SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
January 31, 1998 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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $47,623,896 as of April 15, 1998 based on the
closing price of the Common Stock as reported on the Nasdaq National Market for
that date.
There were 11,905,974 of the Registrant's Common Stock issued and outstanding on
April 15, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of Sigma Designs, Inc.'s definitive Proxy Statement for the
1998 Annual Meeting of Shareholders to be held on June 12, 1998 are incorporated
by reference in Part III of this Form 10-K to the extent stated herein.
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PART I
ITEM 1. BUSINESS
Overview
The following business section contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements 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 in which users interact with computers.
Multimedia integrates different elements, such as sound and video, to enhance
the computing experience and deliver a heightened sense of realism. Through its
REALmagic product line incorporating Moving Picture Experts Group (MPEG)
technology, Sigma Designs has become a leader in this emerging market.
Prior to MPEG's introduction, video on personal computers suffered from serious
drawbacks. Motion pictures appeared jerky, and video was confined to small
window sizes. MPEG, a defined International Standards Organization (ISO)
standard for video compression, eliminated many of those problems and
revolutionized multimedia on the PC platform. For the first time, MPEG users
could play back full-screen, full-motion video combined with stereo audio, even
from a standard CD-ROM. A single CD-ROM using the MPEG compression technique can
store up to 74 minutes of full-motion video and audio.
With MPEG technology, producers can create (and users can enjoy) an interactive,
television-like experience on a desktop PC. The result is a significant new
visual impact, thereby opening possibilities for a wide range of entertainment,
education, training, and business presentation applications. In April 1997, the
Company announced its entry into the Digital Video Disk ("DVD") market. A key
element of the DVD specification is the use of MPEG-2 for digital video
compression, a technology in which Sigma has established expertise. Sigma's
REALmagic Hollywood and Ventura PC-based DVD solutions are extensions of the
Company's MPEG expertise and provide a highly-integrated solution for the PC-DVD
market.
The REALmagic MPEG Standard
Since its first shipment in November 1993, REALmagic technology has received
support from PC industry leaders, software developers, and OEM and retail
customers.
Partnership with PC Industry Leaders
Sigma has developed strategic partnerships to develop and market
network streaming video products with companies such as Hughes Network Systems,
IBM, Microsoft Corporation, Oracle Corporation, Silicon Graphics, Inc.,
Starlight Networks, Sun Microsystems, OptiVision, and First Virtual Corporation.
Support from Software Developers
Support for Sigma's REALmagic MPEG standard has grown to over 1,200
software developers. To further expand the list of developers, Sigma has worked
directly with Microsoft on Microsoft's new streaming standard for MPEG-2 called
DirectShow. Sigma Designs is the first and currently the only company shipping
drivers with DirectShow support for streaming MPEG-2 video, making it the only
recommended decoder for use with Microsoft's NetShow Theater video server.
Using the DirectShow standard, software developers can create streaming video
applications with virtually any video server--without any C programming at all.
This enables universities and corporations to get live video and video on demand
applications online very rapidly, which shortens the sales process.
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Support from OEMs
In the United States, Dell Computer Corporation, Compaq Computer
Corporation, IBM, Hughes Network Systems, and OptiVision have purchased
REALmagic cards for installation inside their systems for streaming video.
Additionally, Philips, Sony, and several other companies market DVD kits that
include REALmagic Hollywood playback cards, and several vendors base their DVD
systems on REALmagic DVD playback cards.
Acceptance by the Corporate Market
REALmagic is the most well-known and most recognized brand name for
MPEG video on PCs. Sigma Designs has developed this brand name through marketing
campaigns and by building a reputation for delivering and supporting inexpensive
MPEG decoders with robust, powerful, and flexible software drivers. This has
made Sigma Designs' REALmagic the de factor standard for corporate market
projects such as corporate-wide rollouts at Merrill Lynch, Smith Barney, and
Wal-Mart.
REALmagic Business Strategy
Sigma's corporate objective is to continue to be a leading provider of MPEG
multimedia products that enable full-screen, full-motion, TV-like quality video
on the standard desktop and the notebook PC. To accomplish this goal the Company
intends to promote widespread acceptance of REALmagic technology. The key parts
of this strategy include:
Encourage Continued Development of Software Utilizing REALmagic
Technology
The Company continues to encourage widespread software title
development by providing free technical support and licensing its comprehensive
API free of charge to all developers who wish to publish REALmagic-compatible
software titles.
Win More OEM Partnerships and Further Penetrate the Corporate Market
To establish REALmagic for MPEG-2 as a standard, the Company will
continue to seek design wins with major PC manufacturers worldwide, in which the
OEMs will factory-install REALmagic boards or chipsets inside their multimedia
PCs. On the retail side, the Company's systems integration sales team will
continue to work with its network of national distributors and special VARs to
distribute its high-end REALmagic playback card. In Europe and Asia Pacific, the
Company will continue to expand its relationship with distributors as well as
OEMs and VARs. In addition, the Company will seek to sell chipsets to add-on
card manufacturers that will, in turn, market to owners of Pentium PCs.
Introduce New Generations of REALmagic, Offer REALmagic products at
Competitive Prices, and Continually Reduce Product Costs
A significant aspect of the Company's product strategy is to increase
the sale of REALmagic chipsets while continuing to develop newer versions and
generations of REALmagic products, including chipsets for both desktop and
notebook PCs. The Company seeks to continue to offer consumers better-featured
and lower-priced products over time.
