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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
JANUARY 31, 1996 000-15116
SIGMA DESIGNS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2848099
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
46501 LANDING PARKWAY, FREMONT, CALIFORNIA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 770-0100
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock as
reported on the Nasdaq National Market on April 22, 1996, was approximately
$89,513,539. Shares of Common Stock held by each executive officer and
director and by each entity that owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of April 10, 1996, the Registrant had 8,772,197 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of Sigma Designs, Inc.'s definitive Proxy Statement for
the 1996 Annual Meeting of Shareholders to be held on June 7, 1996 are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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SIGMA DESIGNS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 1996
INDEX
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PAGE
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PART I............................................................................................................. 1
Item 1. Business.......................................................................................... 1
Item 2. Properties........................................................................................ 11
Item 3. Legal Proceedings................................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............................................... 11
Executive Officers of the Company................................................................. 12
PART II............................................................................................................ 13
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.............................. 13
Item 6. Selected Financial Data........................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 13
Item 8. Financial Statements and Supplementary Data....................................................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............. 18
PART III........................................................................................................... 19
Item 10. Directors and Executive Officers of the Company................................................... 19
Item 11. Executive Compensation............................................................................ 19
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 19
Item 13. Certain Relationships and Related Transactions.................................................... 19
PART IV............................................................................................................ 20
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 20
Signatures........................................................................................ 21
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PART I
ITEM 1. BUSINESS
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The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Certain Factors
Affecting Business, Operating Results and Financial Condition" and
elsewhere in this Annual Report on Form 10-K.
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 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 Pictures 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.
Because of MPEG technology, producers can create (and users can enjoy) an
interactive, television-like experience on a desktop PC. The result was 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, on April 23, 1996,
Sigma entered into an Agreement and Plan of Reorganization (the "Reorganization
Agreement"), by and among the Registrant, Sigma Acquisition Corp., a California
corporation and wholly-owned subsidiary of Sigma ("Sub") and Active Design
Corporation, a California corporation ("Active Design"), pursuant to which Sub
would merge with and into Active Design (the "Merger"). Active Design is a
development stage company engaged in the development, design and marketing of
VLSI circuits that provide high performance graphics and three-dimensional
functionality on PCs. The consummation of the transactions contemplated by the
Reorganization Agreement is subject to, and contingent upon, certain customary
closing conditions. If such conditions are fulfilled and such transactions are
consummated, Active Design will become a wholly-owned subsidiary of the Company.
Pursuant to the Reorganization Agreement, upon closing, if such closing occurs,
all of the outstanding shares of Preferred Stock and Common Stock of Active
Design (collectively, the "Active Design Capital Stock") will be converted into
the right to receive an aggregate of 1,123,760 shares of the Company's Common
Stock ("Sigma Common Stock"). In addition, upon closing, if such closing occurs,
all options to purchase Active Design Capital Stock then outstanding (each, an
"Active Design Option") under Active Design's 1996 Incentive Stock Option Plan
shall be assumed by Sigma. Each Active Design Option so assumed will continue to
have, and be subject to, the same terms and conditions set forth in the
respective option agreements applicable to such Active Design Option immediately
prior to the closing, subject to adjustment of the number of shares and exercise
price thereof to reflect the exchange ratio of Active Design shares for Sigma
shares. The terms of the Reorganization Agreement were negotiated at arms-length
negotiations between Sigma and Active Design.
In connection with the potential Merger, upon closing, if such closing
occurs, 101,138 shares of the Sigma Common Stock (collectively, the "Escrow
Amount") payable as consideration by Sigma shall be placed into escrow, to be
held as security for any losses incurred by Sigma in the event of certain
breaches by Active Design of the representations, warranties and covenants
contained in the Reorganization Agreement. The Escrow Amount shall be
contributed on behalf of each holder of Active Design Capital Stock in
proportion to the aggregate consideration otherwise received by such holder by
virtue of the Merger.
The potential acquisition of Active Design is intended to be a tax-free
reorganization under Section 368(a) of the Internal Revenue Code 1986, as
amended, and is intended to be accounted for using the "pooling of interests"
method of financial accounting.
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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 Microsoft, IBM, Hewlett Packard,
Oracle, Novell and Starlight Networks. On the operating system side, REALMagic
is being 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.
WIDESPREAD SUPPORT FROM SOFTWARE DEVELOPERS. Support for Sigma's REALMagic
MPEG standard has grown rapidly in the software development community. Two 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 60
interactive software titles in the REALMagic format and many more currently
under development.
The REALMagic DOS MPEG API has also 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 which allows the creation of 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 the REALMagic Maxima boards for installation inside their multimedia
PCs. Additionally many VARs have begun taking 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 very well received product, the Company's OEM customers include
NEC in Japan and Hyundai in Korea.
ACCEPTANCE BY 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 and interest in
MPEG technology.
REALMAGIC BUSINESS STRATEGIES
Sigma's corporate objective is to continue to be the 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 the widespread acceptance of the REALMagic
technology. The key parts of this strategy includes:
ENCOURAGE CONTINUED DEVELOPMENT OF SOFTWARE UTILIZING THE REALMAGIC
TECHNOLOGY. The Company continues to encourage widespread software title
development by providing free technical support and licensing its
comprehensive API free of charge to all developers who wish to publish
REALMagic-compatible software titles. In addition, the Company has been
shipping REALMagic Producer, the industry's first low-cost MPEG authoring
system. It enables compression of MPEG video and audio in order to create
high-quality multimedia presentations and titles. The Company expects that
the availability of REALMagic Producer will lead to the development of more
REALMagic MPEG titles, and therefore increase the demand for REALMagic
playback card.
WIN MORE OEM PARTNERSHIPS AND FURTHER PENETRATE RETAIL CHANNEL. To
establish REALMagic as a true standard, the Company will continue to seek
design wins with major PC manufacturers worldwide in which the OEMs will
either factory-install the REALMagic card insider their multimedia PCs
(MPCs) or private-label the card now and distribute it through their own
channels of distribution and later when a single chipset solution becomes
available, these OEMs will install it on the CPUs of their MPCs. On the
retail side, the Company plans to expand its network of national
distributors and special VARs to distribute its high-end REALMagic playback
card
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and the REALMagic Producer, its low cost encoding 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 manufactures 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 the REALMagic products including chipsets for
both desktop and notebook PCs. The general direction is to continue to
offer consumers with better-features and lower price 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:
. REALMAGIC MAXIMA. An MPEG playback card designed to eliminate the
compatibility issue with graphics cards by using the 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 the interactive MPEG titles available
today and all future titles which are OM-1 compatible.
. 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:
+ Very high quality MPEG playback through 16 million color MPEG
video; horizontal and vertical bilinear interpolation; digital
brightness, contrast and saturation adjustment.
+ The use of Sigma's REAL Overlay chip enables the mixing of MPEG
video and PC graphics at resolutions up to 1600 x 1200 with an 85
Hz non-interlaced refresh rate.
+ 100% Windows 95 and MPC3 compliance.
+ 100% OM-1 and REALMagic compatibility.
+ Direct interface for NTSC/PAL decoder to support TV tuner input.
The Company currently expects to commence volume shipment of this product
in the second quarter of fiscal 1997.
. REALMAGIC EXPLORER. In November 1995, the Company announced the
introduction of the REALMagic Explorer chipset. This chipset will put
MPEG-1 digital video playback in ZV port PCMCIA cards for the new
generation of notebook computers. The main features of this chipset
are:
+ MPEG-1 video playback with 16 million colors.
+ MPEG-1 audio layers I and II.
+ 100% REALMagic and OM-1 standard compatible.
+ MPC3 standard compliant.
+ Windows 95 Plug and Play.
The Company currently expects to start volume shipment of this product in
the second half of fiscal 1997.
. REALMAGIC PRODUCER. A 32-bit PCI low cost card with audio/video
capture and MPEG encoding capabilities. This product comes bundled
with a frame-accurate software VTR controller; real-time video
Previewer; Adobe and Caligari trueSpace software which are necessary
to make high-quality multimedia presentations and titles. REALMagic
Producer features include:
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+ Fully compliant with MPEG-1 standard.
+ Compatible with any AVI-compatible video editing software.
+ Compatible with REALMagic decoding products.
+ Files are converted to fully compressed MPEG-1 at three times
actual time.
+ Accepts both S-VHS and Composite video inputs.
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 OEMs include NEC in Japan and Hyundai in Korea and its
international distributors are strategically located in many countries around
the world. However, there can be no assurance that the Company will achieve
significant sales so as to realize profitability in the near term, if at all.
The Company generally acquires and maintains products for distribution
through retail channels based on forecasts rather than firm purchase orders.
Additionally, the Company generally only acquires products for sales to its OEM
customers after receiving purchase orders from such customers, which purchase
orders are typically cancelable without substantial penalty from such OEM
customers. The Company currently places noncancelable orders to purchase
semiconductor products from its suppliers on a twelve to sixteen-week lead time
basis. Consequently, if, as a result of inaccurate forecasts or canceled
purchase orders, anticipated sales and shipments in any quarter do not occur
when expected, expenses and inventory levels could be disproportionately high,
requiring significant working capital resulting in severe pressure on the
Company's financial condition.
RESEARCH AND DEVELOPMENT
As of January 31, 1996, the Company had a staff of 28 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 version of REALMagic MPEG chipsets, new
software titles and cost reduction processes.
To achieve and maintain its technological leadership, the Company must
continue to make technological advancements in the areas of MPEG video and audio
compression and decompression. These advancements include compatibility with
emerging standards and multiple platforms, improvements to the REALMagic
architecture and enhancements to REALMagic API. There can be no assurance that
the Company will be able to make any of such advancement to the REALMagic MPEG
technology or, if they are made, that the Company will be able to market such
advancements to achieve profitability and maintain its technological leadership.
During fiscal 1996, fiscal 1995 and fiscal 1994, the Company's research
and development expenses were approximate $3.8 million, $4.3 million and $12.0
million (including $8.1 million of acquired research and development relating to
the acquisition of EMI) respectively. The Company plans to continue to devote
substantial resources to the research and development of the future generation
of MPEG and other multi-media.
COMPETITION
The market for MPEG multimedia products is highly competitive. While the
Company does not believe that any products sold by a third party is in direct
competition with the REALMagic encoding and 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 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 to market for new product
introductions, product performance, compatibility to industry standards,
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price and marketing and distribution resources. The Company believes that it
competes most favorably with respect to time to market, product performance and
price of REALMagic products. Moreover, the Company believes that the acceptance
of 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 low-cost
architecture of the REALMagic producers, 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 and there can be no assurance that
more patents will be issued, or, 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, 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 encoding and 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, reduced control over delivery
schedules, manufacturing yields and costs. Any delay or interruption on the
supply of any of the components required for the production of 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
Because the Company's customers typically expect quick deliveries, the
Company seeks to ship products within a few weeks of receipt of a purchase
order. The customer may reschedule delivery of products or cancel the purchase
order entirely without significant penalty. Historically, the Company's backlog
has not been reflective of future sales. The Company also expects that in the
near term, its backlog will continue to be not indicative of future sales.
EMPLOYEES
As of January 31, 1996, the Company had 60 full-time employees, including
28 in research and development, 13 in marketing, sales and support, 9 in
operations and 10 in finance and administration. The Company's future success
will depend, in part, on its ability to continue to attract, retain and motivate
highly qualified technical, marketing, engineering and management personnel, who
are in great demand. The Company's employees are not represented by any
collective bargaining unit, and the Company has never experienced a work
stoppage. The Company believes that its employee relations are satisfactory.
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CERTAIN FACTORS AFFECTING BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
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The following is a discussion of certain factors which currently impact or
may impact the Company's business, operating results and/or financial condition.
Anyone making an investment decision with respect to Sigma's capital stock or
other securities is cautioned to carefully consider these factors. Also, the
following discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Annual Report on Form 10-K.
HISTORY OF OPERATING LOSSES
The Company has incurred significant losses in the last four years and has
had substantial negative cash flow in the last five years. 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 has continued to experience
significant losses. 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 $33,923,000. 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. Due in part to an increase in marketing expenses and technological
development associated with the REALMagic product line, the Company does not
expect to report significant net income, if any, in the first quarter of fiscal
1997. There can be no assurance that the Company will achieve profitable
operations in the future 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
upon the Company's ability to achieve a sustained high level of sales to new OEM
customers. To date, the Company has commenced initial shipments of the latest
version of its REALMagic products, REALMagic Maxima, to certain OEM customers,
including NEC 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, the
Company has not yet achieved design wins with a sufficient number of 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 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 1996,
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.
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DEPENDENCE ON DEVELOPMENT OF SOFTWARE TITLES BY THIRD PARTIES
The Company depends on third-party software developers to create, produce
and market the software titles that will operate on 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.
To date, over sixty interactive software titles are available in the
REALMagic format. The Company expects that at least 12 additional titles are
available through the first half of 1996, although there can be no assurance
that any such titles will not be delayed or cancelled. None of these titles are
currently carried by retailers on an unbundled basis and these titles must be
obtained through a Company catalog which is not widely circulated. 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 developer 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. While the Company
is currently distributing titles itself by catalog, future sales of REALMagic
products will likely depend upon 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 allow OEM customers to build type II ZV-port compatible PCMCIA cards for
MPEG-1 video and audio playback, bringing MPEG technology to notebook computers
for the first time. Any delay or failure to bring any of the chipsets to market
could adversely affect the Company's market position by limiting the production
of REALMagic compatible playback cards capable of playing MPEG software titles.
Moreover, there can be no assurance that any of the Company's chipsets will be
broadly accepted by computer manufacturers.
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, upon the ability of the
Company, 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
compression. 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 the
REALMagic technology or, if they are made, that 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.
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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 the 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 the REALMagic technology. REALMagic has earned
its position as a leading product for the PC largely because of its affordable
consumer price point. Increased price competition could have an adverse effect
on the REALMagic product line. Increased competition may be generated from
several major computer product manufacturers who have developed products and
technologies that could compete directly with the REALMagic products on the PC
platform. These include S3, Cirrus Logic, 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, in
producing and selling consumer products through retail distribution, and also
have 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 the REALMagic technology will achieve commercial success or that
they will compete effectively against other interactive multimedia products,
services and technologies that currently exist, are under development or may be
announced by competitors.
RELIANCE ON A SINGLE LINE OF PRODUCTS
The Company's business strategy has been to focus on REALMagic products by
investing heavily in the PC-based MPEG technology. In the fiscal year ended
January 31, 1996, sales of multimedia products accounted for primarily all of
net sales. A decline in the 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 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 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 the OEMs' timing and release of products incorporating the
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. Because 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 on the introduction of
compact disks containing software titles compatible with the Company's format,
the Company's revenues may also vary with the production of and demand for
popular software titles. Such demand may increase or decrease as a result of
8
<PAGE>
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
competed 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 noncancelable orders to purchase semiconductor products from
its foundries on a long lead time basis. Consequently, if, as a result of
inaccurate forecasts or canceled purchase orders, anticipated sales and
shipments in any quarter do not occur when expected, inventory levels could be
disproportionately high, requiring significant working capital, negatively
impacting 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, C-Cube Microsystems, 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, any delay or interruption in the supply of any of the
components required for the production of the REALMagic multimedia card that are
currently obtained from a single source could have a material adverse impact on
the sales of the REALMagic products by the Company and thus on the Company's
business.
