common and equivalent share is computed using the
weighted average number of common shares outstanding and the dilutive effects of
options and other common stock equivalents. For the years in which there was a
net loss, common stock equivalents were not included in the calculation as their
impact would be anti-dilutive.
Fair Value of Financial Investments - In accordance with the provisions
of Statement of Financial Accounting Standards (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 or equivalents and the short-term
investments as of January 31, 1997 approximate fair market value.
Recently Issued Accounting Standard - In February 1997, the Financial
Accounting Standard Board issued Statement of Financial Accounting Standards No.
128, Earnings per Share (SFAS 128). The Company is required to adopt SFAS 128 in
the fourth quarter of fiscal 1998 and will restate at that time earnings per
share (EPS) data for prior periods to conform with SFAS 128. Earlier application
is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were excercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior years, basic
EPS would have been $0.15 in the year ended January 31, 1997 and would have not
been significantly different for the years ended January 31, 1996 and 1995.
Diluted EPS under SFAS 128 would not have been significantly different than EPS
currently reported for each of the years.
3. ACQUISITION OF ACTIVE DESIGN CORP.
On May 3, 1996, the Company aquired 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 Companys common stock, based on the exchange ratio of one share of
Active Design into .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
Companys 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 aquisition, the consolidated
statements of operations combine the Companys year ended January 31, 1997 and
January 31, 1996 with Active Designs 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 aquisition, Active Design did not generate
any revenues; its net losses were $463,000 and $695,000 for the period from
February 1, 1996 through May 3, 1996 (the date of aquisition) and for the period
from May 17, 1995 (inception) through January 31, 1996, respectively.
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 Sales Net Income (Loss)
- --------------------------------------------------------------------------------
Year ended January 31, 1996:
Active Design (May 17, 1995 through
February 29, 1996) $ -- $ (821)
Sigma Designs
(year ended January 31, 1996) 26,374 (13,887)
-------- --------
Combined $ 26,374 $(14,708)
======== ========
Year ended January 31, 1997:
Active Design $ -- $ (463)
Sigma Designs (year ended
January 31, 1997) 41,214 1,992
-------- --------
Combined $ 41,214 $ 1,529
======== ========
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For years ended January 31, 1997, 1996, and 1995
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
circumstances related to subleasing the Companys excess facilities, the Company
recorded a credit to the restructuring account of $517,000 in fiscal 1995.
During fiscal 1996, the Company recorded a credit to the restructuring account
of $350,000 as a result of signing a new sublease agreement with more favorable
terms. The remaining accrual from this restructuring is a facilities accrual of
approximately $613,000 related to the excess of the Companys lease commitment
over the expected sublease income for the term of the lease.
5. INVENTORIES
Inventories at January 31 consist of:
(In thousands) 1997 1996
- --------------------------------------------------------------
Finished goods $ 1,937 $ 1,497
Work in process 3,333 1,524
Raw materials 2,064 2,477
Less reserves (2,454) (3,454)
------- -------
Inventory net $ 4,880 $ 2,044
======= =======
6. EQUIPMENT
Equipment at January 31 consists of:
(In thousands) 1997 1996
- --------------------------------------------------------------
Computers and equipment $ 2,608 $ 2,749
Furniture and fixtures 1,542 1,306
Other 403 346
------- -------
Total 4,553 4,401
Accumulated depreciation and amortization (3,455) (2,904)
------- -------
Equipment net $ 1,098 $ 1,497
======= =======
7. ACCRUED LIABILITIES
Accrued liabilities at January 31 consist of:
(In thousands) 1997 1996
- --------------------------------------------------------------
Other accrued liabilities $1,623 $1,657
Accrued salary and benefits 443 409
------ ------
Total $2,066 $2,066
====== ======
8. BANK LINES OF CREDIT
The Company has $10,830,760 outstanding at January 31, 1997 under a $12,000,000
bank line of credit that expires in September 1997, bears interest at the banks
index rate (4.250% at January 31, 1997) plus 2.5%, and is secured by funds on
deposit in accounts which have been assigned to the lender. The Company also has
no amounts outstanding at January 31, 1997 under a $6,000,000 bank line of
credit that expires in September 1997, bears interest at the banks prime rate
(8.5% at January 31, 1997) plus 1.25%, is secured by the Companys accounts
receivable, inventories, equipment and intangibles, and restricts the Companys
ability to declare or pay dividends.