REALmagic Products
The Company currently offers a complete family of REALmagic products including:
o REALmagic Hollywood--In April 1997, the Company announced its entry into
the DVD market. The REALmagic Hollywood MPEG-2 playback card turns a PC
into a full-featured DVD player that exploits many of the digital video and
digital surround sound capabilities of the DVD format and
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upcoming MPEG-2 interactive titles. The REALmagic Hollywood DVD/MPEG-2
playback card displays flicker-free video at full-screen resolution, making
video watching on a PC a new experience. Movies can be simultaneously
displayed on the PC monitor and on a large-screen TV.
o REALmagic NetStream 2--In October 1997, the Company announced its entry
into the MPEG-2 networked video market. Products in the NetStream family
include specialized hardware and software developed specifically for
delivering video to corporate desktops and can be used for both video on
demand and broadcast video playback. NetStream 2 is an MPEG-2 playback card
offering full plug and play installation and compatibility with a broad
range of third-party applications, including video servers for video on
demand, MPEG encoders for stored or real-time playback, satellite delivery
systems, streaming video playback systems, and scores of customizable
interactive training titles.
o REALmagic EM8300--In March 1998, the Company announced the introduction
of the EM8300 REALmagic DVD/MPEG-2/MPEG-1 decoder IC. Integrating virtually
all functions of a DVD decoder on one chip, the EM8300 is designed to
provide a highly integrated, cost effective vehicle for high-quality DVD.
The EM8300 feature set draws on Sigma's industry-leading experience in the
DVD/MPEG-2 market with earlier designs such as the REALmagic Ventura and
REALmagic Hollywood decoder cards. The result is a blend of performance and
affordability that can be key to gaining market share in the rapidly
growing DVD market.
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 Kapok Computers, TigerDirect, Inc., Royal Computer, ASE
Technologies, LungHwa Electronics Co., Ltd., Zenon Computer Systems, and others.
The Company's international distributors are strategically located in many
countries around the world.
The Company generally acquires and maintains products for distribution through
corporate markets based on forecasts rather than firm purchase orders.
Additionally, the Company generally acquires products for sale to its OEM
customers only after receiving purchase orders from such customers, which
purchase orders are typically cancellable without substantial penalty from such
OEM customers. The Company currently places noncancellable orders to purchase
semiconductor products from its suppliers on a twelve- to sixteen-week lead time
basis. Consequently, if, as a result of inaccurate forecasts or cancelled
purchase orders, anticipated sales and shipments in any quarter do not occur
when expected, expenses and inventory levels could be disproportionately high,
requiring significant working capital and resulting in severe pressure on the
Company's financial condition.
Sales to distributors are typically subject to contractual rights of inventory
rotation and price protection. Regardless of particular contractual rights, the
failure of one or more distributors or OEMs to achieve sustained sell-through of
REALmagic products could result in product returns or collection problems,
contributing to significant fluctuations in the Company's operating results.
Research and Development
As of January 31, 1998, the Company had a staff of 35 research and development
personnel, which conducts all the Company's product development. The Company is
focusing its development efforts primarily on MPEG multimedia products,
including new and improved versions of REALmagic MPEG chipsets and cost
reduction processes.
To achieve and maintain technological leadership, the Company must continue to
make technological advancements in the areas of MPEG video and audio compression
and decompression. These advancements include maintaining compatibility with
emerging standards and multiple platforms, making improvements to the REALmagic
architecture, and developing enhancements to the REALmagic API.
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There can be no assurance that the Company will be able to make any such
advancements in the REALmagic MPEG technology or, if they are made, that the
Company will be able to market such advancements to maintain profitability and
its technological leadership.
During fiscal 1998, fiscal 1997, and fiscal 1996, the Company's research and
development expenses were $4,948,000, $4,688,000, and $4,499,000, respectively.
The Company plans to continue to devote substantial resources to research and
development of future generations of MPEG and other multimedia products.
Competition
The market for MPEG multimedia products is highly competitive; companies such as
C-Cube Microsystems have a high profile in the industry. Although the Company
does not believe that any products sold by a third party are in direct
competition with the REALmagic decoding card in terms of price and performance,
the possibility that other companies with more marketing and financial resources
may develop a competitive product may inhibit the wide acceptance of REALmagic
technology. The Company believes that many computer product manufacturers are
developing MPEG products that 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 with industry standards,
price, and marketing and distribution resources. The Company believes that it
competes most favorably with respect to time to market, product performance, and
price of its REALmagic products. Moreover, the Company believes that the
acceptance of the REALmagic API as an industry standard for software development
could provide a significant competitive advantage for the Company. However,
there can be no assurance that the REALmagic API will be established as an
industry standard or that the Company's lead time in product introduction will
be sustained.
Licenses, Patents, and Trademarks
The Company is seeking patent protection for certain software and hardware
features in current and future versions of REALmagic. The Company currently has
eleven pending patent applications for its REALmagic technology. Six patents
have been issued to the Company. There can be no assurance that more patents
will be issued or that such patents, even if issued, will provide adequate
protection for the Company's competitive position. The Company also attempts to
protect its trade secrets and other proprietary information through agreements
with customers, suppliers, and employees and other security measures. Although
the Company intends to protect its rights vigorously, there can be no assurance
that these measures will be successful.