The Company must provide its suppliers with sufficient lead time in order
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. The manufacturing of 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 delivery 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 purchaser orders or costly recall of products from
customer sites.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its key technical, marketing, sales and management personnel. Given the
complexity of the 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 the REALMagic product, 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.
9
<PAGE>
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 the 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 which 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.
CHANGE IN BUSINESS PLAN
The Company has dramatically altered its business plan with the acquisition
of EMI and with the potential acquisition of Active Design, and the elimination
of all product lines other than the REALMagic line. The Company has begun to
devote its resources to the successful introduction of the REALMagic technology
and related multimedia products. As a result of the change in business strategy,
the Company expects to experience a period of significant alteration in number
and organization of employees. This change has placed, and 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 recently established
and rapidly changing business enterprise.
ACQUISITION RISKS
On April 23, 1996, the Company entered into the Reorganization Agreement
with Active Design, pursuant to which Sigma would acquire Active Design. The
consummation of the transactions contemplated by the Reorganization Agreement
are subject to, and contingent upon, certain customary closing conditions. If
such conditions are fulfilled and such transactions are consummated, Active
Design will become a wholly-owned subsidiary of the Company. There can be no
assurance that the closing conditions will be fulfilled to the satisfaction of
the parties or that the Merger will be consummated in a timely manner, if at
all.
Active Design is a development stage company engaged in the development,
design and marketing of VLSI circuits that provide high performance graphics and
three-dimensional functionality on PCs. Acquisitions in the technology industry
are frequently more difficult to successfully integrate into existing operations
than acquisitions in other industries. Accordingly, there can be no assurance
that the acquisition of Active Design will prove successful even if the
acquisition is consummated. The integration of Active Design into the Company's
business will require the Company to compete in a new market segment which the
Company expects to be highly competitive. If larger companies that possess
significantly greater development resources and budgets than the Company compete
in this emerging market 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 or 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, 1996, 1995 and 1994, sales to
international customers accounted for approximately 63%, 36% and 33% 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 which 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 is successful in increasing
its sales to foreign customers, or 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 price of the Company's Common Stock has been and is expected to
continue to be subject to significant fluctuations. 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
10
<PAGE>
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the price of the Common Stock.
ITEM 2. PROPERTIES
----------
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.
On February 16, 1994, the Company entered into a sublease agreement with
Aureal Semiconductor, Inc. (formerly Media Vision Technology, Inc.) under which
Aureal Semiconductor subleased the Company's old executive offices located at
47900 Bayside Parkway, Fremont, California 94538. The difference between the
Company's total remaining lease commitment of that facility and the total lease
commitment from Aureal Semiconductor has been included in the accrued facilities
as of January 31, 1995.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is not involved in any legal proceedings 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.
11
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
The executive officers and directors of the Company and their ages as of
April 1, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- ----- ---------------------------------------------------------------------
<S> <C> <C>
Thinh Q. Tran 42 Chairman of the Board, President and Chief Executive Officer
Julien Nguyen 38 Co-Chairman of the Board and Chief Technical Officer
Q. Binh Trinh (1) 52 Vice President, Finance, Chief Finance Officer, Secretary and Director
Silvio Perich 47 Senior Vice President, Worldwide Sales
Jacques Martinella 40 Vice President, Engineering
William J. Almon (1)(2) 63 Director
William Wang (1)(2) 32 Director
</TABLE>
_____________________
(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. Nguyen has served as Co-Chairman of the Board and Chief Technical
Officer of the Company since January 1995 and as a Director since October 1993.
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, and
from 1986 to 1991, he worked at Radius Inc. as Director of Product Development.
Mr. Trinh has served as Vice President, Finance and Chief Financial Officer
of the Company since November 1984 and became Secretary of the Company in 1993.
Mr. Trinh has been a Director of the Company since May 1984. From August 1983 to
November 1984, Mr. Trinh was employed by Bailard, Biehl & Kaiser, Inc., an
investment and financial service company, where he served as Vice President,
Controller and Treasurer.
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 1982 to June 1990.
Mr. Wang became a Director of the Company in October 1995. From 1990 to the
present, Mr. Wang has served as Chairman of the Board and Chief Executive
Officer of MAG Innovision, Inc., a company which acts as the international sales
representative of 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.
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 the IBM
Corporation, most recently as Vice President, Low End Storage Products. Mr.
Almon also serves as a Director of Read Rite Corporation.
Mr. Trinh is the brother-in-law of Mr. Tran. There are no other family
relationships among the directors or officers of the Company.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
--------------------------------------------------------------------
COMMON STOCK TRADING RANGE
Sigma Designs' common stock has been traded in the over-the-counter market under
the Nasdaq symbol "SIGM" since the Company's initial public offering on May 15,
1986. The price per share represents the range of high and low closing prices in
the Nasdaq National Market, for the quarter indicated.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995
----------- -----------
HIGH LOW HIGH LOW
-----------------------------------------
<S> <C> <C> <C> <C>
First quarter ended April 30 7 4 1/2 14 8
Second quarter ended July 31 6 7/8 4 1/4 9 5/16 6 3/8
Third quarter ended October 31 6 5/8 4 3/8 8 1/2 4 7/8
Fourth quarter ended January 31 8 7/8 4 3/4 8 5 3/8
</TABLE>
As of April 15, 1996, the Company had approximately 269 shareholders of
record. The Company has not paid any cash dividends on its common stock and does
not plan to pay cash dividends to its shareholders in the near future. The
Company presently intends to retain its earnings to finance the future growth of
its business.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
SELECTED FINANCIAL FIVE-YEAR DATA
In thousands, except per share amount and number of employees
<TABLE>
<CAPTION>
Years ended January 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net sales $26,374 $43,700 $34,989 $27,058 $27,567
Net loss (13,887) (8,772) (29,546) (7,166) (3,443)
Net loss per common share (1.81) (1.20) (5.15) (1.37) (0.67)
Working capital 11,070 17,446 15,117 33,696 41,515
Total assets 23,413 33,387 26,639 44,267 49,049
Shareholders' equity 11,597 18,721 16,499 37,788 44,755
Number of employees 60 138 151 195 197
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Certain Factors Affecting
Business, Operating Results and Financial Condition" and elsewhere in
this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
- ---------------------
During the year ended January 31, 1996, the Company completed its plan to focus
exclusively on multimedia products, primarily its MPEG based REALmagic product
line. During fiscal 1996, the Company also announced plans to focus on chipsets
and place more emphasis on OEM sales for the next generation of REALmagic
products. Net sales decreased in fiscal 1996 to $26,374,000 from $43,700,000 in
the prior year, largely as a result of eliminating non-multimedia product lines
and also in connection with the Company's transition to its next generation of
MPEG products. The net loss for the year ended January 31, 1996 increased to
$13,887,000 from $8,773,000 in the prior year. The current year loss includes
$4.5 million that was accrued in the second quarter for obsolete inventories and
other related costs in connection with the Company's plan to focus on chipsets
and OEM sales and a $3.9 million write down of certain assets of Sigma Designs
Imaging Systems, Inc., its display system subsidiary, to net realizable value in
the first quarter in connection with the sales of SDIS's assets and liabilities.
Consistent with the results of the progress of these strategic efforts,
including an overall reduction in the cost structure, the Company had break even
results in the fourth quarter of fiscal 1996, with net income of $23,000
compared to a net loss of $5,137,000 in the same quarter in the prior year.
SALES
- ------
The following table set forth the Company's net sales in each of its product
groups for the last three years.
<TABLE>
<CAPTION>
(In thousands) FISCAL 1996 FISCAL 1995 FISCAL 1994
<S> <C> <C> <C>
Multimedia products:
Decoding $21,518 $30,345 $ 8,022
Encoding 3,143 - -
Display systems 1,554 7,887 17,825
CPU boards 52 2,050 4,353
Graphics controller boards - - 494
Other 107 3,418 4,295
------- ------- -------
NET SALES $26,374 $43,700 $34,989
======= ======= =======
</TABLE>
The multimedia decoding product group includes a variety of REALmagic playback
controller cards and chipsets, REALmagic upgrade kits which consist of a
REALmagic card, a double-speed CD-ROM drive, a pair of speakers, and an array of
popular MPEG software titles; and MPEG software titles. The multimedia encoding
product group primarily consists of the REALmagic Producer. The display systems
group includes a variety of color and monochrome high-resolution monitors
designed to be used with special applications
13
<PAGE>
such as document imaging or computer-aided designs. Other sales category
consists primarily of sales of surplus and obsolete inventories, sales of
components to service centers and contract revenue.
The Company's net sales decreased 40% in fiscal 1996 and increased 25% in fiscal
1995. The reduction in sales in fiscal 1996 was primarily attributable to the
elimination of non-multimedia product lines and also related to Company's
transition to its next generation of MPEG products. The increase in sales in
fiscal 1995 was attributable to the significant increase in sales of REALmagic
MPEG products.
The following table sets forth the Company's net sales by domestic distribution
channels and export sales for each of the last three fiscal years:
<TABLE>
<CAPTION>
(In thousands) FISCAL 1996 FISCAL 1995 FISCAL 1994
<S> <C> <C> <C>
DOMESTIC SALES:
Retail sales $ 7,736 $17,722 $17,234
OEMs and VARs 1,906 10,070 6,349
------- ------- -------
Total domestic sales 9,642 27,792 23,583
EXPORT SALES:
Asia Pacific 13,274 10,222 1,883
Europe 3,243 5,415 9,163
Canada 215 271 360
------- ------- -------
Total export sales 16,732 15,908 11,406
------- ------- -------
NET SALES $26,374 $43,700 $34,989
======= ======= =======
</TABLE>
The percentages of the Company's net sales attributable to domestic retail sales
were 29% in fiscal 1996, 41% in fiscal 1995, and 49% in fiscal 1994. The
percentages of the Company's net sales attributable to domestic OEM and VAR
sales were 7% in fiscal 1996, 23% in fiscal 1995, and 18% in fiscal 1994. The
percentages of the Company's net sales attributable to export sales were 63% in
fiscal 1996, 36% in fiscal 1995, and 33% in fiscal 1994.
In fiscal 1996, domestic sales decreased 65% over fiscal 1995 while export sales
increased 5%. The reduction in domestic sales in fiscal 1996 was primarily
attributable to the move away from non-multimedia products, which had
proportionately greater impact on domestic sales, as well as due to the impact
of the transition to the next generation of MPEG products.
GROSS MARGIN
- ------------
The Company's gross margin as a percentage of net sales was approximately 3%,
16%, and 21% in fiscal 1996, 1995, and 1994, respectively. The decrease in both
fiscal 1996 and 1995 were primarily the results of inventory reserves and write-
offs in connection with the move away from non-multimedia products and the
transition to new generations of MPEG-based products. Excluding the impact of
such reserves and write-offs, the Company's annual gross margin was
14
<PAGE>
26% and 23% in fiscal 1996 and fiscal 1995, respectively. Although the Company
attempts to minimize the impact of such product transitions, the market for the
Company's product 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.
OPERATING EXPENSES
- ------------------
Sales and marketing expenses decreased $1,152,000 (13%) in fiscal 1996 over
fiscal 1995. The reduction was due to the change in corporate direction, less in
retail distribution and more toward chipset and OEM sales. The same expenses
decreased $426,000 (5%) in fiscal 1995 over fiscal 1994. The small reduction
reflects a more focused approach to marketing which concentrated on the
REALmagic product line.
Research and development expenses in fiscal 1996 decreased $550,000 (13%) over
fiscal 1995. The reduction was attributable to the elimination of display system
research and development efforts. The same expenses increased $498,000 (13%) in
fiscal 1995 over fiscal 1994, excluding $8,137,000 of in-process research and
development expenses in fiscal 1994 related to the acquisition of E-Motions,
Inc. This increase reflected the necessary expenses needed to continue
developing the REALmagic products and the added costs needed to support third-
party software title developers in the development of REALmagic compatible
titles.
The Company's general and administrative expenses in fiscal 1996 increased
$644,000 (18%) in fiscal 1996 over fiscal 1995. The increase was attributable to
the $1,500,000 of accounts receivable reserves in connection with the writedown
of certain assets of SDIS to net realizable value; without these reserves, the
expenses actually decreased by $856,000 (24%). The reduction was attributable to
the general cost reduction efforts by the Company. The same expenses increased
$803,000 (30%) in fiscal 1995 over fiscal 1994. This increase reflected added
costs, primarily related to increased headcount, necessitated by the Company's
decision to combine its remaining display systems business with the imaging
products offered by its Docupoint subsidiary, into a separate entity, SDIS, in
the first quarter of fiscal 1995, and to support the higher level of sales.
In the second quarter of fiscal 1994, the Company recorded a $13.7 million
restructuring charge in connection with the Company's decision to focus
attention on its new multimedia products. This charge included $4.1 million in
accruals of lease commitments for excess facilities. In the fourth quarter of
fiscal 1996, the Company recorded a $350,000 recovery resulting from the more
favorable terms under a new sublease agreement related to this facility. The
remaining facilities accrual of approximately $935,000 relates to the excess of
the Company's lease commitment over expected sublease income for the term of the
lease.
15
<PAGE>
LOSS PER SHARE
- --------------
The Company's $1.81 loss per share in fiscal 1996 was primarily attributable to
low level of sales which was inadequate to cover operating expenses and reserves
recorded by SDIS and Sigma in connection with the sale of SDIS and the new
direction of Sigma to focus on chipset and OEM sales. The $1.20 loss per share
in fiscal 1995 was due primarily to lower than expected sales, reserves recorded
by its subsidiary, SDIS, and Sigma, increased marketing expenses to promote and
market REALmagic products worldwide and significant R&D expenses related to the
cost of supporting third-party software title developers in the development of
REALmagic compatible titles. The Company's $5.15 loss per share in fiscal 1994
was due primarily to sales levels which were not high enough to generate
sufficient gross profits to offset operating expenses and the negative impact on
margin from competitive pricing pressures. The $5.15 loss per share in fiscal
1994 also included $3.80 for restructuring and in-process development expenses.
FINANCIAL CONDITION
- -------------------
The Company had cash and equivalents and short-term investments of $14.8 million
at January 31, 1996, compared with $8.2 million at January 31, 1995. The
increase in cash and equivalents and short-term investments was due primarily to
$6.3 million (net of expenses) raised in the fourth quarter of fiscal 1996
through a private placement and $4.7 million of cash borrowed under bank lines
of credit, offset by net cash used for operations of $5.9 million. The Company
also experienced material reductions in its accounts receivable and inventory
balances during fiscal 1996, largely in connection with its sales of SDIS's
assets and liabilities and its decision to focus on chipsets and OEM sales.