9. LEASES
The Companys primary facility is leased under a noncancelable lease which
expires in March 1999. In addition, the Company leases certain equipment under
capital lease arrangements. Future minimum annual payments under capital and
operating leases are as follows:
Fiscal year Capital Operating
ending January 31: leases leases
- --------------------------------------------------------------------------------
1998 $ 44 $1,725
1999 44 1,318
2000 26 82
---- ------
Total minimum lease payments $114 $3,125
Amount represents interest at a rate of 10.5% (12) ======
----
Present value of minimum lease payments 102
Current portion (35)
----
Long-term portion $ 67
====
Approximately $613,000 of the operating lease commitment is included in accrued
facilities as of January 31, 1997. Rent expense was $351,000, $316,000 and
$344,000 for fiscal 1997, 1996 and 1995, respectively.
10. COMMITMENTS
The Company pays royalties for the right to sell certain products under various
license agreements. During the years ended January 31, 1997, 1996 and 1995, the
Company recorded royalty expense of $742,000, $643,000 and $508,000,
respectively.
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.
F-8
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 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.
Stock Option Plan - The Company's 1994 stock option plan provides for the
granting of options to purchase up to 2,400,000 shares of common stock at the
fair market value on the date of grant. Of this amount, 1,000,000 shares were
authorized for granting by the Board of Directors during fiscal year 1997.
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, 1997 expire six to ten years from date of
grant).
A summary of stock option activity follows:
Outstanding Options
Weighted average
Number of shares excercise price per share
- -----------------------------------------------------------------------------------------------------------
Balances, February 1, 1994 1,044,731 $3.58
Granted 910,000 5.19
Cancelled (200,939) 6.23
Exercised (110,451) 1.65
--------- -----
Balances, January 31, 1995 (470,514 exercisable at
a weighted-average price of $3.86) 1,643,341 $4.28
Granted (weighted-average fair value of $6.07) 1,046,295 3.55
Cancelled (366,222) 4.50
Exercised (98,990) 2.78
--------- -----
Balances, January 31, 1996 (701,938 exercisable at
a weighted-average price of $4.17) 2,224,424 $3.97
Granted (weighted-average fair value of $7.71) 326,000 7.71
Cancelled (144,509) 4.78
Exercised (813,536) 4.21
--------- -----
Balances, January 31, 1997 1,592,379 $4.57
========= =====
At January 31, 1997, options to purchase 441,362 shares were exercisable and
873,573 shares were available for future grant.
Options Outstanding Options Exercisable
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise January 31, Remaining Exercise January 31, Exercise
Prices 1997 Life Price 1997 Price
- -----------------------------------------------------------------------------------------
$ 0.0875 - 0.2272 207,342 8.55 $0.21 45,422 $0.17
3.5000 - 5.5000 1,054,787 5.75 4.62 383,943 4.58
5.6300 - 8.7500 330,250 9.28 7.12 11,997 6.18
- ------------------ --------- ---- ----- ------- -----
$ 0.0875 - 8.7500 1,592,379 6.84 $4.57 441,362 $4.17
================== ========= ==== ===== ======= =====
F-9
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,
1997 as such issuances have been at the fair value of the Companys 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 Companys 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 Companys
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions for the years ended January 31, 1997 and
1996, respectively: expected life, 13 and 9 months following vesting; stock
volatility, 87% and 87%; risk free interest rates, 5.6% and 5.9%; and no
dividends during the expected term. The Companys 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 1997 and 1996 had been amortized
to expense over the vesting period of the awards, pro forma net income (loss)
would have been $347,000 ($0.03 per share) and ($15,391,000) ($1.97 per share
loss). 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, 1997 and
1996 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
provides for the sale of up to 200,000 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 1997, 1996 and
1995, 13,685, 10,905 and 11,432 shares were purchased at an average price of
$7.63, $5.15 and $5.35 per share, respectively.
Issuance of Common Stock and Warrants - On December 15, 1995, the Company issued
convertible debt and warrants to purchase 415,921 shares of common stock at an
exercise price of $7.62 per share for proceeds of $6,276,000 (net of issuance
costs of $374,000). All such debt was converted to 1,134,323 shares of common
stock on the same day. In addition, the warrants were fully exercised in the
year ended January 31, 1997 for total proceeds of $3,170,000 which have been
shown in the statement of shareholders equity for the year ended January 31,
1997 net of $159,000 of additional costs related to the original issuance of the
convertible debt and the warrant.
12. INCOME TAXES
As a result of its net operating loss carryforwards and net losses in fiscal
1996 and 1995, the Company recorded no income tax provision for any of the years
presented.