Manufacturing
To reduce overhead expenses, along with capital and staffing requirements, the
Company currently uses third-party contract manufacturers to fulfill all of its
manufacturing needs, including chipset manufacture and board-level assembly. All
of the chips used by the Company to develop its decoding products are
manufactured by outside suppliers and foundries. Each of these suppliers is a
sole source of supply to the Company of the respective chips produced by such
supplier.
The Company's reliance on independent suppliers involves several risks,
including the absence of adequate capacity and reduced control over delivery
schedules, manufacturing yields, and costs. Any delay or interruption in the
supply of any of the components required for the production of REALmagic
products could have a material adverse impact on the sales of the Company's
products and, thus, on the Company's operating results.
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Backlog
Since the Company's customers typically expect quick deliveries, the Company
seeks to ship products within a few weeks of receipt of a purchase order.
However, 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, 1998, the Company had 71 full-time employees, including 35 in
research and development, 12 in marketing, sales, and support, 11 in operations,
and 13 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.
Certain Factors Affecting Business, Operating Results, and Financial Condition
In the interest of providing the Company's shareholders and potential investors
with certain Company information, including management's assessment of the
Company's future potential, certain statements set forth herein or incorporated
by reference herein relate to management's future plans and objectives or to the
Company's future economic performance. Such statements are "forward-looking
statements" within the meaning of Section 27 A of the Securities Act of 1933, as
amended, and in Section 21E of the Securities Act of 1934, as amended. Although
any forward-looking statements contained herein or incorporated by reference
herein or otherwise expressed by or on behalf of the Company are, to the
knowledge and in the judgment of the officers and directors of the Company,
expected to prove true and to come to pass, the Company is not able to predict
such events with absolute certainty. Accordingly, shareholders and potential
investors are hereby cautioned that certain events or circumstances could cause
actual results to differ materially from those projected or predicted. In
addition, forward-looking statements are based on the Company's knowledge and
judgment as of the date hereof, and the Company does not intend to update any
forward-looking statements to reflect events occurring or circumstances existing
hereafter. In particular, the Company believes the following facts could affect
forward-looking statements made herein or in future written or oral releases
and, by hindsight, prove such statements to be overly optimistic and
unachievable.
History of Operating Losses
The Company incurred significant losses in fiscal 1995, 1996, and 1998
and had substantial negative cash flow in fiscal 1995, 1996, 1997 and 1998.
Since the introduction of the Company's REALmagic Moving Picture Experts Group
("MPEG") product line in November 1993, the Company has invested heavily in
marketing and technological innovation for its REALmagic products. As a result,
the Company experienced significant losses through fiscal 1996. Fiscal 1995,
1996, and 1998 also included significant losses associated with products other
than those related to the REALmagic technology. Since inception, the Company's
total accumulated deficit is $38,761,000. 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. There can be no
assurance that the Company will achieve return to profitable operations in any
future fiscal quarter or fiscal year or that profitable operations, if achieved,
will be sustainable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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Marketing Risks
The Company's ability to increase its sales, achieve profitability, and
maintain REALmagic as a PC industry multimedia standard depends substantially on
the Company's ability to achieve a sustained high level of sales to new OEM
customers. 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. The Company has not
achieved bundling agreements with numerous OEM customers to ensure success of
the REALmagic product line. Moreover, even if the Company achieves new design
wins, there can be no assurance that personal computer ("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 corporate markets. 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 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.
Technological Change
The market for multimedia PC products is characterized by rapidly
changing technology and user preferences, evolving formats for compression of
video and audio data, and frequent new product introductions. Even though
REALmagic products and related software titles have gained initial market
acceptance, the Company's success will depend, among other things, on the
Company's ability to achieve and maintain technological leadership and to remain
competitive in terms of price and product performance.
To have technological leadership, the Company must continue to make
technological advancements and research and development investments in the area
of MPEG video and audio decoding. These advancements include compatibility with
emerging standards and multiple platforms, improvements to the REALmagic
architecture, enhancements to the REALmagic API, and the achievement of these
enhancements. There can be no assurance that the Company will be able to make
any such advancements to its REALmagic technology or that, if such advances are
made, the Company will be able to achieve and maintain technological leadership.
Any material failure of the Company or OEMs and software developers to develop
or incorporate any required improvement could adversely affect the continued
acceptance of the Company's technology and the introduction and sale of future
products based on the Company's technology. There can be no assurance that
products or technologies developed by others will not render obsolete the
Company's technology and the products based on the Company's technology.
To be 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.
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Competition
The market for multimedia PC products is highly competitive, driven by
faster processors provided by Intel Corporation and other companies. The
possibility that other companies with more experience and financial resources
may develop a competitive product may inhibit future growth of REALmagic
technology. Increased competition may be generated from several major computer
product manufacturers that have developed products and technologies that could
compete directly with REALmagic products on the PC platform. These include SGS
Thompson Microelectronics, C-Cube Microsystems, IBM Corporation, Chromatic
Research, Inc., Zoran Corporation, and LSI Logic. In addition, Intel processors
are becoming more powerful, so that video decoding may eventually be done in
software. Most of the above companies have substantial experience and expertise
in audio, video, and multimedia technology and in producing and selling consumer
products through retail distribution, as well as substantially greater
engineering, marketing, and financial resources than the Company. Competitors of
the Company may form cooperative relationships, which could present formidable
competition to the Company. There can be no assurance that REALmagic technology
will achieve commercial success or that it will compete effectively against
other interactive multimedia products, services, and technologies that currently
exist, are under development, or may be announced by competitors.