Company's primary sources of funds to date have been cash generated from
operations prior to 1993, proceeds from public and private offerings of its
common stock 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 needs for the next twelve months.
At January 31, 1996, the Company has $5,596,000 outstanding under a $10,000,000
bank line of credit that expires in June 1996 and is secured by funds on deposit
in accounts which have been assigned to the lender. The Company also has
$796,000 outstanding at January 31, 1996 under a $6,000,000 bank line of credit
that expires in May 1996 and is secured by the Company's account receivables,
inventories, equipment and intangibles. Beyond the next twelve month period the
Company believes that to the extent it does not generate cash from operations
that it may have to raise additional capital through either public or private
offerings of its common stock or from additional bank financing.
FACTORS AFFECTING FUTURE OPERATING RESULTS
- ------------------------------------------
The Company's annual and quarterly results have in the past and may in the
future vary due to a number of factors, including but not limited to new
product introduction 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
16
<PAGE>
inability to protect its intellectual property or a 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 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 from
the levels anticipated by securities analysts could have an immediate and
significant adverse effect on the trading price of the Company's common stock in
any given period. 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.
17
<PAGE>
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. Active Design's financial statements, the notes thereto, and the
independent auditors' report appear on pages F-18 through F-27 of this Annual
Report on Form 10-K. The unaudited pro forma condensed combined financial
statements and the notes thereto of Sigma and Active Design appear on pages F-28
through F-31 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
18
<PAGE>
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 1996 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 this Annual Report on Form 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
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Financial Statements.
---------------------
A. The following financial statements of the
Company are filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report................................................... F-2
Consolidated Balance Sheets as of January 31, 1996 and 1995.................... F-3
Consolidated Statements of Operations for the years ended January 31, 1996,
1995 and 1994.................................................................. F-4
Consolidated Statements of Shareholders' Equity for the years
ended January 31, 1996, 1995 and 1994.......................................... F-5
Consolidated Statements of Cash Flows for the years ended January 31, 1996,
1995 and 1994.................................................................. F-6
Notes to Consolidated Financial Statements..................................... F-8
</TABLE>
B. The following financial statements of Active Design
Corporation for the period from May 17, 1995 (Inception) to
February 29, 1996 are filed as part of this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.................................................... F-19
Balance Sheet as of February 29, 1996........................................... F-20
Statement of Operations for the period from May 17, 1995
(Inception) to February 29, 1996............................................... F-21
Statement of Shareholders' Deficiency for the period from May 17, 1995
(Inception) to February 29, 1996............................................... F-22
Statement of Cash Flows for the period from May 17, 1995 (Inception) to
February 29, 1996............................................................. F-23
Notes to Financial Statements................................................... F-24
</TABLE>
C. The following pro forma condensed consolidated financial
statements of the Company and Active Design Corporation are
filed as part of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Introduction to Unaudited Pro Forma Condensed
Combined Consolidated Financial Statements.................................... F-28
Unaudited Pro Forma Condensed Combined Balance Sheet............................ F-29
Unaudited Pro Forma Condensed Combined Statement of Operations.................. F-30
Notes to Condensed Combined Financial Statements................................ F-31
</TABLE>
2. Financial Statement Schedules. The following financial statement
-----------------------------
schedule of the Company for the fiscal years ended January 31,
1996, 1995 and 1994 filed as part of this Annual Report on Form
10-K should be read in conjunction with the Financial Statements,
and related notes thereto, of the Company.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II Valuation and Qualifying Accounts and Reserves..................... S-1
</TABLE>
Schedules not listed above have been omitted since they are
either not required, not applicable, or the information is
otherwise included.
5. Exhibits:
--------
See Item 14(c) below.
(b) Reports on Form 8-K.
-------------------
No Reports on Form 8-K were filed during the fourth quarter ended
January 31, 1996.
(c) Exhibits.
--------
The exhibits listed on the accompanying index to exhibits
immediately following the financial statement schedules are filed
as part of, or incorporated by reference into, this Annual Report
on Form 10-K.
(d) Financial Statement Schedules.
-----------------------------
See Item 14(a)(2) above.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Fremont, State of California, on this 29th day of April 1996.
SIGMA DESIGNS, INC.
By /s/ Thinh Q.Tran
-------------------------------------------
Thinh Q. Tran
Chairman of the Board,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thinh Q. Tran and Q. Binh Trinh, 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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Thinh Q. Tran Chairman of the Board, President and Chief Executive
- --------------------------------------
Thinh Q. Tran Officer (Principal Executive Officer) April 29, 1996
/s/ Julien Nguyen Co-Chairman of the Board and Chief Technical
- --------------------------------------
Julien Nguyen Officer April 29, 1996
/s/ Q. Binh Trinh Vice President, Finance, Chief Financial Officer,
- --------------------------------------
Q. Binh Trinh Secretary and Director (Chief Financial and
Accounting Officer) April 29, 1996
______________________________________
William J. Almon Director
______________________________________
William Wang Director
</TABLE>
21
<PAGE>
SIGMA DESIGNS, INC.
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
AND INDEPENDENT AUDITORS' REPORT
F-1
<PAGE>
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, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended January 31, 1996. 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended January 31,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statement taken as a whole, presents fairly in
other material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
March 1, 1996
(April 22, 1996 as to Note 14)
F-2
<PAGE>
SIGMA DESIGNS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1996 AND 1995
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 3,810 $ 881
Short-term investments (including $6,094 in 1996, restricted
by borrowing agreement) 10,966 7,349
Accounts receivable (net of allowances: $892 and $1,101, respectively) 4,789 11,958
Inventories - net 2,044 9,736
Prepaid expenses and other assets 760 1,086
-------- --------
Total current assets 22,369 31,010
EQUIPMENT - Net 910 1,343
OTHER ASSETS 134 1,034
-------- --------
TOTAL $ 23,413 $ 33,387
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit $ 6,392 $ 1,710
Accounts payable 2,785 9,333
Accrued liabilities 1,704 1,748
Accrued facilities 418 773
-------- --------
Total current liabilities 11,299 13,564
-------- --------
ACCRUED FACILITIES - long term 517 1,102
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:
1996, 8,724,161; 1995, 7,479,943 45,501 38,820
Unrealized gain (loss) on securities available for sale 19 (63)
Accumulated deficit (33,923) (20,036)
-------- --------
Shareholders' equity 11,597 18,721
-------- --------
TOTAL $ 23,413 $ 33,387
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXPECT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
NET SALES $ 26,374 $ 43,700 $ 34,989
COSTS AND EXPENSES:
Cost of sales 25,492 36,980 27,538
Research and development 3,799 4,349 11,988
Sales and marketing 7,870 9,022 9,448
General and administrative 4,165 3,521 2,718
Restructuring charges (credit) (350) (517) 13,654
--------- --------- ---------
Total costs and expenses 40,976 53,355 65,346
--------- --------- ---------
LOSS FROM OPERATIONS (14,602) (9,655) (30,357)
Interest income 444 474 660
Interest expense (395) (138) -
Gain (loss) from sales of investments 666 546 -
--------- --------- ---------
LOSS BEFORE INCOME TAXES (13,887) (8,773) (29,697)
CREDIT FOR INCOME TAXES - - 151
--------- --------- ---------
NET LOSS $ (13,887) $ (8,773) $ (29,546)
========= ========= =========
NET LOSS PER COMMON SHARE $ (1.81) $ (1.20) $ (5.15)
========= ========= =========
SHARES USED IN COMPUTATION 7,679 7,307 5,733
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES RETAINED
COMMON STOCK AVAILABLE EARNINGS
-----------------------------
SHARES AMOUNT FOR SALE (DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C>
Balances, February 1, 1993 5,266,069 $19,287 $ - $ 18,501 $ 37,788
Common stock issued under stock plans 101,991 493 - 493
Common stock issued and options
assumed in acquisition of E-Motions,
Inc. 860,000 7,764 - - 7,764
Net loss - - - (29,546) (29,546)
--------- ------- ----- --------- ---------
Balances, January 31, 1994 6,228,060 27,544 (11,045) 16,499
Sale of common stock 1,130,000 12,959 - - 12,959
Common stock issued under stock plans 121,883 242 - - 242
Payment to E-Motions, Inc. shareholders - (1,925) - - (1,925)
Buy-back of Docupoint minority interest (218) (218)
Unrealized loss on securities available for sale - - (63) - (63)
Net loss - - - (8,773) (8,773)
--------- ------- ----- --------- ---------
Balances, January 31, 1995 7,479,943 38,820 (63) (20,036) 18,721
Common stock issued under stock plans 109,895 331 - - 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
Unrealized gain on securities
available for sale - - 82 - 82
Net loss - - - (13,887) (13,887)
--------- ------- ----- --------- ---------
Balances, January 31, 1996 8,724,161 $45,501 $ 19 $ (33,923) $ 11,597
========= ======= ===== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,887) $ (8,773) $(29,546)
Adjustments to reconcile net loss to net cash provided by (used
for) operating activities:
Depreciation and amortization 1,309 774 1,169
Loss (gain) from investment (666) (205) 39
Loss on disposal of assets 22 - -
Provision (credit) for restructuring costs (350) (517) 13,654
Write-off of research and development in progress acquired in
connection with the purchase of E-Motions, Inc. - - 8,137
Changes in assets and liabilities:
Accounts receivable 7,169 (4,712) (775)
Inventories 7,692 866 (6,512)
Prepaid expenses and other (76) 351 (340)
Income taxes receivable and payable - - 2,201
Accounts payable (6,548) 5,126 (758)
Accrued liabilities (560) (1,793) (930)
-------- -------- --------
Net cash used for operating activities (5,895) (8,883) (13,661)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (10,947) (10,472) (14,535)
Maturity of short-term investments 7,412 6,574 25,348
Sales of long-term investments 1,560 844 -
Equipment additions (200) (721) (612)
Software development costs capitalized - - (233)
Title development costs capitalized (296) (950) -
Other assets 6 (305) (261)
Cash from purchase of E-Motions, Inc. - - 183
-------- -------- --------
Net cash provided by (used for) investing activities (2,465) (5,030) 9,890
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank lines of credit 4,682 1,710 -
Common stock sold 331 13,201 493
Payment to E-Motion shareholders - (1,925) -
Proceeds from issuance of convertible debt and warrants - net 6,276 - -
-------- -------- --------
Net cash provided by financing activities 11,289 12,986 493
-------- -------- --------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,929 (927) (3,278)
CASH AND EQUIVALENTS:
Beginning of period 881 1,808 5,086
-------- -------- --------
End of period $ 3,810 $ 881 $ 1,808
======== ======== ========
</TABLE>
(Continued)
F-6
<PAGE>
SIGMA DESIGNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH PAID FOR INTEREST $ 388 $ 136 $ -
======= ======= ========
CASH PAID (RECEIVED) FOR INCOME TAXES $ 3 $ - $ (2,201)
======= ======= ========
NONCASH INVESTING ACTIVITIES:
Purchase of E-Motions, Inc.:
Common stock issued and options assumed $ - $ - $ 7,764
Net investment in E-Motions, Inc. prior to purchase - - 636
Fair value of assets acquired - - (295)
Liabilities assumed - - 32
------- ------- --------
Acquired research and development in progres $ - $ - $ 8,137
======= ======= ========
NONCASH FINANCING ACTIVITIES:
Conversion of subordinated debt to common stock
and issuance of warrants. $ 6,276 $ - $ -
======= ======= ========
Adjustment of E-Motions, Inc. purchase price $ 74 - -
======= ======= ========
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-7
<PAGE>
SIGMA DESIGNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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,
1996, substantially all business activity related to MPEG multimedia
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
Company's 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):
<TABLE>
<CAPTION>
JANUARY 31, 1996
-----------------------------------
GROSS
MARKET UNREALIZED
COST VALUE GAIN (LOSS)
<S> <C> <C> <C>
Certificates of deposit $ 7,030 $ 7,030 $ -
Corporate obligations 1,965 1,979 14
U.S. government obligations 1,952 1,957 5
-------- -------- ------
$ 10,947 $ 10,966 $ 19
======== ======== ======
</TABLE>
Certificates of deposit at January 31, 1996 includes $6,094,000 which is
restricted as to use because it is security for a bank line of credit
(Note 8).
F-8
<PAGE>
<TABLE>
<CAPTION>
JANUARY 31, 1995
-----------------------------------
GROSS
MARKET UNREALIZED
COST VALUE GAIN (LOSS)
<S> <C> <C> <C>
Corporate obligations $ 4,461 $ 4,440 $ (21)
U.S. government obligations (primarily
U.S. Treasury notes) 2,951 2,909 (42)
-------- -------- -------
$ 7,412 $ 7,349 $ (63)
======== ======== =======
</TABLE>
Gross realized gains and losses were insignificant in 1996, 1995 and 1994.
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 $481,000 and
$883,000, net of accumulated amortization of $91,000 and none were included
in prepaids and other assets as of January 31, 1996 and 1995, 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 were not
material in 1996 and 1995 and therefore were expensed.
INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 which uses an asset and liability
approach. 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 Company's cash and cash equivalents are on deposit with
one financial institution. The Company's short-term investments are managed
by a major domestic financial institution, in a portfolio with defined
investment objectives of competitive money market returns, high liquidity
and safety of capital. Its portfolio of short-term investments typically
include United States government obligations and corporate obligations.
From time to time, the Company also makes
F-9
<PAGE>
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 majority of accounts receivable are derived from sales
to retail chain distributors and manufacturers of personal computers. The
Company maintains reserves for potential credit losses and such losses have
been within management's expectations.
STOCK COMPENSATION - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," establishes accounting and
disclosure requirements using a fair value method of accounting for stock-
based employee compensation plans and is effective for fiscal years
beginning after December 15, 1995. The Company will adopt this statement on
February 1, 1996 and will elect to continue applying APB Opinion No. 25 to
account for its stock-based employee compensation arrangements. Based on
the Company's current use of equity instruments, adoption of the new
standard will not affect reported earnings, financial position or cash
flows.
ACCOUNTING PERIOD - For convenience, the financial statements are shown as
ending January 31, although the fiscal years ended on January 27, 1996,
January 28, 1995 and January 29, 1994, respectively. Fiscal 1996, 1995 and
1994 each included 52 weeks.
NET LOSS PER COMMON SHARE is computed using the weighted average number of
common shares outstanding. Because there was a net loss in each year
presented, common stock equivalents were not included in the calculation as
their impact would be anti-dilutive.
3. PURCHASE OF E-MOTIONS, INC.
On July 29, 1993, the Company acquired all remaining outstanding shares of
E-Motions, Inc. (E-Motions). This acquisition was accounted for using the
purchase method of accounting. E-Motions was a development stage company in
the business of developing products for the multimedia market, and its
technology consisted primarily of in-process development of integrated
circuit designs and related software technology. Prior to this transaction,
the Company owned slightly less than 50% of the outstanding shares of E-
Motions on a fully diluted basis.
