SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 31, 1998 or
( ) Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.
Commission File No. 0-15116
Sigma Designs, Inc.
(Exact name of Registrant as specified in its charter)
California 94-2848099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
46501 Landing Parkway, Fremont, California 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 770-0100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes____X____ No________
As of August 31, 1998 there were 12,289,293 shares of the Registrant's Common
Stock issued and outstanding.
<PAGE>
<TABLE>
TABLE OF CONTENTS
SIGMA DESIGNS, INC.
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets--July 31, 1998 and January 31, 1998 3
Condensed Consolidated Statements of Operations--Three months and six months
ended July 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows--Six months ended
July 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SIGMA DESIGNS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands.)
<CAPTION>
July 31, January 31,
1998 1998*
--------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 1,187 $ 697
Short-term investments 17,541 15,951
Accounts receivable - net 12,257 12,395
Inventories 10,631 7,314
Prepaid expenses & other 366 592
-------- --------
Total current assets $ 41,982 $ 36,949
Property and equipment, net 1,532 1,241
Other assets 117 139
-------- --------
Total assets $ 43,631 $ 38,329
======== ========
Liabilities and shareholders' equity
Current liabilities:
Bank line of credit $ 13,866 $ 13,316
Accounts payable 2,920 3,014
Accrued liabilities and other 1,725 1,324
Accrued facilities 93 336
-------- --------
Total current liabilities $ 18,604 $ 17,990
Capital lease-long term 351 27
Shareholders' equity:
Preferred stock 6,332 2,715
Common stock 57,612 56,419
Accumulated deficit (39,205) (38,759)
Shareholder note receivable (63) (63)
-------- --------
Total shareholders' equity 24,676 20,312
-------- --------
Total liabilities and shareholders' equity $ 43,631 $ 38,329
======== ========
<FN>
See accompanying notes.
* Derived from audited balance sheet included in the Company's annual report on
Form 10-K for the year ended January 31, 1998
</FN>
</TABLE>
3
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<TABLE>
SIGMA DESIGNS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share data.)
<CAPTION>
Three months ended Six months ended
July 31, July 31,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 9,056 $ 8,593 $ 19,450 $ 17,100
Costs and expenses:
Cost of sales 6,289 8,598 13,680 14,529
Sales and marketing 970 1,147 2,100 2,441
Research and development 1,606 1,231 2,777 2,395
General and administrative 922 2,743 1,636 3,464
-------- -------- -------- --------
Total costs and expenses 9,787 13,719 20,193 22,829
Loss from operations (731) (5,126) (743) (5,729)
Interest and other income, net 41 (24) 37 (19)
Income tax credit 317 824 317 824
-------- -------- -------- --------
Net loss before dividend on
preferred stock (373) (4,326) (389) (4,924)
-------- -------- -------- --------
Dividend on preferred stock (15) (80) (55) (80)
Net loss available to
common shareholders $ (388) $ (4,406) $ (444) $ (5,004)
======== ======== ======== ========
Net loss per common share--basic
and diluted $ (0.03) $ (0.40) $ (0.04) $ (0.46)
======== ======== ======== ========
Shares used in computation--basic
and diluted 11,861 10,928 11,769 10,887
======== ======== ======== ========
<FN>
See accompanying notes
</FN>
</TABLE>
4
<PAGE>
<TABLE>
SIGMA DESIGNS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
6 Months Ended
July 31
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) (389) (4,924)
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization 230 227
Loss on disposal of assets 11 28
Changes in assets and liabilities:
Accounts receivable 138 2,437
Inventories (3,317) (1,415)
Prepaid expenses and other 226 (4)
Accounts payable 203 (789)
Accrued liabilities (88) (1,079)
Other -- 201
------- -------
Net cash used for operating activities
(2,986) (5,318)
Cash flows from investing activities
Purchase of short-term investments (17,297) (10,409)
Maturity of short-term investments 15,705 5,299
Other assets 22 16
Purchase of fixed assets (164) (133)
------- -------
Net cash used for investing activities (1,734) (5,227)
Cash flows from financing activities
Proceeds from sale of common stock 163 119