Reliance on a Single Line of Products
The Company's business strategy has been to focus on REALmagic products
by investing heavily in PC-based MPEG technology. In the fiscal year ended
January 31, 1998, sales of multimedia products accounted for virtually all of
net sales. A decline in market demand for multimedia products would materially
adversely affect the Company's operating results. The Company's present reliance
on REALmagic products is exacerbated by the fact that multimedia product sales
are concentrated in the personal computer industry. A decline in demand for PCs
could have a material adverse effect on the Company's operating results and
financial condition.
Variability of Operating Results
The Company's operating results have fluctuated in the past and may
continue to fluctuate in the future due to a number of factors, including but
not limited to new product introductions by the Company and its competitors;
market acceptance of the Company's products by OEMs, software developers, and
end users; the success of the Company's promotional programs; gains or losses of
significant customers; reductions in selling prices; inventory obsolescence; an
interrupted or inadequate supply of semiconductor chips; the Company's ability
to protect its intellectual property; and loss of key personnel. In addition,
sales to OEM customers are subject to significant variability from quarter to
quarter, depending on OEMs' timing and release of products incorporating
REALmagic technology, experience with sell-through of such products, and
inventory levels.
The market for consumer electronics products is characterized by significant
seasonal swings in demand, which typically peak in the fourth calendar quarter
of each year. Since the Company expects to derive a substantial portion of its
revenues from the sales of REALmagic products in the future and the demand for
such products will depend in part on the emergence of digital video technology,
the Company's revenues may vary with the availability of and demand for DVD
titles. Such demand may increase or decrease as a result of a number of factors
that cannot be predicted, such as consumer preferences and product announcements
by competitors. Announcements of directly competing products will likely have a
negative effect on operating results. Based on the Company's experience, the
Company believes that a substantial portion of its shipments will occur in the
third month of a quarter, with significant shipments completed in the latter
part of the third month. This shipment pattern may cause the Company's operating
results to be difficult to predict. The Company currently places noncancellable
orders to purchase semiconductor products from its foundries on a long lead time
basis. Consequently, if, as a result of inaccurate forecasts or cancelled
purchase orders, anticipated sales and shipments in any quarter do not occur
when expected, inventory levels could be disproportionately high, requiring
significant working capital, negatively affecting operating results.
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Manufacturing Risks
REALmagic products and components are presently manufactured by outside
suppliers or foundries. 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. The Company obtains
certain of its components from a single source. 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
currently obtained from a single source could have a material adverse impact on
sales of REALmagic products by the Company and, thus, on the Company's business.
The Company must provide its suppliers with sufficient lead time to meet
forecasted manufacturing objectives. Any failure to properly forecast such
quantities could materially adversely affect the Company's ability to produce
REALmagic products in sufficient quantities. No assurance can be given that the
Company's forecasts regarding new product demand will be accurate, particularly
since the Company sells REALmagic products on a purchase order basis.
Manufacturing the REALmagic chipsets is a complex process, and the Company may
experience short-term difficulties in obtaining timely deliveries, which could
affect the Company's ability to meet customer demand for its products. Any such
delay in delivering products in the future could materially and adversely affect
the Company's operating results. In addition, should any of the Company's major
suppliers be unable or unwilling to continue to manufacture the Company's key
components in required volumes, the Company would have to identify and qualify
acceptable additional suppliers. This qualification process could take up to
three months or longer. No assurances can be given that any additional sources
of supply could be in a position to satisfy the Company's requirements on a
timely basis.
In the past, the Company has experienced production delays and other
difficulties, and the Company could experience similar problems in the future.
In addition, there can be no assurance that a product defect will not escape
identification at the factory, possibly resulting in unanticipated costs,
cancellations, or deferrals of purchase orders or costly recall of products from
customer sites.
Dependence on Key Personnel
The Company's future success depends in large part on the continued
service of its key technical, marketing, sales, and management personnel. Given
the complexity of REALmagic technology, the Company is dependent on its ability
to retain and motivate highly skilled engineers involved in the ongoing hardware
and software development of REALmagic products who will be required to refine
the existing hardware system and API and to introduce enhancements in future
applications. The multimedia PC industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. There can be
no assurance that the Company's current employees will continue to work for the
Company or that the Company will be able to obtain the services of additional
personnel necessary for the Company's growth. The Company does not have "key
person" life insurance policies on any of its employees.
Limited Intellectual Property Protection
The Company's ability to compete may be affected by its ability to
protect its proprietary information. The Company currently holds six patents
covering the technology underlying the REALmagic products, and the Company has
filed certain patent applications and is in the process of preparing others.
There can be no assurance that any additional patents for which the Company has
applied will be issued or that any issued patents will provide meaningful
protection of its product innovations. The Company, like other emerging
multimedia companies, relies primarily on trade secrets and technological
know-how in the conduct of its business. In addition, the Company is relying in
part on copyright law to protect its proprietary rights with respect to
REALmagic technology. Although the Company uses measures such as confidentiality
agreements to protect its intellectual property, there can be no assurance that
these methods will be sufficient. For example, the Company has filed a lawsuit
against a
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former employee alleging theft of trade secrets and other Company intellectual
property. See Item 3 - Legal Proceedings.