As part of this transaction, the Company issued 860,000 shares of common
stock and assumed options to acquire 217,529 shares of its common stock. In
addition, the Company was required to make a cash payment of $1.9 million
based on the average trading price of its common stock in July 1994. The
maximum amount of this contingent payment (approximately $4 million) was
included in the cost of the acquired company and in shareholders' equity.
Shareholders' equity was reduced by $1.9 million at the time of the actual
payment.
The cost of the acquired company, which includes the consideration related
to this transaction and the Company's previous investment in E-Motions, is
as follows (in thousands):
<TABLE>
<S> <C>
Cost $8,400
Assets acquired (295)
Liabilities assumed 32
------
Excess of cost over net assets acquired $8,137
======
</TABLE>
F-10
<PAGE>
Based on the stage of E-Motion's development, the nature of its business
and the absence of other identifiable intangible assets, the cost in excess
of net assets acquired is acquired research and development in process and,
accordingly, was charged to research and development expense in the period
acquired.
The following information for fiscal 1994 is presented on a pro forma
basis, as if the transaction had taken place on February 1, 1993:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
-------------
1994
<S> <C>
Pro forma revenue $ 34,989
Pro forma net loss $ (21,772)
Pro forma net loss per share $ (3.30)
Shares used in computation 6,593
</TABLE>
For purposes of this pro forma information, the $8.1 million of acquired
research and development was excluded from the results of operations.
4. RESTRUCTURING
In July 1994, 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 the subleasing of the Company's
excess facilities, the Company recorded a credit of $517,000 in fiscal
1995. During fiscal 1996, the Company recorded a credit 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 $935,000 related to the excess of the Company's lease
commitment over the expected sublease income for the term of the lease.
Restructuring charges (credit) for the years ended January 31, 1996, 1995
and 1994 consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Excess and obsolete inventories $ - $ - $ 8,222
Excess facilities (reduction of previously accrued (350) (517) 4,100
Excess property and leasehold improvements - - 465
Severance accruals - - 300
Capitalized software and other assets - - 270
Other costs - - 297
------ ------ -------
Total $ (350) $ (517) $13,654
====== ====== =======
</TABLE>
F-11
<PAGE>
5. INVENTORIES
Inventories at January 31 consist of:
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS)
<S> <C> <C>
Finished goods $ 1,497 $ 3,787
Work in process 1,524 4,590
Raw materials 2,477 6,979
Less reserves (3,454) (5,620)
------- -------
Inventory - net $ 2,044 $ 9,736
======= =======
</TABLE>
6. EQUIPMENT
Equipment at January 31 consists of:
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS)
<S> <C> <C>
Computers and equipment $ 2,142 $ 3,767
Furniture and fixtures 1,290 1,607
Other 346 344
------- -------
Total 3,778 5,718
Accumulated depreciation and amortization (2,868) (4,375)
------- -------
Equipment - net $ 910 $ 1,343
======= =======
</TABLE>
7. ACCRUED LIABILITIES
Accrued liabilities at January 31 consist of:
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS)
<S> <C> <C>
Other accrued liabilities $1,295 $1,036
Accrued salary and benefits 409 712
------ ------
Total $1,704 $1,748
====== ======
</TABLE>
8. BANK LINES OF CREDIT
The Company has $5,596,000 outstanding at January 31, 1996 under a
$10,000,000 bank line of credit that expires in June 1996, bears interest
at the bank's index rate (3.250% at January 31, 1996) plus 2.5% and is
secured by funds on deposit in accounts which have been assigned to the
lender. The Company also has $796,000 outstanding at January 31, 1996 under
a $6,000,000 bank line of credit that expires in May 1996, bears interest
at the bank's prime (8.5% at January 31, 1996) plus 2%, is secured by the
Company's accounts receivable, inventories, equipment and intangibles, and
restricts the Company's ability to declare or pay dividends.
F-12
<PAGE>
9. LEASES
The Company leases its primary facility under a noncancelable lease which
expires in August 1998. Total future minimum lease payments under the
Company's operating leases are $4,900,859 at January 31, 1996, $1,776,218
for fiscal 1997, $1,724,562 per year for fiscal 1998, $1,317,809 for fiscal
1999 and $82,000 for fiscal 2000. Approximately $935,000 of this commitment
is included in accrued facilities as of January 31, 1996.
Rent expense was $316,000, $344,000 and $962,000 for fiscal 1996, 1995 and
1994, respectively.
10. COMMITMENTS
The Company pays royalties for the right to sell certain products under
various license agreements. During the years ended January 31, 1996, 1995
and 1994, the Company recorded royalty expense of $643,000, $508,000 and
$181,000, 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.
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.
During fiscal 1991, the Board of Directors of the Company approved a
program to repurchase up to 1,000,000 shares of the Company's common stock
in the open market. No shares were repurchased in fiscal 1994, fiscal 1995
or fiscal 1996.
STOCK OPTION PLAN
The Company's 1994 Stock Option Plan provides for the granting of options
to purchase up to 1,400,000 shares of common stock at the fair market value
on the date of grant. Generally options granted under the 1994 plan become
exercisable over a five year period and expire not more than ten years from
the date of grant (all options outstanding at January 31, 1996 expire six
to ten years from date of grant).
F-13
<PAGE>
A summary of stock option activity follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------------
NUMBER
OF SHARES PRICE PER SHARE
<S> <C> <C> <C>
Balances, January 31, 1993 706,700 $4.2500 - $ 8.50
Granted 604,500 3.5000 - 13.75
Exercised (92,938) 0.0900 - 8.50
Cancelled (391,060) 3.5000 - 8.50
Assumed in acquisition of E-Motions (Note 3) 217,529 0.0875 - 1.17
----------
Balances, January 31, 1994 1,044,731 0.0875 - 13.75
Granted 910,000 4.8800 - 8.00
Exercised (110,451) 0.0500 - 6.50
Cancelled (200,939) 0.8750 - 13.75
----------
Balances, January 31, 1995 1,643,341 0.8750 - 13.75
Granted 817,055 4.2500 - 5.63
Exercised (366,222) 0.0875 - 13.50
Cancelled (98,990) 0.0875 - 5.75
----------
Balances, January 31, 1996 1,995,184 $0.0875 - $13.50
==========
</TABLE>
At January 31, 1996 options to purchase 701,938 shares of common stock were
exercisable and 135,748 shares were available for future grants under the
Plan.
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 1996, 1995 and 1994, 10,905, 11,432
and 9,053 shares were purchased at an average price of $5.15, $5.35 and
$2.98 per share, respectively.
ISSUANCE OF COMMON STOCK AND WARRANTS
On December 15, 1995, the Company issued convertible debt and warrants to
purchase 415,920 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. The warrants are exercisable at any time and expire on December 15,
1997. The total net proceeds are reflected as an addition to common stock
in the statement of shareholders' equity for the year ended January 31,
1996.
F-14
<PAGE>
12. INCOME TAXES
As a result of its net losses in fiscal 1996 and 1995, the Company recorded
no income tax provision in those years. The credit for income taxes of
$151,000 in fiscal 1994 resulted from the carryback of its 1994 losses to
prior years for federal tax purposes.
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:
<TABLE>
<CAPTION>
January 31,
1996 1995
(In thousands)
------------------
<S> <C> <C>
Deferred tax assets:
Net operating losses and tax credit carryforwards $ 16,521 $ 9,967
Reserves not currently deductible 2,410 4,022
Capitalized R&D expenditures 682 638
Other 184 175
-------- --------
19,797 14,802
Deferred tax liabilities:
Capitalized software and title development (209) (228)
-------- --------
19,588 14,574
Valuation allowance (19,588) (14,574)
-------- --------
Net deferred taxes $ - $ -
======== ========
</TABLE>
SFAS 109 requires that the tax benefit of net operating losses, temporary
differences and credit carryforwards be recorded as an asset to the extent
that management assesses that realization is "more likely than not."
Realization of the future tax benefits is dependent on the Company's
ability to generate sufficient taxable income within the carryforward
period. Because of the Company's recent history of operating losses, risks
associated with its new product introduction including the dependence on
rapid acceptance of new technology, the dependence on development of
complimentary software by third parties and other risks, such as
technological change in the industry, short product life cycles and
reliance on a limited number of suppliers and manufacturing contractors,
management believes that recognition of the deferred tax assets arising
from the above-mentioned future tax benefits is currently not appropriate
and, accordingly, has provided a valuation allowance. The valuation
allowance increased by approximately $5 million in fiscal 1996 primarily as
a result of an increase in net operating losses available to the Company.
F-15
<PAGE>
Net operating losses and tax credit carryforwards as of January 31, 1996
are as follows:
<TABLE>
<CAPTION>
EXPIRATION
(IN THOUSANDS) YEARS
<S> <C> <C>
Net operating losses, federal $ 43,200 2006-2011
Net operating losses, state 20,400 1998-2000
Tax credits, federal 600 2006-2011
Tax credits, state 500 2006-2011
</TABLE>
The Company's effective tax rate differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Computed at 35% $ (4,860) $ (3,070) $ (10,047)
Valuation allowance 5,014 3,166 6,952
Acquired research and develop - - 2,856
Other (154) (96) 88
-------- -------- ---------
Total $ - $ - $ (151)
======== ======== =========
</TABLE>
13. CUSTOMER AND GEOGRAPHIC INFORMATION
One domestic customer accounted for 11%, 18% and 16% of net sales in fiscal
1996, 1995 and 1994, respectively. 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.
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
Domestic $ 9,642 $ 27,792 $ 23,583
Export sales:
Asia Pacific 13,274 10,222 1,883
Europe 3,243 5,415 9,163
Canada 215 271 360
-------- -------- --------
Total $ 26,374 $ 43,700 $ 34,989
======== ======== ========
</TABLE>
14. SUBSEQUENT EVENT - BUSINESS COMBINATION
On April 22, 1996, the Company announced it had entered into an Agreement
and Plan of Reorganization (Agreement) with Active Design Corporation
(Active Design) under which the Company will be the surviving entity in a
merger transaction that is expected to be accounted for as a pooling of
interests. Under this Agreement, Active Design will exchange all of its
outstanding common stock 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 share (exchange ratio) of the Company. The
Company will also assume all 1,092,000 outstanding options to acquire
shares of common stock of Active Design at the exchange ratio, which
results in 240,240 options to acquire the Company's common stock. Active
Designs was incorporated on May 17, 1995 and is a development stage company
in the business of developing products for the multimedia market and,
accordingly, has not recorded revenues to date.
F-16
<PAGE>
Active Design's net loss for the period from May 17, 1995 through February 29,
1996 was $846,000.
* * * * *
F-17
<PAGE>
ACTIVE DESIGN CORPORATION
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS FOR THE PERIOD FROM
MAY 17, 1995 (INCEPTION) THROUGH FEBRUARY 29, 1996
AND INDEPENDENT AUDITORS' REPORT
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Active Design Corporation:
We have audited the accompanying balance sheet of Active Design Corporation (a
development stage company) as of February 29, 1996 and the related statements of
operations, shareholders' deficiency and of cash flows for the period from May
17, 1995 (inception) to February 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Active Design Corporation at February 29,
1996, and the results of its operations and its cash flows for the period from
May 17, 1995 (inception) to February 29, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
April 22, 1996
F-19
<PAGE>
ACTIVE DESIGN CORPORATION
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
BALANCE SHEET
FEBRUARY 29, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS -
Cash and Equivalents $ 836,631
EQUIPMENT - Net 587,303
OTHER ASSETS 6,331
----------
TOTAL $1,430,265
==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 83,674
Accrued liabilities 316,650
Current portion of capital lease obligation 10,426
Advance from shareholder 10,910
----------
Total current liabilities 421,660
----------
CAPITAL LEASE OBLIGATION 24,784
REDEEMABLE CONVERTIBLE PREFERRED STOCK 1,074,851
SUBSCRIPTION RECEIVED FOR REDEEMABLE CONVERTIBLE PREFERRED STOCK 755,000
SHAREHOLDERS' DEFICIENCY
Common stock - 10,000,000 shares authorized; 1,608,000 shares issued and outstanding 244,200
Deferred stock compensation (163,800)
Shareholder notes receivable (80,400)
Deficit accumulated during the development stage (846,030)
----------
Shareholders' deficiency (846,030)
----------
TOTAL $1,430,265
==========
</TABLE>
See notes to financial statements.
F-20
<PAGE>
ACTIVE DESIGN CORPORATION
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 17, 1995 (INCEPTION) TO FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
<S> <C>
OPERATING EXPENSES:
Research and development $ 699,790
Sales and marketing 82,328
General and administrative 42,844
---------
Total operating expenses 824,962
---------
INTEREST INCOME (4,801)
INTEREST EXPENSE 1,018
---------
NET LOSS $ 821,179
=========
NET LOSS PER COMMON SHARE $ 0.72
=========
SHARES USED IN PER SHARE COMPUTATION 1,178,256
=========
</TABLE>
See notes to financial statements.
F-21
<PAGE>
ACTIVE DESIGN CORPORATION
(A DEVELOPMENT STAGE COMPANY)
Statement of Shareholders' Deficiency
For the Period from May 17, 1995 (inception) to February 29, 1996
<TABLE>
<CAPTION>
Deficit
Common Stock Deferred Accumulated
-------------------- Stock Shareholder During
Shares Amount Compensation Notes Receivable Development Stage Total
------ ------ ------------ ---------------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, May 17, 1995
(inception) - $ - $ - $ - $ - $ -
Common stock issued for
notes, on December 15,
1995 at $0.05 per share 1,608,000 80,400 - (80,400) - -
Deferred stock
compensation - 163,800 (163,800) - - -
Accretion of redeemable
preferred stock
redemption value - - - - (24,851) (24,851)
Net loss - - - - (821,179) (821,179)
--------- -------- --------- -------- --------- ---------
Balances, February 29,
1996 1,608,000 $244,200 $(163,800) $(80,400) $(846,030) $(846,030)
========= ======== ========= ======== ========= =========
</TABLE>
See notes to financial statements.
F-22
<PAGE>
ACTIVE DESIGN CORPORATION
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 17, 1995 (INCEPTION) TO FEBRUARY 29, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (821,179)
Adjustments to reconcile net loss cash used for operating activities:
Depreciation and amortization 37,091
Changes in assets and liabilities:
Accounts payable 83,674
Accrued liabilities 316,650
----------
Net cash used for operating activities (383,764)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment additions (585,602)
Other assets (7,108)
----------
Net cash used for investing activities (592,710)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligation (2,805)
Proceeds from sale of preferred stock 1,805,000
Proceeds from shareholder advance 10,910
----------
Net cash provided by financing activities 1,813,105
----------
INCREASE IN CASH AND EQUIVALENTS
AND BALANCE AT FEBRUARY 29, 1996 $ 836,631
==========
NONCASH INVESTING AND FINANCING TRANSACTIONS:
Issuance of common stock for notes receivable $ 80,400
==========
Equipment acquired under capital leases $ 38,015
==========
Accretion of redeemable preferred stock redemption value $ 24,851
==========
Deferred stock compensation $ 163,800
==========
</TABLE>
There were no cash payments for interest or income taxes in the period.