Proceeds from sale of preferred stock, net 4,648 4,190
Payment of dividends (77) --
Repayment of capital lease obligations (74) (13)
Bank borrowings, net 550 2,635
------- -------
Net cash provided by financing activities 5,210 6,931
Net increase (decrease) in cash and equivalents 490 (3,614)
Cash and equivalents, beginning of period 697 6,945
------- -------
Cash and equivalents, end of period 1,187 3,331
======= =======
Noncash financing activities
Property acquired under capital lease 668 0
Series A preferred dividends 54 93
Conversion of Series A preferred stock into common stock 1,012 0
Issuance costs for preferred stock paid for in common stock 361 355
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Balance sheet information as of January 31, 1998 was derived from the
Company's audited consolidated financial statements. All other information is
unaudited, but in the opinion of management includes all adjustments necessary
to present fairly the results of the interim period. The results of operations
for the quarter ended July 31, 1998 are not necessarily indicative of results to
be expected for the entire year. This report on form 10-Q should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended January 31, 1998 and notes thereto included in the Form 10-K Annual
Report previously filed with the Commission.
2. Inventories consist of the following:
(In thousands)
July 31 January 31
1998 1998
-------- --------
Finished goods $ 3,562 $ 3,366
Work-in process 5,437 3,497
Raw materials 5,525 4,291
Less: reserves (3,893) (3,840)
-------- --------
$ 10,631 $ 7,314
======== ========
3. During the fourth quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per share" and, retroactively,
restated prior period earnings per share (EPS) for the change. SFAS 128 requires
a dual presentation of basic and diluted EPS. Basic EPS for the periods
presented is computed by dividing net loss available to common shareholders by
the weighted average of common shares outstanding (excluding shares subject to
repurchase). Diluted EPS for the periods presented is the same as basic EPS
since all other potential dilutive securities are excluded as they are
antidilutive.
<TABLE>
The following table sets forth the computation of basic and diluted net loss per
share:
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31, July 31, July 31,
1998 1997 1998 1997
------------------------------- -------------------------------
(In Thousands Expect Per Share Data)
<S> <C> <C> <C> <C>
Numerator (for basic and diluted net loss per common share):
Net loss applicable to common shareholders $ (388) $ (4,406) $ (444) $ (5,004)
-------- -------- -------- --------
Denominator:
Weighted average shares outstanding 11,978 11,135 11,886 11,118
Less: Shares subject to repurchase (117) (207) (117) (231)
Denominator for basic and diluted net loss
per common share 11,861 10,928 11,769 10,887
-------- -------- -------- --------
Net loss per common share - basic and diluted $ (0.03) $ (0.40) $ (0.04) $ 0.46
-------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
4. In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which requires that an enterprise report, by major components and as a single
total, the change in net assets during the period from nonowner sources.
Adoption of SFAS No. 130 did not impact the Company's consolidated financial
position, results of operations, or cash flows. The reconciliation of net loss
to comprehensive net loss is as follows (in thousands):
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
1998 1997 1998 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net loss available to common shareholders $ (388) $(4,406) $ (444) $(5,004)
Other comprehensive loss--net unrealized gain
(loss) on short-term investments (3) (12) (8) (41)
---------------------- ----------------------
Total comprehensive loss $ (391) $(4,418) $ (452) $(5,045)
---------------------- ----------------------
</TABLE>
In June 1997, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of this statement will not impact the Company's consolidated financial
position, results of operations, or cash flows. The Company will adopt this
statement in its financial statements for the year ending January 31, 1999.
5. During the second quarter of fiscal 1999, the Company received a settlement
of $317,568 from the California Franchise Tax Board on a claim previously filed
by the Company.