The electronics industry is characterized by frequent litigation regarding
patent and intellectual property rights. Any such litigation could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not the outcome of such
litigation is favorable to the Company. Moreover, in the event of an adverse
result in any such litigation, the Company could be required to expend
significant resources to develop noninfringing technology or to obtain licenses
to the technology that is the subject of the litigation. There can be no
assurance that the Company would be successful in such development or that any
such licenses would be available on acceptable terms, if at all. In addition,
patent disputes in the electronics industry have often been settled through
cross-licensing arrangements. Because the Company does not yet have a large
portfolio of issued patents, the Company may not be able to settle an alleged
patent infringement claim through a cross-licensing arrangement.
International Operations
During the fiscal years ended January 31, 1998, 1997. and 1996, sales
to international customers accounted for approximately 64%, 72%, and 63%, of the
Company's net sales, respectively. The Company anticipates that sales to
international customers, including sales of REALmagic products, will continue to
account for a substantial percentage of net sales. In addition, some of the
foundries that manufacture the Company's products and components are located in
Asia. Overseas sales and purchases to date have been denominated in U.S.
dollars. Due to the concentration of international sales and the manufacturing
capacity in Asia, the Company is subject to the risks of conducting business
internationally. These risks include unexpected changes in regulatory
requirements and fluctuations in the U.S. dollar that could increase the sales
price in local currencies of the Company's products in international markets or
make it difficult for the Company to obtain price reductions from its foundries.
The Company does not currently engage in any hedging activities to mitigate
exchange rate risks. To the extent that the Company engages in transactions in
foreign currencies, the Company's results of operations could be adversely
affected by exchange rate fluctuations.
The Company derives a substantial portion of its revenues from sales to the Asia
Pacific region, a region of the world subject to increased levels of economic
instability. There can be no assurance that such instability will not have a
material adverse effect on the Company's results of operations.
Volatility of Stock Price
The market of the Company's Common Stock has been subject to
significant volatility, which is expected to continue. Factors such as
announcements of the introduction of new products by the Company or its
competitors and market conditions in the technology, entertainment, and emerging
growth company sectors may have a significant impact on the market price of the
Company's Common Stock. Further, the stock market has experienced volatility
that has particularly affected the market prices of equity securities of many
high technology and development stage companies such as those in the electronics
industry. Such volatility has often been unrelated or disproportionate to the
operating performance of such companies. These fluctuations, as well as general
economic and market conditions, may adversely affect the price of the Common
Stock.
Potential for Dilution
Series B Preferred Stock. As of April 15, 1998, 5,000 shares of the
Company's Series B Convertible Preferred Stock (the "Series B Preferred Stock")
were issued and outstanding. Each share of the Series B Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the stated value ($1,000) of the share of Series B Preferred Stock
(under certain circumstances, such value may be increased by a premium based on
the number of days the Series B Preferred Stock is held) by the then current
Conversion Price (which is determined by reference to the then current market
price). If converted on April 15, 1998, the Series B Preferred Stock would have
been convertible into
10
<PAGE>
approximately 1,311,303 shares of Common Stock, but this number of shares could
prove to be significantly greater in the event of a decrease in the trading
price of the Common Stock. Purchasers of Common Stock could therefore experience
substantial dilution of their investment upon conversion of the Series B
Preferred Stock. The shares of Series B Stock are not registered and may be sold
only if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as Rule 144.
As of March 9, 1998, "Warrants" to purchase 50,000 shares of Common Stock issued
to the purchasers of the Series B Preferred Stock and exercisable beginning on
May 1, 1998 for a period of three years at a price based on a premium to the
market price as of April 30, 1998 (as may be adjusted from time to time under
certain antidilution provisions) were outstanding.
As of March 9, 1998, 5,754,398 shares of Common Stock were reserved for issuance
upon exercise of the Company's outstanding warrants and options (excluding the
Warrants) and an additional 3,400,000 shares of Common Stock were reserved for
issuance upon conversion of the preferred stock and exercise of the Warrants. At
April 15, 1998, there were 11,905,974 shares of Common Stock outstanding. Of
these outstanding shares, 11,884,191 were freely tradable without restriction
under the Securities Act unless held by affiliates.
Series A Preferred Stock. As of April 15, 1998, 20,000 shares of the
Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock")
were issued and outstanding. Each share of the Series A Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the stated value ($100) of the share of Series A Preferred Stock by the
then current Conversion Price (which is determined by reference to the then
current market price). If converted on April 15, 1998, the Series A Preferred
Stock would have been convertible into approximately 670,758 shares of Common
Stock, but this number of shares could prove to be significantly greater in the
event of a decrease in the trading price of the Common Stock. Purchasers of
Common Stock could therefore also experience substantial dilution of their
investment upon conversion of the Series A Preferred Stock. The shares of Series
A Stock are not registered and may be sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. A portion of the shares of Common Stock into
which the Series A Preferred Stock may be converted have been previously
registered and the remaining portion will be registered pursuant to a
Registration Statement to be filed in the future.