See notes to financial statements.
F-23
<PAGE>
ACTIVE DESIGN CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FROM MAY 17, 1995 (INCEPTION) TO FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Active Design Corporation (the Company) was incorporated as a California
Corporation on May 17, 1995 and is a development stage company in the
business of developing low cost, full motion video hardware products for
the multimedia industry. The Company's primary activity to date has been
product development and fund raising.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
Equipment consists primarily of computers and related equipment and is
stated at cost. Depreciation is computed using the straight-line method
based on the useful lives of the assets (three to five years).
Organization costs are included in other assets and are amortized using the
straight-line method over five years.
Income Taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 under which deferred taxes are based
on an asset and liability approach. The Company has net operating loss
carryforwards of approximately $800,000, which expire in 2111. No deferred
tax benefit has been provided due to uncertainties surrounding the
realization of this tax benefit.
Net loss per common share is computed using the weighted average number of
common shares outstanding. Redeemable convertible preferred stock has been
excluded because it would be anti-dilutive. The accretion of preferred
stock redemption value has been reflected as an adjustment to the net loss
in determining net loss per common share.
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 and
the valuation allowance on deferred tax assets. Actual results could differ
from those estimates.
F-24
<PAGE>
Stock Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," establishes accounting and
disclosure requirements using a fair value method of accounting for stock-
based employee compensation plans and is effective for fiscal years
beginning after December 15, 1995. The Company will adopt this statement on
February 1, 1996 and will elect to continue applying APB Opinion No. 25 to
account for its stock-based employee compensation arrangements. Based on
the Company's current use of equity instruments, adoption of the new
standard will not affect reported earnings, financial position or cash
flows.
3. EQUIPMENT
<TABLE>
<CAPTION>
Equipment consists of the following at February 29, 1996:
<S> <C>
Computers and software $550,782
Equipment 56,413
Furniture and fixtures 16,422
--------
623,617
Accumulated depreciation and amortization (36,314)
--------
$587,303
========
</TABLE>
Equipment with a net book value of $34,240, net of accumulated amortization
of $3,805, is leased under capital leases. Computers and software includes
$300,000 which has been accrued as the Company's best estimate of an
obligation due to certain of its software suppliers. The amount is subject
to negotiation and the estimated range is $300,000 to $350,000.
4. SHAREHOLDER ADVANCE
An employee shareholder has advanced $10,910 to the Company for use as
working capital during the establishment of a sales branch in Taiwan. The
advance is noninterest bearing, unsecured and has no fixed repayment terms.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock all of which
has been designated as Series A. In December 1995, the Company issued
2,100,000 shares of Series A redeemable convertible preferred stock for
proceeds of $1,050,000. Prior to February 29, 1996, the Company also
received a total of $755,000 in subscriptions for shares of Series A
redeemable convertible preferred stock which were issued after February 29,
1996.
Significant terms of outstanding redeemable convertible preferred stock are
as follows:
. The preferred stock is redeemable at the option of the holder after the
tenth anniversary of the initial issuance, for an amount equal to the
original issuance price plus any declared and unpaid dividends and a
redemption premium equal to an interest rate of 9% per annum. The
difference between the original issue price and the redemption amount is
being charged to deficit accumulated during development stage.
F-25
<PAGE>
. Each share is convertible at the option of the holder into one share of
common stock, subject to adjustment for events of dilution. Shares will
automatically be converted upon a public offering of common stock
meeting specified criteria or upon agreement by holders of 2/3 of the
outstanding shares to convert.
. Preferred shares have the same voting rights as the common shares into
which they are convertible.
. Dividends may be declared at the discretion of the Board of Directors
and are noncumulative.
. In the event of liquidation of the Company, holders of Series A
preferred shares are entitled to receive, prior to any distribution to
holders of common stock, an amount equal to $0.50 per share, all
declared but unpaid dividends, and an amount which will result in a
cumulative 9% rate of return calculated from the original issue date.
6. SHAREHOLDERS' EQUITY
The Company's common stock includes 1,608,000 restricted shares issued to
its founders, officers and employees that are subject to a right of
repurchase by the Company upon termination of employment at the original
purchase amount. Such repurchase right expires ratably over a four year
period from the date of issuance. The Company also has a right to reacquire
that person's vested shares at the fair value of the shares upon
termination of employment. In addition, the Company retains a right of
first refusal regarding any other sale or transfer of shares. The
repurchase right as to vested shares and the right of first refusal expires
upon a merger with another company, the sale of all or substantially all of
the Company's assets or upon an initial public offering of the Company's
stock. Shareholders' notes receivable represent amounts due from officers
and employees for the issuance of shares of restricted stock. The notes are
full recourse, bear interest at 12% and are due five years from the date of
issuance (2000 to 2001).
Stock Option Plan
The Company's Stock Option Plan provides for the granting of options to
purchase up to 1,500,000 shares of common stock at the fair market value on
the date of grant. Generally, options granted under the plan become
exercisable over a four-year period and expire not more than ten years
from the date of grant. Since inception, 1,092,000 options have been issued
at an issue price of $0.05 per share, and all such options are outstanding
at February 29, 1996. The fair value per share at the measurement date of
such option was $0.20 per share and, accordingly, $163,800 has been
recorded as deferred stock compensation. None of these options were
exercisable at February 29, 1996 and 408,000 shares are available for
further grant.
F-26
<PAGE>
7. COMMITMENTS
The Company leases its facility under a noncancellable operating lease that
expires in 1999. In addition, the Company leases certain equipment under
capital leases. At February 29, 1996, future minimum annual lease payments
are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ended February 29: Leases Leases
<S> <C> <C>
1997 $ 14,734 $ 20,544
1998 14,734 20,544
1999 10,883 6,848
-------- --------
40,351 $ 47,936
========
Amounts representing interest (5,141)
--------
Present value or minimum lease payments 35,210
Current portion (10,426)
--------
Capital lease obligation $ 24,784
========
</TABLE>
8. SUBSEQUENT EVENT
On April 22, 1996, the Company announced it had entered into an Agreement
and Plan of Reorganization (Agreement) with Sigma Designs, Inc., subject to
approval by the preferred stockholders of the Company, under which Sigma
Designs, Inc. will be the surviving entity in a merger transaction
accounted for as a pooling of interests. Under the Agreement, the company
will exchange each outstanding share of common stock and preferred stock
into 0.22 share of common stock of Sigma Designs, Inc. In addition, Sigma
Designs, Inc. will assume all outstanding options at the same exchange
ratio.
* * * * * * * * *
F-27
<PAGE>
SIGMA DESIGNS, INC.
AND ACTIVE DESIGN CORPORATION
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
F-28
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
reflect the merger of Sigma Designs, Inc. and Active Design Corporation under
the application of the pooling-of-interests method of accounting. Under this
method of accounting, the historical book values of the assets, liabilities, and
shareholders' equity of Active Designs Corporation, as reported on its February
29, 1996 balance sheet, are carried over onto the January 31, 1996 unaudited pro
forma condensed combined balance sheet of Sigma Designs, Inc. and no good will
or other intangible assets are created. The unaudited pro forma condensed
combined statement of operations for the year ended January 31, 1996 combines
the results of operations of Sigma Designs, Inc. for the year ended January 31,
1996 and Active Design Corporation for the period from May 17, 1995 (inception)
through February 29, 1996.
The unaudited pro forma condensed combined financial statements do not purport
to be indicative of the combined financial position or results of operations of
future periods or indicative of the results that actually would have been
realized had the entities been a single entity during these periods.
The accompanying unaudited pro forma financial information is based on a
conversion ratio of 22 shares of Sigma Designs, Inc. common stock for each share
of Active Design Corporation preferred and common stock.
F-29
<PAGE>
SIGMA DESIGNS, INC. AND ACTIVE DESIGN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------ ---------------------------
Active
Sigma Design
Designs, Inc. Corporation Adjustments Combined
January 31, February 29,
1996 1996
<S> <C> <C> <C> <C>
Current assets:
Cash and equivalents $ 3,810 $ 837 $ $ 4,647
Short-term investments 10,966 -- -- 10,966
Accounts receivable, net 4,789 -- -- 4,789
Inventories, net 2,044 -- -- 2,044
Prepayment and other assets 760 -- -- 760
------- ------- ------- -------
Total current assets 22,369 837 -- 23,206
Property and equipment, net 910 587 -- 1,497
Other assets 134 6 -- 140
------- ------- ------- -------
Total assets $23,413 $ 1,430 -- $24,843
======= ======= ======= =======
Current liabilities:
Line of credit $ 6,392 $ -- $ -- $ 6,392
Accounts payable 2,785 84 -- 2,869
Accrued liabilities 1,704 317 200 2,221
Current portion of capital lease obligation -- 10 -- 10
Accrued facilities 418 -- 418
Advance from shareholder -- 11 -- 11
------- ------- ------- -------
Total current liabilities 11,299 421 200 11,921
------- ------- ------- -------
Capital lease obligation -- 24 -- 24
Accrued facilities - long-term 517 -- -- 517
Redeemable convertible preferred stock (Note 2) -- 1,075 (1,075) --
Subscriptions received for redeemable
convertible preferred stock (Note 2) -- 755 (755) --
Shareholders' equity:
Common stock (Note 2) 45,501 244 1,830 47,655
Deferred stock compensation -- (164) -- (164)
Accumulated deficit (Note 2) (33,923) (846) (200) (34,969)
Shareholder note receivable -- (80) -- (80)
Unrealized gain on securities available for sale 19 -- -- 19
------- ------- ------- -------
Total shareholders' equity 11,597 (846) 1,530 12,381
------- ------- ------- -------
Total liabilities and shareholders' equity $23,413 $ 1,430 $ -- $24,843
======= ======= ======= =======
</TABLE>
F-30
<PAGE>
SIGMA DESIGNS, INC. AND ACTIVE DESIGN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------ ---------------------------
Active
Sigma Design
Design, Inc. Corporation
Year Ended Period Ended
January 31, February 29,
1996 1996 Adjustments Combined
<S> <C> <C> <C> <C>
Net sales $ 26,374 $ -- $ -- $ 26,374
Costs and expense:
Cost of sales 25,492 -- -- 25,492
Research and development 3,799 700 -- 4,499
Selling and marketing 7,870 82 -- 7,952
General and administrative 4,165 43 -- 4,208
Restructuring charges (350) -- -- (350)
-------- -------- -------- --------
40,976 825 -- 41,801
-------- -------- -------- --------
Loss from operations (14,602) (825) -- (15,427)
Interest income 444 5 -- 449
Interest expense (395) (1) -- (396)
Gains from investments 666 -- -- 666
-------- -------- -------- --------
Net loss $(13,887) $ (821) $ -- $(14,708)
======== ======== ======== ========
Net loss per common share $ (1.81) $ (0.72) $ -- $ (1.82)
======== ======== ======== ========
Shares used in computation 7,679 1,178 7,917
======== ======== ========
</TABLE>
F-31
<PAGE>
SIGMA DESIGNS, INC. AND ACTIVE DESIGN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. The unaudited pro forma condensed combined balance sheet reflects the
issuance of 247,280 shares of Sigma Designs, Inc. common stock, based on an
exchange ratio of 0.22 shares of Sigma Designs, Inc. common stock for each
share of Active Design Corporation preferred and common stock, including
subscriptions for preferred stock.
2. For purposes of the unaudited pro forma condensed combined statement of
operations, the pro forma condensed combined net loss per share is based on
the combined weighted average number of common shares of Sigma Designs,
Inc. and common and preferred shares of Active Design Corporation based
upon the exchange ratio of 0.22 shares of Sigma Designs, Inc. common stock
for each share of Active Design corporation preferred and common stock.
3. The unaudited pro forma data combines Sigma Designs, Inc.'s income
statement data for the year ended January 31, 1996 with Active Design
Corporation's income statement data for the period from May 17, 1995
(inception) through February 29, 1996 as though the transaction had
occurred effective February 1, 1995. The unaudited pro forma balance sheet
data combines Sigma Designs, Inc.'s balance sheet data as of January 31,
1996 with Active Design Corporation's balance sheet data as of February 29,
1996, as if the transaction had occurred effective January 31, 1996.
4. Estimated merger expenses to be incurred by Sigma Designs, Inc. and Active
Design Corporation are approximately $200,000 and have been included
as an accrued liability in the unaudited pro forma balance sheet data.
These expenses will be charged against net loss of the combined Company at
the consummation of the merger.
F-32
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS:
BEGINNING OF WRITE OFFS OF BALANCE AT
CLASSIFICATION YEAR ADDITIONS ACCOUNTS END OF YEAR
- ---------------------------------------------- -------------- ------------ ---------------- -------------
<S> <C> <C> <C> <C>
Allowance for returns and doubtful accounts,
price protection and sales returns:
Year ended January 31,
1996 $1,101,000 $ 134,000 $ 343,000 $ 892,000
1995 885,000 351,000 135,000 1,101,000
1994 579,000 389,000 83,000 885,000
Inventory reserves
Year Ended January 31,
1996 $5,620,000 $5,789,000 $7,754,000 $3,655,000
1995 4,470,000 4,425,000 3,275,000 5,620,000
1994 1,455,000 8,022,000 6,007,000 4,470,000
</TABLE>
- ------------
(1) Amount written off, net of recoveries.
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------
<C> <S> <C>
3.1(1) Restated Articles of Incorporation, as amended.
3.2(2) Bylaws of Registrant, as amended.
4.1(1) Article IV of the Articles of Incorporation of Registrant (see Exhibit 3.1).
10.1(3) Distribution Agreement dated September 10, 1985 between Registrant and
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 Agreement and Plan of Reorganization by and among the Registrant, Sigma
Acquisition Corporation and Active Design Corp. dated as of April 23, 1996.
22.1 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (included on page 21).
27 Financial Data Schedule.
</TABLE>
__________________
(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.
<PAGE>
(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 of 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).
+ Pursuant to Rule 406(b) under the Securities Act, confidential treatment
has been granted to portions of this exhibit, which portions have been
deleted and filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 10.11
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
By and Among
SIGMA DESIGNS, INC.,
SIGMA ACQUISITION CORP.
and
ACTIVE DESIGN CORPORATION
Dated as of April 23, 1996
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION, dated as of April 23, 1996, among
SIGMA DESIGNS, INC., a California corporation ("Sigma"), SIGMA ACQUISITION
CORP., a California corporation and a wholly-owned subsidiary of Sigma ("Sub"),
and ACTIVE DESIGN CORPORATION, a California corporation ("Active Design") (the
"Agreement").
INTENDING TO BE LEGALLY BOUND, and in consideration of the promises and
mutual covenants and agreements contained herein, Sigma, Sub and Active Design
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 Merger; Effective Time of the Merger. Subject to the terms and
------------------------------------
conditions of this Agreement and of the Agreement and Plan of Merger dated the
date hereof and attached hereto as Exhibit A (the "Merger Agreement"), Sub will
be merged with Active Design (the "Merger") in accordance with the California
General Corporation Law. The Merger Agreement provides, among other things, the
method of effecting the Merger and the manner and basis of converting each
issued and outstanding share of capital stock of Active Design into shares of
Common Stock of Sigma ("Sigma Common Stock"). The Merger Agreement shall be
executed by Active Design, Sigma and Sub concurrently with the execution of this
Agreement.