6. In February 1998, two class action complaints were filed against the Company
in the United States District Court, Northern District of California. The
actions were filed on behalf of putative classes of purchasers of the Company's
common stock during the period October 24, 1995 through February 13, 1997. The
complaints allege that Sigma Designs, Inc. and certain of its officers and/or
directors violated federal securities laws in connection with various public
statements made during the putative class period. The complaints do not specify
the amount of damages sought by the plaintiffs. The plaintiffs have filed a
motion to consolidate the complaints. The Company believes that it has
meritorious defenses to the allegations made in the complaints and intends to
conduct a vigorous defense.
The Company is also party to various claims against it. Although the ultimate
outcome of these matters is not presently determinable, management believes that
the resolution of all such pending matters will not have a material adverse
effect on the Company's financial position or results of operations.
7. In August 1998, the Company redeemed 2,000 shares of Series A Preferred Stock
from one preferred stock shareholder. The total redemption cost and accrued
dividends were $222,247.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
The Company registered a net loss of $388,000 ($0.03 per share) on net sales of
$9,056,000 for the fiscal quarter ended July 31, 1998 compared to a net loss of
$4,406,000 ($0.40 per share) on net sales of $8,593,000 for the same quarter in
the prior year. Revenues for the second quarter of fiscal 1999 and for the six
months ended July 31, 1998 increased 5% and 14%, respectively, as compared to
the same periods in the prior year. The increase was primarily attributable to
the introduction of the Company's proprietary MPEG decoding chipsets in the
second quarter of fiscal 1999, which resulted in increased sales to computer
board manufacturers. OEM chipset sales for the second quarter of fiscal 1999 and
for the six months ended July 31, 1998 increased 72% and 107%, respectively, as
compared with the corresponding periods last year.
<TABLE>
The following table sets forth the Company's net sales by product and market
segments:
<CAPTION>
By Product Group Three Months Ended Six Months Ended
July 31 July 31
--------------------- --------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
MPEG Boards $ 3,815 $ 5,261 $ 9,125 $ 8,692
MPEG & Graphic Chipsets 5,071 2,941 9,886 6,074
Accessories & other 170 391 439 2,334
--------- --------- -------- --------
$ 9,056 $ 8,593 $ 19,450 $ 17,100
========= ========= ======== ========
By Market Segment
Internet/Intranet Video Networking $ 1,898 $ 3,197 $ 5,321 $ 5,627
PC-DVD Upgrade kit 1,917 2,065 3,779 3,405
OEM Chipsets 5,071 2,941 9,859 4,773
Videoconferencing 20 58 132 2,450
Other 150 332 359 845
--------- --------- -------- --------
$ 9,056 $ 8,593 $ 19,450 $ 17,100
========= ========= ======== ========
</TABLE>
MPEG-based boards and chipsets represented 98% of net sales for the quarter
ended July 31, 1998 as compared with 96% for the same quarter last year. For the
six months ended July 31, 1998, MPEG-based boards and chipsets represented 98%
of net sales as compared with 86% for the same period last year. By market
group, OEM chipsets, PC-DVD upgrade kits, and video networking products
accounted for 56%, 21%, and 21% of total net sales, respectively, in the second
quarter of fiscal 1999 as compared with 34%, 24%, and 37% of total net sales,
respectively, in the same quarter last year. For the six months ended July 31,
1998, OEM chipsets, PC-DVD upgrade kits, and video networking products accounted
for 51%, 19%, and 27% of total net sales, respectively, as compared with 28%,
20%, and 33% of total net sales, respectively, in the same period last
8
<PAGE>
year. The board level product line is targeted at OEM customers and system
integrators to address the internet/intranet video networking market for
corporate and home consumer applications. The chipsets are targeted at add-in
card manufacturers and large-volume OEMs building interactive multimedia
products for business and consumer markets.
The Company's international sales represented 76% of net sales in the quarter
ended July 31, 1998 as compared with 48% in the comparable quarter of the prior
year. Revenues generated from international sales were concentrated in two Asian
countries--Taiwan and Hong Kong--which accounted for 56% and 9% of net sales,
respectively, for the quarter ended July 31, 1998. For the six months ended July
31, 1998, international sales accounted for 71% of net sales as compared with
57% in the comparable period of the prior year. Sales to one international
customer accounted for 25% of net sales in the second quarter ended July 31,
1998. The Company's customers in Taiwan are primarily computer board
manufacturers that sell their products in worldwide, global markets.