As of March 9, 1998, warrants to purchase 57,142 shares of Common Stock issued
to the purchasers of the Series A Preferred Stock and exercisable beginning on
April 30, 1998 for a period of three years at a price based on a premium to the
market price as of April 30, 1998 (as may be adjusted from time to time under
certain antidilution provisions) were outstanding. The shares of Common Stock
issuable upon exercise of these warrants have been previously registered and the
remaining portion will be registered pursuant to a Registration Statement to be
filed in the future.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
The executive officers and directors of the Company and their ages as of April
1, 1998 are as follows:
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thinh Q. Tran 44 Chairman of the Board, President, and Chief Executive Officer
Silvio Perich 49 Senior Vice President, Worldwide Sales
Jacques Martinella 42 Vice President, Engineering
Prem Talreja 44 Vice President, Marketing
Kit Tsui 48 Director of Finance, Chief Financial Officer, and Secretary
William J. Almon(1)(2) 65 Director
William Wang(1)(2) 34 Director
<FN>
- ---------------------------------------------------------------------------------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
</FN>
</TABLE>
11
<PAGE>
Mr. Tran, a founder of the Company, has served as President, Chief Executive
Officer, and Chairman of the Board of Directors since February 1982. Prior to
joining the Company, Mr. Tran was employed by Amdahl Corporation and Trilogy
Systems Corporation, both of which were involved in the IBM-compatible mainframe
computer market.
Mr. Perich joined the Company in September 1985 as Director, Sales. In September
1992, Mr. Perich became Senior Vice President, Worldwide Sales of the Company.
Mr. Perich was a co-founder of Costar Incorporated, a manufacturer's
representative organization for high technology products, where he served as
partner from October 1979 to September 1985. From September 1972 until September
1979, Mr. Perich served in several sales management roles at Siliconix Inc., a
specialty semiconductor manufacturer.
Mr. Martinella joined the Company in May 1994 as Director, VLSI Engineering. In
December 1995, Mr. Martinella became Vice President, Engineering. From June 1990
to April 1994, Mr. Martinella served in engineering and management positions at
Weitek, a microchip manufacturer. In addition, Mr. Martinella was an engineer at
National Semiconductor, a semiconductor manufacturer, from June 1982 to June
1990.
Mr. Talreja joined the Company in March 1996 as Vice President, Marketing. From
June 1994 to February 1996, Mr. Talreja was Director, Marketing of OPTi, Inc.,
an ASIC design company. From April 1991 to May 1994, Mr. Talreja was Marketing
Manager of Cirrus Logic Inc., a diversified semiconductor company. From June
1988 to March 1991, Mr. Talreja was Vice President, Marketing of Able
Communications, a private telecommunications company. From January 1984 to May
1988, Mr. Talreja was Marketing Manager of Siemens Semiconductor, a
semiconductor company. From January 1979 to April 1988, Mr. Talreja was Product
Marketing Manager of Inmos Corporation, an ASIC design company.
Ms. Tsui joined the Company in November 1982 as its Accounting Manager. Ms. Tsui
was promoted to Director of Finance in February 1990, acting Chief Financial
Officer and Secretary in December 1996 and became Chief Financial Officer in
July 1997.
Mr. Almon has served as a Director of the company since April 1994. In May 1994,
he became Chairman of the Board and Chief Executive Officer of StorMedia, Inc.,
a manufacturer of thin film disks. From December 1989 until February 1993, Mr.
Almon served as President and Chief Executive Officer of Conner Peripherals,
Inc., a manufacturer of computer disk drives and storage management devices.
From 1958 until 1987, Mr. Almon held various management positions with IBM
Corporation, most recently as Vice President, Low End Storage Products. Mr.
Almon also serves as a Director of Read Rite Corporation and International
Marketing Services, Inc.
Mr. Wang became a Director of the Company in October 1995. From January 1995 to
the present, Mr. Wang has served as Chairman of the Board, Chief Executive
Officer, and President of Diva Technology and has served since January 1996 as a
Director of Diva LABS. From 1990 to April 1997, Mr. Wang served as Chairman of
the Board and Chief Executive Officer of MAG Innovision Co., Inc., a company
that acts as the international sales representative for MAG Technology Co. Ltd.
of Taiwan, a supplier of computer monitors. From 1986 until 1990, Mr. Wang
worked at Tatung Company of America in the Video Display Division.
ITEM 2. FACILITIES
The Company currently leases a 50,000 square foot facility in Fremont,
California that is used as the Company's headquarters. The lease will expire in
March 1999. The Company believes that it has adequate facilities to accommodate
the Company's operations in the near term.
ITEM 3. LEGAL PROCEEDINGS
In February 1998, two putative class action complaints were filed in the United
States District Court for the Northern District of California, Romine, et al. v.
Sigma Designs, Inc., et al., No. C-98-0537-TEH(N.D.Cal) and Shah, et al. v.
Sigma Designs, Inc., et al, No.C-98-0582-MHP (N.D.Cal.). The federal court
complaints allege that Sigma Designs, inc. and certain of its officers and/or
directors, issued false or misleading statements regarding the Company's
business prospects during the period October 24, 1995
12
<PAGE>
through February 13, 1997. 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 complaint and intends to conduct a vigorous defense.
On November 21, 1997, the Company filed a Complaint against Dr. Han-Ping Chen in
the Santa Clara County Superior Court. The Complaint alleges causes of action
for claim and delivery, conversion misappropriation of trade secrets, breach of
contract, and breach of fiduciary duty relating to the Company's proprietary 2D
and 3D graphics technology. Dr. Chen has not yet filed an Answer. The suit seeks
unspecified compensatory damages. The Company intends to vigorously pursue such
claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Sigma Designs' Common Stock has been traded under the Nasdaq symbol "SIGM" since
the Company's initial public offering on May 15, 1986. The table below sets
forth the high and low closing prices in the Nasdaq National Market for the
quarters indicated.