Subject to the provisions of this Agreement and the Merger Agreement, the
Merger Agreement, together with required officers' certificates, shall be filed
in accordance with the California
<PAGE>
General Corporation Law on the Closing Date (as defined in Section 1.2). The
Merger shall become effective upon confirmation of such filing of the Merger
Agreement and such officers' certificates. The date of confirmation of such
filing being hereinafter referred to as the "Effective Date of the Merger" and
the time of confirmation of such filing is hereinafter referred to as the
"Effective Time of the Merger" or the time of "effectiveness."
1.2 Closing. The closing of the Merger (the "Closing") will take place as
-------
soon as practicable on the later of (i) the date of the Active Design
Shareholders' approval referred to in Section 5.1(a) or (ii) the first business
day after satisfaction or waiver of the latest to occur of the conditions set
forth in Article V (the "Closing Date"), at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304, unless a
different date or place is agreed to in writing by the parties hereto.
1.3 Effects of the Merger. At the Effective Time of the Merger, (i) the
---------------------
separate existence of Sub shall cease and Sub shall be merged with and into
Active Design (Sub and Active Design are sometimes referred to herein as the
"Constituent Corporations" and Active Design after the Merger is sometimes
referred to herein as the "Surviving Corporation"), (ii) the Articles of
Incorporation of Sub shall be the Articles of Incorporation of the Surviving
Corporation, except that such Articles shall be amended to provide that the name
of the corporation is Active Design Corporation, (iii) the Bylaws of Sub shall
be the Bylaws of the Surviving Corporation, (iv) the directors of Sub shall be
the directors of Active Design, (v) the officers of Active Design shall remain
the officers of the Surviving Corporation; and (vi) the Merger shall, from and
after the Effective Time of the Merger, have all the effects provided by
applicable law.
1.4 Tax-Free Reorganization. The Merger is intended to be a reorganization
-----------------------
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code").
-2-
<PAGE>
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock. As of the Effective Time of the Merger, by
-----------------------
virtue of the Merger and without any action on the part of the holder of any
shares of capital stock of Active Design:
(a) Capital Stock of Sub. All issued and outstanding shares of capital
--------------------
stock of Sub shall be converted into 1,000 shares of Common Stock of Active
Design. Each stock certificate of Active Design evidencing ownership of any such
shares shall continue to evidence ownership of such shares of capital stock of
the Surviving Corporation.
(b) Conversion of Capital Stock of Active Design. All issued and
--------------------------------------------
outstanding shares of capital stock of Active Design (other than the 1,000
shares of capital stock of Sub which are converted into shares of Common Stock
of the Surviving Corporation pursuant to Section 2.1(a) and those shares held by
persons exercising dissenters' rights in accordance with Chapter 13 of the
California General Corporation Law ("Dissenting Shares")) shall be converted and
exchanged, without any action on the part of the holders thereof, in the
following manner:
Concurrent with the Effective Time of the Merger, the holders of
outstanding shares of Active Design Common Stock and Preferred Stock (together,
the "Active Design Capital Stock") shall, subject to the same terms and
conditions upon which they received the existing Active Design Capital Stock,
have a right to receive newly issued shares of Common Stock of Sigma (the
"Exchange Shares") such that one share of Active Design Capital Stock
outstanding prior to the Merger shall
-3-
<PAGE>
be exchanged for a 0.22 share of Sigma Common Stock, all shares of Active Design
Capital Stock being exchanged for an aggregate of 1,123,760 shares of Sigma
Common Stock.
The ratio pursuant to which each share of Active Design Capital Stock will
be exchanged for 1,123,760 shares of Sigma Common Stock, determined in
accordance with the foregoing provisions, is hereinafter referred to as the
"Exchange Ratio."
(c) Escrow. Of the 1,123,760 shares issued pursuant to Section 2.1(b),
------
101,138 shares shall be placed into escrow (the "Escrow Fund") and subject to
the Escrow Agreement, attached hereto as Exhibit B, pursuant to Sections 3.1,
7.2, 7.3, 7.4, 7.5 and 7.6, without any act of any shareholder of Active Design.
Such shares shall remain in escrow until the earlier to occur of (i) the first
anniversary date of the Effective Time or (ii) the date Sigma has received a
signed opinion from its independent auditors certifying Sigma's financial
statements for the year ending January 31, 1997 (the "1997 Audit Date"), but
shall not terminate as to any claim asserted in good faith prior to such date
and shall be subject to the Escrow Agreement. The Escrow Agreement provides that
the shares are subject to any rights or claims which Sigma may have against
Active Design with respect to the representations and warranties made by Active
Design in Sections 3.1(b) and (j) herein.
(d) Dissenters' Rights. If holders of capital stock of Active Design
------------------
are entitled to dissenters' rights in connection with the Merger under Chapter
13 of the California General Corporation Law, any Dissenting Shares shall not be
converted into Sigma Common Stock but shall be converted into the right to
receive such consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to the law of the State of California.
-4-
<PAGE>
(e) Fractional Shares. No fraction of a share of Sigma Common Stock
-----------------
will be issued, but in lieu thereof each holder of shares of Active Design
Capital Stock who would otherwise be entitled to a fraction of a share of Sigma
Common Stock (after aggregating all fractional shares of Sigma Common Stock to
be received by such holder) shall receive from Sigma an amount of cash (rounded
to the nearest whole cent) equal to the product of (i) such fraction, multiplied
by (ii) the average closing price of a share of Sigma Common Stock for the ten
most recent days that Sigma Common Stock has traded, ending on the trading day
immediately prior to the Effective Time, as reported on the NASDAQ National
Market System.
(f) Registration Rights. The holders of Exchange Shares shall be
-------------------
entitled to one request registration of the Exchange Shares on Form S-3 but no
sooner than three months after the closing. The closing is presently
anticipated to be April 19, 1996. The terms and conditions of the request
registration shall be evidenced by a Registration Rights Agreement in a form
substantially similar to that attached hereto as Exhibit C.
2.2 Exchange of Shares.
------------------
(a) No Further Ownership Rights in Active Design Capital Stock. All
----------------------------------------------------------
Sigma Common Stock delivered upon the surrender for exchange of shares of Active
Design Capital Stock in accordance with the terms hereof shall be deemed to have
been delivered in full satisfaction of all rights pertaining to such shares of
Active Design Capital Stock. There shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares
of Active Design Capital Stock which were outstanding immediately prior to the
Effective Time of the Merger.
-5-
<PAGE>
2.3 Active Design Stock Options. Upon the Closing, Sigma shall assume each
---------------------------
and every outstanding option for shares of Active Design Common Stock issued
pursuant to the Active Design Stock Option Plan (an "Active Design Option") and
all obligations of Active Design under the Active Design Stock Option Plan
relating to the Active Design Options. Each and every assumed Active Design
Option (an "Assumed Option") shall continue to be on the same terms and
conditions of the corresponding Active Design Option except that (i) it will be
exercisable for that number of whole shares of Sigma Common Stock equal to the
product obtained by multiplying the number of shares of Active Design Common
Stock subject to such Active Design Option immediately prior to closing by the
Exchange Ratio and rounded down to the nearest whole number and (ii) the per
share exercise price for the shares of Sigma Common Stock issuable upon exercise
of an Assumed Option shall be determined by dividing the per share exercise
price under the corresponding Active Design Option by the Exchange Ratio, and
rounding the exercise price up to the nearest whole cent. Sigma shall issue to
each holder of an outstanding Active Design Option a document evidencing the
Assumed Option after the Closing Date. The right to receive the Assumed Option
may not be assigned or transferred in any manner except by operation of law, by
will or by the laws of descent. Any attempted assignment in violation of this
Section shall be void.
-6-
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Active Design. Except as disclosed
-----------------------------------------------
in a document referring specifically to the representations and warranties in
this Agreement which identifies the section and subsection to which such
disclosure relates and which is delivered by Active Design to Sigma prior to the
execution of this Agreement (the "Active Design Disclosure Schedule," attached
hereto as Exhibit D), Active Design represents and warrants to Sigma and Sub as
set forth below.
(a) Organization, Standing and Power. Active Design is a corporation
--------------------------------
duly organized, validly existing and in good standing under the laws of
California, and has all requisite power and authority to own, operate and lease
its properties and to carry on its business as now being conducted. Active
Design is duly qualified as a foreign corporation and is in good standing in
each jurisdiction in which the failure to so qualify would have a material
adverse effect on its business condition. Active Design has no subsidiaries or
any direct or indirect equity interest in or loans to any partnership,
corporation, joint venture, business association or other entity. Active Design
has delivered to Sigma current, complete and correct copies of the Articles of
Incorporation and Bylaws of Active Design as amended to the date hereof.
(b) Capital Structure. The authorized capital stock of Active Design
-----------------
consists of 1,608,000 shares of Common Stock, without par value, 3,500,000
shares of Series A Preferred Stock, without par value, and options to purchase
1,092,000 shares of Common Stock. The outstanding shares of Series A Preferred
Stock are convertible into an aggregate of 3,500,000 shares of Common Stock of
Active Design. All outstanding shares of Active Design Common Stock and
-7-
<PAGE>
Preferred Stock are validly issued, fully paid and nonassessable and not subject
to preemptive rights created by statute, Active Design's Articles of
Incorporation or Bylaws or any agreement to which Active Design is a party or by
which Active Design is bound. Except for the shares and options identified
above, there are no shares, options, warrants, calls, conversion rights,
commitments or agreements of any character to which Active Design is a party or
by which it may be bound that do or may obligate Active Design to issue, deliver
or sell, or cause to be issued, delivered or sold, additional shares of the
capital stock of Active Design or that do or may obligate Active Design to
grant, extend or enter into any such share, option, warrant, call, conversion
right, commitment or agreement.
(c) Authority. Active Design has all requisite corporate power and
---------
authority to enter into this Agreement and the Merger Agreement and, subject to
approval of this Agreement and the Merger Agreement by the shareholders of
Active Design, to perform its obligations hereunder, and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the Merger Agreement, the performance by Active Design of its obligations
hereunder and thereunder and the consummation of the transactions contemplated
hereby and thereby have been duly and validly authorized by all necessary
corporate action on the part of Active Design, and have been unanimously
approved by the Board of Directors of Active Design. No other corporate
proceeding on the part of Active Design is necessary to authorize this Agreement
or the Merger Agreement or the performance of Active Design's obligations
hereunder or thereunder or the consummation of the transactions contemplated
hereby or thereby, other than the approval of the Merger by Active Design's
shareholders. This Agreement and the Merger Agreement have been duly executed
-8-
<PAGE>
and delivered by Active Design and constitute legal, valid and binding
obligations of Active Design enforceable against Active Design in accordance
with their respective terms, except as enforcement may be limited by bankruptcy,
insolvency, or other similar laws affecting the enforcement of creditors' rights
generally. The execution and delivery of this Agreement and the Merger
Agreement do not, and the consummation of the transactions contemplated hereby
and thereby will not result in any breach or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material benefit
under, or result in the creation of a material lien or encumbrance on any of the
properties or assets of Active Design pursuant to any material agreement,
contract, note, or license to which Active Design is a party or by which Active
Design or any of its properties or assets may be bound or affected.
(d) Financial Statements. Active Design has furnished Sigma with its
--------------------
unaudited financial statements for the period from inception until February 29,
1996, including a balance sheet of Active Design at February 29, 1996 and the
related statement of income. The foregoing financial statements are referred to
collectively as the "Active Design Financial Statements." The Active Design
Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied (except that the Active Design
Financial Statements related thereto do not contain full notes), and fairly
present the financial position of Active Design at the date thereof and the
results of their operations and changes in financial position for the periods
then ended.
-9-
<PAGE>
(e) No Defaults. Active Design has not received notice that it would
-----------
be with the passage of time, in default or violation of any material term,
condition or provision of any material agreement, note, or license to which
Active Design is a party or by which Active Design or its properties or assets
may be bound.
(f) Litigation. There is no action, suit, proceeding, claim or
----------
investigation pending or, to the best knowledge of Active Design, threatened,
against Active Design which could, individually or in the aggregate, have a
material adverse effect on the Business Condition of Active Design.
(g) Absence of Undisclosed Liabilities. Active Design has no
----------------------------------
liabilities or obligations (whether absolute, accrued or contingent, and whether
or not determined or determinable) of a character which, under generally
accepted accounting principles, should be accrued, shown, disclosed or indicated
in a balance sheet of Active Design, except liabilities, obligations or
contingencies which in the aggregate are not more than $10,000 more than the
aggregate of all liabilities, obligations and contingencies accrued or reserved
against in the Active Design Financial Statements.
(h) Major Contracts. Active Design has provided to Sigma a list of
---------------
all material contracts to which it is a party as a part of the Active Design
Disclosure Schedule, attached hereto as Exhibit E. Copies of all such contracts
have been provided to Sigma.
(i) Interests of Officers. None of Active Design's officers or
---------------------
directors has any material interest in any property, real, personal, tangible or
intangible, used in or pertaining to its business, including any interest in
the Active Design Intellectual Property Rights, except for rights as a
shareholder.
-10-
<PAGE>
(j) Technology. Active Design owns, or is licensed or otherwise
----------
entitled to use rights to all patents, trademarks, trade names, service marks,
copyrights, and any applications therefor, maskworks, designs, net lists,
schematics, technology, know-how, computer software programs or applications and
tangible or intangible proprietary information or material that in any material
respect are used or currently proposed to be used in the business of Active
Design (the "Active Design Intellectual Property Rights"). Active Design is
not, and as a result of the execution and delivery of this Agreement or the
performance of Active Design's obligations hereunder will not be, in violation
of any material license, sublicense or agreement described in the Active Design
Material Contract Schedule as described in 3.1(h). Active Design is the sole
and exclusive owner or licensee of, with all right, title and interest in and to
(free and clear of any liens or encumbrances), the Active Design Intellectual
Property Rights. No claims with respect to the Active Design Intellectual
Property Rights have been asserted or, to the knowledge of Active Design after
reasonable investigation, are threatened by any person, nor does Active Design
know of any valid grounds for any bona fide claims (i) to the effect that the
manufacture, sale or use of any product as now used or offered or proposed for
use or sale by Active Design infringes on any copyright, patent or trade secret,
(ii) against the use by Active Design of any trademarks, trade names, trade
secrets, copyrights, technology, know-how or computer software and applications
and hardware used in the business of Active Design as currently conducted or as
proposed to be conducted, or (iii) challenging the ownership, validity or
effectiveness of any of the Active Design Intellectual Property Rights. No
third party possesses any claim in any way limiting Active Design Intellectual
Property Rights, including, but not limited to, claims made by third parties
that previously or currently employed or employ any past or
-11-
<PAGE>
present employees or consultants of Active Design. Without limiting the
foregoing, Active Design represents that the Product (as defined by the Parties
separate and apart from this Agreement), if sold by Active Design or Sigma, will
not infringe any intellectual property rights held by any third party and that
there will be no reasonable basis for claiming any such infringement.