The Company's gross margin as a percentage of net sales for the quarter
increased to 31% and 30% during the second quarter and the first half of fiscal
1999, respectively, from (.06%) and 15% in the same periods in fiscal 1998. The
significant increase was due to a combination of the Company's decision to write
down excess inventories and related receivables in the second quarter of fiscal
1998 and the increase in sales of chipset products in the second quarter of
fiscal 1999, which generally have higher profit margins as compared to the
Company's other product lines.
Sales and marketing expenses decreased by $177,000 (15%) and $341,000 (14%),
respectively, to $970,000 and $2,100,000 during the second quarter and first
half of fiscal 1999 as compared to the same periods in fiscal 1998. The decrease
was largely due to a reduction in outside sales representatives and sales
support related expenses as the Company continued to focus more on OEM and
corporate markets instead of retail channels. Research and development expenses
increased $375,000 (30%) and $382,000 (16%), respectively, to $1,606,000 and
$2,777,000 during the second quarter and first half of fiscal 1999 as compared
to the same periods in fiscal 1998. The increase was primarily attributable to
the Company's continued development of its proprietary single-chip REALmagic
DVD/MPEG-2 decoder and increased non-recurring engineering expenses associated
with the Company's board product designs based on its proprietary chipsets.
General and administration expenses decreased $1,821,000 (66%) and $1,828,000
(53%), respectively, to $922,000 and $1,636,000 during the second quarter and
first half of fiscal 1999 as compared to the same periods in fiscal 1998. The
significant decrease in general and administration expenses was largely due to a
charge of $1,937,000 for accounts receivable reserves in connection with sales
of graphics products in the second quarter of fiscal 1998. The Company
discontinued its graphics business during the third quarter of fiscal 1998.
Excluding this charge, general and administration expenses would have increased
$116,000 and $109,000, respectively, during the second quarter and first half of
fiscal 1999 as compared to the same periods in fiscal 1998. The
9
<PAGE>
increase was primarily attributable to contingent legal fees associated with the
settlement from the California Franchise Tax Board for a claim previously filed
by the Company, as described in Note 5.
Liquidity and Capital Resources
The Company had cash and short-term investments of $18.7 million at July 31,
1998, as compared with $16.6 million at January 31, 1998. The increase in cash
and short-term investments during the first half of fiscal 1999 was primarily
the result of the Company's sale of preferred stock. In February 1998, the
Company raised an additional $5 million in equity capital through the sale of
convertible preferred stock (Series B) in a private placement. Given current
market conditions, the Series B preferred stock, upon conversion, could have a
significant dilutive effect. The Company's management is currently evaluating
several alternatives to minimize the dilutive impact of Series B preferred
stock.
Cash used for operating activities for the six months ended July 31, 1998 of
$2.9 million was primarily the result of an increase in inventories from January
31, 1998. Investing activities used cash of $1.8 million and $5.2 million
primarily for the purchase of short-term investments for the six months ended
July 31, 1998 and 1997, respectively. Financing activities provided cash of $5.2
million and $6.9 million for the six months ended July 31, 1998 and 1997,
respectively. Sales of Series B preferred stock was the principal financing
activity that provided cash for the six months ended July 31, 1998. Sale of
Series A preferred stock and bank borrowings were the principal financing
activities that provided cash for the six months ended July 31, 1997.
The primary sources of funds to date have been cash generated from operations,
proceeds from preferred and common stock issuances, and bank borrowings under
lines of credit. The Company believes that its current reserve of cash and
equivalents and short-term investments and the availability of funds under its
existing asset-based banking arrangements will be sufficient to meet anticipated
operating and capital requirements for the next twelve months. However, the
Company may have to raise additional capital through either public or private
offerings of its common stock or preferred stock or from additional bank
financing prior to that time. There is no assurance that such capital or bank
financing will be available to the Company when needed. The estimate of time the
Company's cash and other resources will last is a forward-looking statement that
is subject to the risks and uncertainties set forth below, as well as other
factors, and the actual results may differ as a result of such factors.