Fiscal 1998 Fiscal 1997
----------- -----------
High Low High Low
- --------------------------------------------------------------------------------
First quarter ended April 30 9 5/8 2 5/16 11 5/8 8 1/16
Second quarter ended July 31 5 5/8 2 9/16 13 1/2 7 1/4
Third quarter ended October 31 9 1/4 4 9/16 9 7/8 7 1/4
Fourth quarter ended January 31 6 3 11 5/8 7 3/8
As of April 15, 1998, the Company had 260 shareholders of record. The Company
has not paid cash dividends on its common stock and does not plan to pay cash
dividends to its common shareholders in the near future. The Company is
obligated to pay certain dividends on its outstanding preferred stock. In 1998,
the Company paid $572,000 in dividends on such stock.
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
Selected Financial Five-Year Data
Year ended January 31
(In thousands, except per share data 1998 1997 1996 1995 1994
and number of employees) --------------------------------------------------------
- ------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 36,982 $ 41,214 $ 26,374 $ 43,700 $ 34,989
Net income (loss) (5,648) 1,529 (14,708) (8,773) (29,546)
Diluted net income (loss) per share (0.51) 0.14 (1.88) (1.20) (5.15)
Working capital 18,960 20,164 11,461 17,446 15,117
Total assets 38,329 37,915 24,843 33,387 26,639
Shareholders' equity 20,312 21,017 12,581 18,721 16,499
Number of employees 71 86 60 138 151
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
For the fiscal year ended January 31, 1998, the Company's net sales were $37.0
million, down 10% from $41.2 million reported in fiscal 1997. This decrease in
sales was primarily attributable to the Company's decision to eliminate its
graphics business to enable the Company to focus on the DVD market and slow
growth in the DVD personal computer market caused by delays in developing
industry standards. Net loss for the fiscal year ended January 31, 1998 was $5.6
million as compared to net income of $1.5 million in the prior fiscal year. The
net loss for fiscal 1998 included a charge of $3.6 million to write down older
MPEG and graphics products and associated receivables, and a $572,000 dividend
on the Company's preferred stock.
The following table shows certain items as a percentage of net sales, which are
included in the Company's Consolidated Statement of Operations:
Percentage of Net Sales
Year Ended
1/31/98 1/31/97 1/31/96
-------------------------------------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 76.5% 64.4% 96.7%
-------------------------------------
Gross Profit 23.5% 35.6% 3.3%
Operating Expenses
Research & development 13.4% 11.4% 17.1%
Sales & marketing 11.8% 13.4% 30.2%
General & administration 14.0% 7.2% 16.0%
Other income (expense) 2.0% .2% 4.1%
-------------------------------------
Income (loss) before dividend
on preferred stock (13.7%) 3.7% (55.8%)
Dividend on preferred stock (1.5%) -- --
-------------------------------------
Net income (loss) available to
common shareholders (15.3%) 3.7% (55.8%)
Sales
The following table sets forth the Company's net sales in each of its product
groups for the last three years:
(In thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996
- ------------------------------------------------------------------------
Multimedia products:
Boards $18,264 $16,295 $24,661
Chipsets 15,723 23,111 --
Accessories 2,047 1,026 --
Display systems -- -- 1,554
CPU boards -- -- 52
Other 948 782 107
-------------------------------------------
TOTAL NET SALES $36,982 $41,214 $26,374
-------------------------------------------
===========================================
The multimedia products category includes MPEG playback solutions for both
desktop and notebook computers as well as high performance graphics acceleration
for PC manufacturers and add-on card
15
<PAGE>
makers. The board level product line is targeted at OEM customers and system
integrators to address the computer-based training, kiosk, and corporate
video-on-demand markets. The chipsets are targeted at manufacturers and large
volume OEM customers building interactive multimedia products for business and
consumer markets. Multimedia accessories include CD titles, DVD ROM drives, and
video conferencing products. The "other" sales category consists primarily of
sales of surplus inventories and contract revenue. The Company completely
eliminated its non-multimedia business in fiscal 1997, including display systems
and CPU boards.
The Company's net sales decreased 10% in fiscal 1998, as compared to a 56%
increase in fiscal 1997. The decrease in sales in fiscal 1998 was primarily due
to the elimination of the Company's graphics business during the second fiscal
quarter, and slow growth in the DVD personal computer market caused by delays in
developing industry standards. The increase in sales in fiscal 1997 was largely
attributable to increased graphics chipset sales to OEM customers.
The following table sets forth the Company's sales by domestic and international
sales for each of the last fiscal years:
(In thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996
- ----------------------------------------------------------------------------
Domestic Sales 13,349 11,636 9,642
----------------------------------------------
International Sales
Asia 20,833 26,708 13,274
Europe 2,429 2,400 3,243
Canada 371 470 215
----------------------------------------------
Total International 23,633 29,578 16,732
----------------------------------------------
TOTAL NET SALES 36,982 41,214 26,374
==============================================
The Company's domestic sales as a percentage of total net sales were 36% in
fiscal 1998, 28% in fiscal 1997, and 37% in fiscal 1996. In fiscal 1998, the
Company's domestic sales increased 15% over fiscal 1997. The increase was
primarily due to increased demand in video streaming applications in corporate
markets.