(k) Title to Properties; Absence of Liens and Encumbrances; Condition
-----------------------------------------------------------------
of Equipment. Active Design has good and valid title to, or, in the case of
- ------------
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used in its business, free and
clear of any liens, charges, pledges, security interests or other encumbrances,
except as reflected in the Active Design Financial Statements and except for
such imperfections of title and encumbrances, if any, which are not substantial
in character, amount or extent, and which do not materially detract from the
value, or interfere with the present use, of the property subject thereto or
affected thereby.
(l) Active Design Employees. The Active Design Disclosure Schedule
-----------------------
identifies the employees and/or consultants working exclusively for Active
Design and sets forth the job title and each such employee's base salary and
anticipated bonus, if any. There have been no stock options or restricted stock
awards issued to such employees. None of such employees has indicated to Active
Design a present intention to resign or retire.
(m) Investment Representation. The holders of Active Design Capital
-------------------------
Stock hereby represent that they are aware that the shares issued in the Merger
will not be registered under the Securities Act of 1933 and may not be sold or
transferred in the absence of such a registration or an opinion of counsel to
Sigma that such shares may be sold pursuant to an exemption to such
-12-
<PAGE>
registration. The holders of shares to be issued in the Merger represent that
they have the ability to evaluate the Sigma shares to be issued in the Merger
and have received access to all information requested by them necessary to
complete an evaluation of the Sigma shares. Such holders further represent that
they are acquiring the Sigma shares for investment purposes and not with a view
towards further distribution and that they recognize that the availability of an
exemption from the Securities Act for the issuance of shares pursuant to the
Merger may depend upon the accuracy of the foregoing representations.
(n) Disclosure. No representation or warranty made by Active Design
----------
in this Agreement, nor any document, written information, statement, financial
statement, certificate, schedule or exhibit prepared and furnished or to be
prepared and furnished by Active Design or its representatives pursuant hereto
or in connection with the transactions contemplated hereby, contains or will
contain any untrue statement of a material fact, or omits or will omit to state
a material fact necessary to make the statements or facts contained herein or
therein not misleading in light of the circumstances under which they were
furnished.
3.2 Representations and Warranties of Sigma and Sub. Except as disclosed
-----------------------------------------------
in a document referring specifically to the representations and warranties in
this Agreement which identifies the section and subsection to which such
disclosure relates and which is delivered by Sigma to Active Design prior to the
execution of this Agreement (the "Sigma Disclosure Schedule," attached hereto as
Exhibit E), Sigma and Sub represent and warrant to, and agree with, Active
Design as follows:
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(a) Organization; Standing and Power. Sigma is a corporation validly
--------------------------------
existing and in good standing under the laws of California, and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its businesses as now being conducted.
(b) Capital Structure. As of the date hereof the authorized capital
-----------------
stock of Sigma consists of 20,000,000 shares of Sigma Common Stock, no par value
and 2,000,000 shares of Sigma Preferred Stock, no par value. At the close of
business on January 31, 1996, approximately 8,724,161 shares of Sigma Common
Stock were outstanding, approximately 135,748 shares of Sigma Common Stock were
reserved for issuance upon the exercise of outstanding stock options, warrants
to purchase 415,920 shares at the exercise price of $7.621 per share had been
issued, and no shares of Sigma Preferred Stock were outstanding. All the
outstanding shares of Sigma Common Stock are validly issued, fully paid,
nonassessable and free of preemptive rights. The shares of Sigma Common Stock
issuable in connection with the Merger are duly authorized and reserved for
issuance and, when issued in accordance with the terms of the Merger Agreement,
will be validly issued, fully paid, nonassessable and free of preemptive
rights. As of the date hereof, the authorized capital stock of Sub consists of
1,000 shares of Common Stock, without par value, all of which are validly
issued, fully paid and nonassessable and owned by Sigma. Except for the shares
listed above issuable pursuant to Sigma stock options, and warrants, there are
not any options, warrants, calls, conversion rights, commitments or agreements
of any character to which Sigma or any Subsidiary of Sigma is a party or by
which any of them may be bound obligating Sigma or any Subsidiary of Sigma to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of the capital stock of Sigma or of any Subsidiary of Sigma or obligating
Sigma or any Subsidiary of Sigma to grant, extend or enter into
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any such option, warrant, call, conversion right, commitment or agreement. In
this Agreement, a "Subsidiary" means a corporation or other entity whose voting
securities are owned or are otherwise controlled directly or indirectly by a
parent corporation or other intermediary entity in an amount sufficient to elect
at least a majority of the Board of Directors or other managers of such
corporation or other entity.
(c) Authority. Sigma and Sub have all requisite corporate power and
---------
authority to enter into this Agreement and to consummate the transactions
contemplated hereby and by the Merger Agreement. Sub has all requisite
corporate power and authority to enter into the Merger Agreement. The execution
and delivery by Sigma of this Agreement, and by Sub of this Agreement and the
Merger Agreement, and the consummation of the transactions contemplated by this
Agreement and the Merger Agreement have been duly authorized by all necessary
corporate action on the part of Sigma and Sub, respectively. This Agreement has
been duly executed and delivered by Sigma and Sub and constitutes a valid and
binding obligation of Sigma and Sub enforceable in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, or other similar
laws affecting the enforcement of creditors' rights generally.
(d) SEC Documents; Sigma Financial Statements. Sigma has furnished
-----------------------------------------
Active Design with a true and complete copy of each Form 10-K and 10-Q filed by
Sigma with the SEC since January 1, 1995 (the "Sigma SEC Documents"). As of
their respective filing dates, the Sigma SEC Documents complied in all material
respects with the requirements of the Exchange Act and none of the Sigma SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements made therein,
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in light of the circumstances in which they were made, not misleading, except to
the extent corrected by a subsequently filed Sigma SEC Document.
(e) Litigation. There is no action, suit, proceeding, investigation
----------
or claim pending or, to the best knowledge of Sigma, threatened against Sigma or
any of its Subsidiaries which could, individually or in the aggregate, have a
material adverse effect on the business condition of Sigma and its Subsidiaries
taken as a whole, or which in any manner challenges or seeks to prevent, enjoin,
alter or materially delay any of the transactions contemplated hereby.
(f) Disclosure. No representation or warranty made by Sigma in this
----------
Agreement, nor any document, written information, statement, financial
statement, certificate, schedule or exhibit prepared and furnished or to be
prepared and furnished by Sigma or its representatives pursuant hereto or in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of a material fact, or omits or will omit to state a
material fact necessary to make the statements or facts contained herein or
therein not misleading in light of the circumstances under which they were
furnished. To the knowledge of Sigma after reasonable inquiry, there is no
event, fact or condition that materially and adversely affects the Business
Condition of Sigma and its Subsidiaries taken as a whole, or that reasonably
could be expected to do so, that has not been set forth in this Agreement or in
the Sigma Disclosure Schedule.
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ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 Additional Agreements. During the period from the date of this
---------------------
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time of the Merger, the parties hereto agree (except to the
extent that the parties hereto shall otherwise consent in writing) that:
(a) Active Design Conduct. Active Design shall carry on its business
---------------------
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent with such business, use all
reasonable efforts consistent with past practice and policies to preserve intact
its present business organization, keep available the services of its present
employees and preserve its relationships with customers, suppliers,
distributors, developers, licensors, licensees, and others having business
dealings with it, to the end that its goodwill and ongoing business shall be
unimpaired at the Effective Time of the Merger. Active Design shall promptly
notify Sigma of any event or occurrence or event not in the ordinary course of
business of Active Design and any event which could have a material and adverse
effect on the business condition of Active Design taken as a whole. Except as
expressly contemplated by this Agreement or the Active Design Disclosure
Schedule, Active Design shall not, without the prior written consent of Sigma:
(i) Enter into any commitment or transaction not in the ordinary
course of business (x) to be performed over a period longer than one month in
duration, or (y) to purchase fixed assets for a purchase price in excess of
$1,000;
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(ii) Grant any severance or termination pay to any director or to
any employee;
(iii) Transfer or license to any person or entity, or in any way
encumber, any rights to the Active Design Intellectual Property Rights;
(iv) Declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of Active Design, or repurchase or
otherwise acquire, directly or indirectly, any shares of its capital stock .
(v) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of its
capital stock or securities convertible into, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities.
(vi) Cause or permit any amendments to its Articles of
Incorporation or Bylaws other than as proposed in this Agreement or as requested
in writing by Sigma;
(vii) Adopt any option plan, or enter into any employment
contract, pay any special bonus or special remuneration to any director or
employee, or increase the salaries or wage rates of its employees or terminate
any employees.
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(b) Sigma Conduct. Sigma shall promptly notify Active Design of any
-------------
event or occurrence or event which is not in the ordinary course of business of
Sigma or its Subsidiaries and which is material and adverse to the business
condition of Sigma and its Subsidiaries taken as a whole. Sigma shall not
without the prior consent of Active Design (i) amend its Articles of
Incorporation in any manner which would materially adversely affect the rights
of holders of Sigma Common Stock, or (ii) issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the purchase
of, any shares of its capital stock of any class or securities convertible into,
or subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it or any of its Subsidiaries to issue
any such shares or other convertible securities, except as proposed in this
Agreement and except for the issuance or proposed issuance of shares of its
capital stock or options to purchase shares of its capital stock pursuant to its
1995 Stock Option Plan.
(c) Exclusivity; Acquisition Proposals. Unless and until this
----------------------------------
Agreement shall have been terminated by either party pursuant to Section 6.1
hereof, Active Design shall not, directly or indirectly, through any of its
officers, directors, agents, representatives or affiliates, solicit, encourage,
initiate or entertain any proposals or offers from, engage in any negotiations
or discussions with, or provide any information to any party other than Sigma
and its designees relating to the acquisition of Active Design by merger,
consolidation, purchase of all or substantially all of Active Design's assets,
tender or exchange offer, stock purchase or other business combination (each of
the foregoing, an "Acquisition"), or a proposal or offer from any party other
than Sigma and its designees to purchase equity securities of Active Design.
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(d) Consents. Each of Sigma and Active Design shall promptly apply
--------
for or otherwise seek, and use its best efforts to obtain, all consents and
approvals required to be obtained by it for the consummation of the Merger, and
Active Design shall use its best efforts to obtain all necessary consents,
waivers and approvals under any of Active Design's material agreements,
contracts, licenses or leases in connection with the Merger.
(e) Support of Merger by Certain Shareholders. Simultaneously with
-----------------------------------------
execution of the Merger Agreement, all directors and officers of Active Design
who are shareholders shall execute an agreement to vote their Active Design
Capital Stock in favor of the transactions contemplated hereby and the Merger
Agreement in a form substantially similar to that attached hereto as Exhibit F.
(f) Affiliate Agreements. Active Design Disclosure Schedule D sets
--------------------
forth those persons who are, in Active Design's reasonable judgment,
"affiliates" of Active Design within the meaning of Rule 145 (each such person
who is an "affiliate" of Active Design within the meaning of Rule 145 is
referred to as an "Affiliate") promulgated under the Securities Act ("Rule
145"). Active Design shall provide Sigma such information and documents as
Sigma shall reasonably request for purposes of reviewing such list. Active
Design shall cause to be delivered to Sigma, concurrently with the execution of
this Agreement (and in each case prior to the Effective Time) from each of the
Affiliates an executed Affiliate Agreement in the form attached hereto as
Exhibit G. Sigma and Merger Sub shall be entitled to place appropriate legends
on the certificates evidencing any Sigma Capital Stock to be received by such
Affiliates of Active Design pursuant to the terms of this
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Agreement, and to issue appropriate stop transfer instructions to the transfer
agent for Sigma Common Stock, consistent with the terms of such Affiliates
Agreements.
(g) Statement of Beneficial Ownership. Prior to the execution of the
---------------------------------
Merger Agreement, all shareholders of Active Design shall have executed an
agreement delineating the rights of each such shareholder to the capital stock
of Active Design (the "Statement of Beneficial Ownership"). The Statement of
Beneficial Ownership shall be in a form substantially similar to that attached
hereto as Exhibit H.
(h) Active Design Shareholders' Meeting. Active Design shall promptly
-----------------------------------
after the date hereof take all action necessary in accordance with California
Law and its Articles of Incorporation and Bylaws to convene an Active Design
Shareholders' Meeting on or prior to April 12, 1996 or as soon thereafter as is
practicable ("Shareholders' Meeting Date"). Active Design shall consult with
Sigma and shall use all reasonable efforts to hold the Active Design
Shareholders' Meeting on or prior to such day. Active Design shall use its best
efforts to solicit from shareholders of Active Design proxies in favor of the
Merger and shall take all other action necessary or advisable to secure the vote
or consent of shareholders required by California Law to effect the Merger.
(i) Brokers or Finders. Each of Sigma, Sub and Active Design
------------------
represents, as to itself and any Subsidiaries, that no agent, broker, investment
banker or other firm or person is or will be entitled to any broker's or
finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement.
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(j) Issuance of Shares. Sigma shall, as and when required under this
------------------
Agreement and the Merger Agreement, issue and deliver certificates representing
the Sigma Common Stock into which the Capital Stock of Active Design outstanding
at the Effective Time of the Merger will be converted upon tender of
certificates representing capital stock of Active Design.
(k) Public Announcements. Sigma and Active Design shall cooperate
--------------------
with each other prior to releasing information concerning this Agreement and the
transactions contemplated hereby, shall furnish to the other drafts of all press
releases or other public announcements prior to publication and shall obtain the
consent of the other prior to the issuance of press releases or the release of
other public announcements.
(l) Confidentiality. No party hereto nor any of their respective
---------------
Subsidiaries, if any, shall release, publish, reveal or disclose, directly or
indirectly, any business or technical information of any other party hereto or
any of its Subsidiaries designated orally or in writing as "confidential" or
"proprietary" (or in like words), including, but not limited to, systems,
processes, formulae, data, functional specifications, computer programs,
blueprints, know-how, improvements, discoveries, developments, designs,
inventions, techniques, new products, marketing and advertising methods,
supplier agreements, customer lists, pricing policies, financial information,
projections, forecasts, strategies, budgets or other information related to its
business or its customers (hereinafter referred to as "Evaluation Material"),
except to a party's directors, officers, employees, financial advisors, legal
counsel, independent public accountants or other agents, advisors or
representatives as shall require access thereto on a need-to-know basis for the
purpose of the transactions contemplated by this Agreement and who shall agree
to be bound by the terms of this section. Each party agrees to
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take all reasonable precautions to safeguard the confidentiality of the other
party's Evaluation Material and to exercise at least the same degree of care
with respect to such Evaluation Material that such party exercises with respect
to its own confidential information.