Factors Affecting Future Operating Results
The Company's quarterly results have in the past and may in the future vary
significantly due to a number of factors, including but not limited to new
product introductions by the Company and its competitors; market acceptance of
the technology embodied in the
10
<PAGE>
Company's products generally and the Company's products in particular; shifts in
demand for the technology embodied in the Company's products generally and the
Company's products in particular and/or those of the Company's competitors;
gains or losses of significant customers; reduction in average selling prices
and gross margins, which may occur either gradually or precipitously; inventory
obsolescence; write-downs of accounts receivable; an interrupted or inadequate
supply of semiconductor chips or other materials; the Company's inability to
protect its intellectual property; loss of key personnel; technical problems in
the development, rampup, and manufacture of products causing shipping delays;
future dilution due to conversion of preferred stock or reductions in the
Company's stock price due to unauthorized shortselling by preferred
stockholders; and availability of third-party manufacturing capacity for
production of certain of the Company's products. The Company derives a
substantial portion of its revenues from sales to the Asia Pacific region, a
region of the world that is subject to increased economic instability. There can
be no assurance that such instability will not have a material adverse effect on
the Company's future international sales. Any adverse change in the foregoing or
other factors could have a material adverse effect on the Company's business,
financial condition, and results of operations.
Due to the factors noted above, the Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis.
Past financial performance should not be considered a reliable indicator of
future performance, and investors should not use historical trends to anticipate
results or trends of future periods. Any shortfall in revenue or earnings could
have an immediate and significant adverse effect on the trading price of the
Company's common stock. Additionally, the Company may not learn of such
shortfall until late in a fiscal quarter, which could result in even more
immediate and adverse effect on the trading price of the Company's common stock.
Furthermore, the Company operates in a highly dynamic industry, which often
results in volatility of the Company's common stock price.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company has compleated investigating whether any of its products requires
modification to make them Year 2000 compliant. The Company has also been in
contact with its significant suppliers and vendors to determine whether the
products or services supplied by them are Year 2000 compliant and there were no
negative responses. Based on the results thus far, the Company does not believe
the costs of making its products Year 2000 compliant will be material or that it
will incur material costs relating to its internal systems. The Company's
estimate of costs related to Year 2000 compliance is a forward-looking statement
that is subject to risks and uncertainties, including whether management's
assumptions of future events prove to be correct, that could cause actual costs
to be higher.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the quarter
ended July 31 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: September 14, 1998 SIGMA DESIGNS, INC.
/s/ Thinh Q. Tran
-------------------------------------------
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Kit Tsui
-------------------------------------------
Director of Finance, Chief
Financial Officer and Secretary (Principal
Financial and Accounting Officer)
Article 5: Financial Data Schedule
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 1,187
<SECURITIES> 17,541
<RECEIVABLES> 15,763
<ALLOWANCES> 3,506
<INVENTORY> 10,631
<CURRENT-ASSETS> 41,982
<PP&E> 4,219
<DEPRECIATION> 2,687
<TOTAL-ASSETS> 43,631
<CURRENT-LIABILITIES> 18,604
<BONDS> 0
0
6,332
<COMMON> 57,612
<OTHER-SE> (39,268)
<TOTAL-LIABILITY-AND-EQUITY> 43,631
<SALES> 19,450
<TOTAL-REVENUES> 19,450
<CGS> 13,680
<TOTAL-COSTS> 13,680
<OTHER-EXPENSES> 6,513
<LOSS-PROVISION> 72
<INTEREST-EXPENSE> 484
<INCOME-PRETAX> (706)
<INCOME-TAX> (317)
<INCOME-CONTINUING> (706)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (389)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