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109), effective at the beginning of fiscal
1995. 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 are as follows:
January 31,
(In thousands) 1997 1996
- ----------------------------------------------------------
Deferred tax assets:
Net operating losses and tax
credit carryforwards $ 16,803 $ 16,521
Reserves not currently deductible 2,177 2,410
Capitalized R&D expenditures 195 682
Disqualified disposition 201 --
Other 137 184
-------- --------
19,513 19,797
Deferred tax liabilities:
Capitalized software and title
development (69) (209)
-------- --------
19,444 19,588
Valuation allowance (19,444) (19,588)
-------- --------
Net deferred taxes $ -- $ --
======== ========
F-10
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 complementary 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, 1997
are as follows:
Expiration
(In thousands) Years
- -----------------------------------------------------------------
Net operating losses, Federal $42,600 2006-2012
Net operating losses, State 19,800 1998-2000
Tax credits, Federal 770 2006-2012
Tax credits, State 430 2006-2012
The Company's effective tax rate differs from the federal statutory rate
as follows:
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------
Computed at 35% $ 535 $(4,860) $(3,070)
Valuation allowance (144) 5,014 3,166
Other (391) (154) (96)
------- ------- -------
Total $ -- $ -- $ --
======= ======= =======
13. CUSTOMER AND GEOGRAPHIC INFORMATION
One domestic customer accounted for 11%, 11% and 18% of net sales in
fiscal 1997, 1996 and 1995, respectively. In fiscal 1997, two international
customers accounted for 23% and 20% of net sales, respectively. No international
customers accounted for more than 10% of net sales in fiscal 1996 and 1995. The
Company markets its products internationally through foreign distributors and
OEMs. The following table represents a summary of domestic and export sales by
geographic region.
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------
Net sales:
Domestic $11,636 $ 9,642 $ 27,792
Export sales:
Asia Pacific 26,708 13,274 10,222
Europe 2,400 3,243 5,415
Canada 470 215 271
------- -------- --------
Total $41,214 $ 26,374 $ 43,700
======= ======== ========
Taiwan accounted for 42% of net sales in fiscal 1997. In fiscal 1996,
Taiwan accounted for 11% of net sales, Japan accounted for 15%, and Hong Kong
accounted for 10%. In fiscal 1995, Japan accounted for 12% of net sales.
14. CONTINGENCY
The Company is 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 Companys financial position or results of operations.
F-11
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
BALANCE AT DEDUCTIONS:
BEGINNING OF WRITE OFFS OF BALANCE AT
CLASSIFICATION YEAR ADDITIONS ACCOUNTS(1) END OF YEAR
- -------------- ------------- --------- ------------- -----------
Allowance for returns and
doubtful accounts, price protection,
and sales returns:
Year ended January 31,
1997 $ 892,000 $ 165,000 $ 165,000 $ 892,000
1996 1,101,000 134,000 343,000 892,000
1995 885,000 351,000 135,000 1,101,000
Inventory reserves
Year ended January 31,
1997 $3,454,000 41,000 1,040,000 2,455,000
1996 5,620,000 5,588,000 7,754,000 3,454,000
1995 4,470,000 4,425,000 3,275,000 5,620,000
(1) Amount written off, net of recoveries.
S-1
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
3.1(1) Restated Articles of Incorporation, as amended.
3.2(2) Bylaws of Registrant, as amended.
4.1(1) Article V of the Articles of Incorporation of Registrant
(see Exhibit 3.1).
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.
+10.3(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.
10.6(6) Industrial Space Lease dated February 16, 1994 by and between the
Registrant and Renco Bayside Investors.
10.7(6) 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 Stock Option Plan and form of Director
Option Agreement.
10.10(9) Form of Subscription Agreement, by and between the Registrant and
certain purchasers.
10.11(10) Agreement and Plan of Reorganization by and among the Registrant,
Sigma Acquisition Corporation and Active Design Corp. dated as of
April 23, 1996.
23.1 Independent Auditors' Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (included on page 21).
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 the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1995.
(7) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (No. 33-81914) filed July 25, 1994.
(8) 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.
(9) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 333-883) filed on February 2,
1996, Amendment No. 1 thereto filed April 30, 1996, Amendment No. 2
thereto filed May 14, 1996 and Amendment No. 3 thereto filed May 17, 1996.
(10) Incorporated by reference to exhibit filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1996.
+ Pursuant to Rule 406(b) under the Securities Act, confidential treatment
has been granted to portions of this exhibit, which portions have deleted
and filed separately with the Securities and Exchange Commission.