ARTICLE V
CONDITIONS PRECEDENT
5.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions:
(a) Shareholder Approval. This Agreement and the Merger Agreement
--------------------
shall have been approved and adopted by the affirmative vote of the holders of
(i) a majority of the outstanding shares of Common Stock of Active Design voting
as a class and (ii) a majority of the Series A Preferred Stock of Active Design
voting as a class. It is intended that the foregoing shareholder approval will
be obtained by majority written consent pursuant to Section 603 of the
California General Corporation Law concurrent with the execution of the
Agreement.
(b) Approvals. All authorizations, consents, orders or approvals of,
---------
or declarations or filings with, or expiration of waiting periods imposed by,
any governmental entity necessary for the consummation of the transactions
contemplated by this Agreement shall have been filed, occurred or been obtained,
other than filings and approvals relating to the Merger or affecting Sigma's
ownership of Active Design or any of its properties if failure to make such
filing or obtain such approval would not be materially adverse to Sigma or
Active Design taken as a whole.
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(c) Legal Action. No temporary restraining order, preliminary
------------
injunction or permanent injunction or other order preventing the consummation of
the Merger shall have been issued by any Governmental Entity and remain in
effect, and no litigation seeking the issuance of such an order or injunction,
or seeking the imposition against Sub, the Surviving Corporation or Sigma of
substantial damages if the Merger is consummated, shall be pending which, in the
good faith judgment of Active Design's or Sigma's Board of Directors (acting
upon the written opinion of their respective outside counsel) has a reasonable
probability of resulting in such order, injunction or damages. In the event any
such order or injunction shall have been issued, each party agrees to use its
reasonable efforts to have any such injunction lifted.
(d) Employment, Non-Competition and Consulting. Subject to compliance
------------------------------------------
with pooling of interests accounting treatment of the Merger, Sigma, Active
Design and Dan Chen shall have entered into an intellectual property agreement
substantially similar to the form attached hereto as Exhibit I.
(e) Delivery of Ancillary Agreements. Subject to compliance with
--------------------------------
pooling of interests accounting treatment of the Merger, Sigma, Active Design
and Sub, as applicable, and any other parties contemplated in the Agreements and
Documents listed on the Index of Exhibits attached hereto ("Ancillary
Agreements"), shall have entered into the Ancillary Agreements in forms
substantially the same as those attached hereto as Exhibits A through H and J in
a manner mutually satisfactory to Sigma and Active Design.
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5.2 Conditions of Obligations of Sigma and Sub. The obligations of
------------------------------------------
Sigma and Sub to effect the Merger are subject to the satisfaction of the
following conditions, unless waived by Sigma and Sub:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Active Design set forth in this Agreement shall be true and
correct in all material respects (i) as of the date of this Agreement, (ii) as
of the Shareholders' Meeting Date and (iii) as of the Closing Date, as though
made on and as of each such date, except as otherwise contemplated by this
Agreement, and Sigma shall have received a certificate signed by the chief
executive officer and the chief financial officer of Active Design to such
effect on the Closing Date.
(b) Performance of Obligations of Active Design. Active Design shall
-------------------------------------------
have performed in all material respects all obligations and covenants required
to be performed by it under this Agreement and the Merger Agreement prior to the
Closing Date, including, but not limited to, the execution of (i) Shareholder
Agreements pursuant to Section 4.1(e) of this Agreement, (ii) Affiliates
Agreements pursuant to Section 4.1(f) of this Agreement and (iii) Statements of
Beneficial Ownership pursuant to Section 4.1(g) of this Agreement. Sigma shall
have received a certificate signed by the chief executive officer and the chief
financial officer of Active Design to such effect.
(c) Dissenters. Holders of not more than 5% of the outstanding shares
----------
of Active Design Capital Stock shall have exercised, or shall continue to have
the right to exercise, dissenters' rights as described in Section 2.1(d), with
respect to the transactions contemplated by this Agreement.
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(d) Opinion of Accountants. Sigma shall have received an opinion of
----------------------
Deloitte & Touche LLP, independent auditors, acceptable to Sigma, to the effect
that the Merger qualifies for pooling of interests accounting treatment if
consummated in accordance with this Agreement.
5.3 Conditions of Obligation of Active Design. The obligation of
-----------------------------------------
Active Design to effect the Merger is subject to the satisfaction of the
following conditions unless waived by Active Design:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Sigma and Sub set forth in this Agreement shall be true and
correct in all material respects (except for such representations and warranties
which are qualified by their terms by a reference to materiality, which
representations and warranties as so qualified shall be true in all respects) as
of the date of this Agreement and as of the Closing Date as though made on and
as of each such date, except as otherwise contemplated by this Agreement, and
Active Design shall have received a certificate signed by the chief executive
officer and the chief financial officer of Sigma to such effect.
(b) Performance of Obligations of Sigma and Sub. Sigma and Sub shall
-------------------------------------------
have performed in all material respects all obligations and covenants required
to be performed by them under this Agreement and the Merger Agreement prior to
the Closing Date, and Active Design shall have received a certificate signed by
the chief executive officer and the chief financial officer of Sigma to such
effect.
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ARTICLE VI
TERMINATION
6.1 This Agreement may be terminated at any time prior to the Effective
Time of the Merger, whether before or after approval of the Merger by the
shareholders of Active Design:
(a) by mutual agreement of Sigma, Sub and Active Design;
(b) by Sigma, if there has been a breach by Active Design of any
representation, warranty, covenant or agreement set forth in this Agreement on
the part of Active Design which is material and which Active Design fails to
cure within ten days after notice thereof is given by Sigma (except that no cure
period shall be provided for a breach by Active Design which by its nature
cannot be cured);
(c) by Active Design, if there has been a breach by Sigma of any
representation, warranty, covenant or agreement set forth in this Agreement on
the part of Sigma which is material and which Sigma fails to cure within ten
days after notice thereof is given by Active Design (except that no cure period
shall be provided for a breach by Sigma which by its nature cannot be cured);
(d) by Sigma or Active Design, if the Merger shall not have been
consummated on or before June 30, 1996;
(e) by Sigma or Active Design if the required approval of the
shareholders of Active Design contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote upon a vote taken
at the Shareholders' Meeting or at any adjournment thereof, provided that all
officers and directors of Active Design vote to approve the Agreement; or
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(f) by Sigma or Active Design if any permanent injunction or other
order of a court or other competent authority preventing the Merger shall have
become final and nonappealable.
6.2 This Agreement may be terminated by Sigma if Sigma shall determine, in
its sole discretion, that the Product will not perform substantially as
represented and discussed between the parties hereto.
ARTICLE VII
GENERAL PROVISIONS
7.1 Nonsurvival of Representations, Warranties and Agreements. All
---------------------------------------------------------
representations, warranties and agreements in this Agreement shall be deemed to
be conditions to the Merger and shall not survive the consummation of the
Merger, provided, however, that the representations and warranties made in
Sections 3.1(b) and 3.1(j) herein shall survive the Merger and continue until
the earlier to occur of (i) the first anniversary date of the Effective Time or
(ii) the 1997 Audit Date. Sigma shall have as an available, but not exclusive,
remedy in the event such representations and warranties are violated, a right to
the shares in the Escrow Pool as provided for in Sections 3.1, 7.2, 7.3, 7.4,
7.5 and 7.6, and as specified in the Escrow Agreement attached hereto as
Exhibit B.
7.2 Agreement to Indemnify. Upon execution of this agreement, each
----------------------
shareholder of Active Design hereby agrees, severally, but not jointly, to
indemnify and hold Sigma and its officers, directors and affiliates harmless,
against all claims, losses, liabilities, damages, deficiencies, costs and
expenses, including reasonable attorneys' fees and expenses of investigation
(hereinafter individually
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a "Loss" and collectively "Losses"), incurred by Sigma, its officers, directors,
or affiliates (including the Surviving Corporation) directly or indirectly as a
result of any inaccuracy or breach of a representation or warranty of Active
Design contained in Sections 3.1(b) and(j).
7.3 Expiration of Indemnification. The indemnification obligations
-----------------------------
of the shareholders under Section 7.2 shall terminate on the earlier to occur of
(i) the first anniversary date of the Effective Time or (ii) the 1997 Audit
Date, but shall not terminate as to any Loss (or a potential claim by an
appropriate party) asserted in good faith prior to such date.
7.4 Escrow Fund.
-----------
(a) As security for the indemnity provided for in Section 7.2 hereof
and by virtue of this Agreement and the Merger Agreement the holders of Active
Design Capital Stock will be deemed to have received and deposited with the
Escrow Agent (as defined below) 101,138 shares of Sigma Common Stock issued to
them in the Merger (plus any additional shares as may be issued upon any stock
split effected by Sigma after the Closing) ("Escrow Shares"), without any act of
any such shareholders. Each such shareholder will contribute shares on a pro
rata basis equal to 101,138 shares multiplied by a fraction, the numerator of
which is the number of shares of Sigma Common Stock such shareholder is entitled
to receive in the Merger pursuant to Section 2.1(b) (excluding therefrom shares
of Sigma Common Stock otherwise issuable in respect of Dissenting Shares) and
the denominator of which is the total number of shares of Sigma Common Stock all
holders of Active Design Capital Stock are entitled to receive in the Merger
pursuant to Section 2.1(b) (excluding therefrom shares of Sigma Common Stock
otherwise issuable in respect of Dissenting Shares). Such shares will be subject
to the Escrow Agreement and will be deposited
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with Wilson Sonsini Goodrich & Rosati, (or other mutually acceptable
institution) as Escrow Agent (the "Escrow Agent"), such deposit to constitute
the Escrow Pool to be governed by the terms set forth herein.
(b) Upon compliance with and subject to the terms hereof, Sigma shall
be entitled to indemnity from the Escrow Pool for all Losses incurred by Sigma,
its officers, directors or affiliates. Each such indemnity will be allocated
among the shareholders in the same proportion as the number of Escrow Shares
contributed by the shareholder to the escrow to the total number of all Escrow
Shares. Such indemnity shall result in a forfeiture of Escrow Shares as set
forth in this Section 7.2. Notwithstanding the foregoing, the maximum exposure
of the Active Design shareholders shall not exceed 120% of the value of the
Escrow Pool as of the closing date.
7.5 Closing. The Escrow Pool shall remain in existence during the
-------
period of time (the "Escrow Period") between the Effective Time of the Merger
and the earlier to occur of: (i) the first anniversary of the Effective Time or
(ii) the 1997 Audit Date.
7.6 Protection of Escrow Fund. The Escrow Agent shall hold and
-------------------------
safeguard the Escrow Fund during the Escrow Period, shall treat such fund as a
trust fund in accordance with the terms of this Agreement and not as the
property of Sigma and shall hold and dispose of the Escrow Pool only in
accordance with the terms hereof.
7.7 Amendment. This Agreement may be amended by the parties hereto,
---------
by action taken by their respective Board of Directors, at any time before or
after approval of the Merger by the shareholders of Active Design; provided that
following approval of the Merger by the shareholders of Active Design, no
amendment shall be made which by law requires the further approval of such
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shareholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
7.8 Legends. The shares of Sigma Common Stock to be issued in the
-------
Merger shall bear a legend prominently printed thereon which will state that
such shares constitute restricted securities under the Securities Act of 1933
and may not be transferred or sold in the absence of a registration under the
Act or the availability of an exemption therefrom.
7.9 Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) or sent by telecopy,
confirmation received, to the parties at the following addresses and telecopy
numbers (or at such other address or number for a party as shall be specified by
like notice):
(a) if to Sigma or Sub, to:
Sigma Designs, Inc.
46501 Landing Parkway
Fremont, CA 94538
Telephone: (510) 770-0100
Telecopy: (510) 770-2640
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attn: Tor R. Braham, Esq.
Telephone: (415) 493-9300
Telecopy: (415) 493-6811
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(b) if to Active Design, to:
Active Design Corporation
1885 Lundy Avenue, Suite 202
San Jose, California 95131
Telephone: (408) 321-8528
Telecopy: (408) 321-8527
with a copy to:
General Counsel Associates
1891 Landings Drive
Mountain View, California 94043
Telephone: (415) 428-3900
Telecopy: (415) 428-3901
7.10 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
7.11 Entire Agreement. This Agreement and the documents and
----------------
instruments and other agreements among the parties delivered pursuant hereto
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and are not intended to confer upon any other person any rights or remedies
hereunder except as otherwise expressly provided herein.
7.12 No Transfer. This Agreement and the rights and obligations set
-----------
forth herein may not be transferred or assigned by operation of law or otherwise
without the consent of each party hereto.
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This Agreement is binding upon and will inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
7.13 Severability. If any provision of this Agreement, or the
------------
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties further agree to replace such
void or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of the void or unenforceable provision.
7.14 Other Remedies. Except as otherwise provided herein, any and
--------------
all remedies herein expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby or by law or equity
on such party, and the exercise of any one remedy will not preclude the exercise
of any other.
7.15 Further Assurances. Each party agrees to cooperate fully with
------------------
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to evidence and reflect the transactions described
herein and contemplated hereby and to carry into effect the intents and purposes
of this Agreement.
7.16 Absence of Third Party Beneficiary Rights. No provision of this
-----------------------------------------
Agreement is intended, nor will be interpreted, to provide to create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, employee, partner or any party hereto
-33-
<PAGE>
or any other person or entity unless specifically provided otherwise herein,
and, except as so provided, all provisions hereof will be personal solely
between the parties to this Agreement.
7.17 Mutual Drafting. This Agreement is the joint product of Sigma
---------------
and Active Design, and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of Sigma and Active Design, and shall
not be construed for or against any party hereto.
7.18 Governing Law. This Agreement shall be governed in all
-------------
respects, including validity, interpretation and effect, by the laws of the
State of California (without giving effect to its choice of law principles).
-34-
<PAGE>
IN WITNESS WHEREOF, Sigma, Sub and Active Design have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
SIGMA DESIGNS, INC.
By: /s/ Thinh Q. Tran
----------------------------------------
Thinh Q. Tran
Chief Executive Officer
SIGMA ACQUISITION CORP.
By: /s/ Thinh Q. Tran
----------------------------------------
Thinh Q. Tran
Chief Executive Officer
ACTIVE DESIGN CORPORATION
By: /s/ Dan Chen
----------------------------------------
Dan Chen
President
-35-
<PAGE>
EXHIBIT 22.1
<PAGE>
EXHIBIT 23.1
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
8316 on Forms S-8 and S-3, Amendment No. 1 to Registration Statement No. 333-813
on Form S-3, and in Registration Statements Nos. 33-20226, 33-23699, 33-33571,
33-41330 and 33-81914 on Forms S-8 of our report dated March 1, 1996 (April 22,
1996 as to Note 14) on the consolidated financial statements and related
financial statement schedule of Sigma Designs, Inc. and our report dated April
27, 1996 on the financial statements of Active Design Corporation, all appearing
in this Annual Report on Form 10-K of Sigma Designs, Inc. for the year ended
January 31, 1996.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Jose, California
April 29, 1996
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