The percentages of the Company's net sales attributable to international sales
were 64% in fiscal 1998, 72% in fiscal 1997, and 63% in fiscal 1996. During
fiscal 1998 and 1997, international sales were made predominantly to customers
in two Asian countries--Taiwan and Hong Kong. In fiscal 1998, Taiwan and Hong
Kong accounted for 40% and 9% of the Company's net sales respectively, with one
Taiwanese customer contributing 39% of the Company's total net sales. In fiscal
1997, Taiwan and Hong Kong accounted for 42% and 9% of the Company's net sales
respectively. In fiscal 1998, the Company's international sales decreased 20%
over fiscal 1997. The decrease was largely attributable to the discontinuation
of graphics products and a slow adoption rate of DVD technology in the PC market
internationally. While the current Asian economic downturn has had minimal
effect on the Company's sales to the Asian region to date, there can be no
assurance that continued difficulties in the Asian economies will not result in
reduced demand from customers located in such countries in the future.
Gross Margin
The Company's gross margin as a percentage of net sales was approximately 24% in
fiscal 1998, 36% in fiscal 1997, and 3% in fiscal 1996. The decrease in gross
margin in fiscal 1998 was largely due to the decrease in sales of multimedia
chipsets, which traditionally have higher gross margin than board products, and
a charge of $1.7 million in connection with the write-down of older MPEG and
graphics products. In fiscal 1998, the gross margin of multimedia boards and
chipsets was recorded at 24% and 44% respectively, as compared to 30% and 47%
respectively in fiscal 1997. The comparatively low gross
16
<PAGE>
margin in fiscal 1996 was primarily the result of inventory reserves and
write-offs in connection with the Company's strategic decision to move away from
non-multimedia products. Although the Company attempts to minimize the impact of
product transitions, the market for the Company's products is volatile and
subject to 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 $1.2 million, or 21%, in fiscal 1998 over
fiscal 1997. The decrease was primarily attributable to a reduction in sales
support personnel, lower sales commissions as a result of lower net sales, and a
reduction in media and cooperative advertising programs as the Company continued
to emphasize less retail distribution and more OEM sales. Sales and marketing
expenses decreased $2.4 million, or 30%, in fiscal 1997 over fiscal 1996. The
reduction was primarily due to the elimination of SDIS, the Company's monitor
subsidiary in fiscal 1996 and a reduction in media advertising and trade show
expenses, reflecting a more focused approach to marketing concentrated on
chipset and OEM sales.
Research and development expenses increased $260,000, or 6%, in fiscal 1998 over
fiscal 1997. The increase was largely due to an increase in engineering
personnel expense, reflecting the Company's continued efforts in the development
of DVD/MPEG2-based products. Research and development expenses increased
$189,000, or 4%, in fiscal 1997 over fiscal 1996. The increase was primarily due
to research and development expenses incurred in the graphics chip business in
connection with the acquisition of Active Design Corporation.
The Company's general and administrative expenses in fiscal 1998 increased $2.2
million, or 73%, over fiscal 1997. The increase was primarily attributable to a
charge of $1.9 million in accounts receivable reserves in connection with the
write-off of assets associated with the graphics products. The same expenses
decreased $1.2 million, or 29%, in fiscal 1997 over fiscal 1996. The reduction
was primarily due to the elimination of SDIS, the Company's monitor subsidiary,
and general cost containment efforts by the Company.
Liquidity and Capital Resources
The Company had cash, cash equivalents, and short-term investments of $16.7
million at January 31, 1998, compared with $18.8 million at January 31, 1997.
The primary sources of cash in fiscal 1998 came from $4.2 million (net of
expenses) proceeds from the sale of 45,000 shares of convertible preferred stock
and $2.5 million cash borrowings under bank lines of credit. The primary uses of
cash included $8.3 million used by operations, and approximately $4.2 million
used to purchase short-term investments. As of January 31, 1998, the Company had
$12 million outstanding under a $12 million bank revolving line of credit that
expires in October 1998 and is collateralized by funds on deposit in accounts
that have been assigned to the lender. The Company also has a $6 million bank
line of credit available that expires in October 1998, and is secured by the
Company's accounts receivable, inventories, equipment, and intangibles,
including intellectual property. This asset-based line of credit had an
outstanding balance of $1.3 million as of January 31, 1998.
Inventories increased since the end of January 31, 1997 from $4.9 million to
$7.3 million at January 31, 1998. The increase was largely due to the build-up
of components for the Company's DVD/MPEG2-based products.
17
<PAGE>
Immediately after the close of the 1998 fiscal year, in February 1998, the
Company raised an additional $5 million in equity capital through the sale of
convertible preferred stock in a private placement. These proceeds will be used
to finance manufacturing capability for the Company's DVD/MPEG-2 and networked
video product offerings.
The Company's 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 actual results may differ as a result of such
factors.
Factors Affecting Future Operating Results
The Company's annual and quarterly results have in the past and may in the
future vary significantly due to a number of factors, including but not limited
to new product introductions by the Company and its competitors; market
acceptance of the technology embodied in the Company's products generally and
the Company's products in particular; shifts in demand for the technology
embodied in the Company's products generally and the Company's products in
particular and/or those of the Company's competitors; gains or losses of
significant customers; reduction in average selling prices and gross margins,
which may occur either gradually or precipitously; inventory obsolescence;
write-downs of accounts receivable; an interrupted or inadequate supply of
semiconductor chips or other materials; the Company's inability to protect its
intellectual property; loss of key personnel; technical problems in the
development, rampup, and manufacture of products causing shipping delays; and
availability of third-party manufacturing capacity for production of certain of
the Company's products. The Company derives a substantial portion of its
revenues from sales to the Asia Pacific region, a region of the world that is
subject to increased economic instability. There can be no assurance that such
instability will not have a material adverse effect on the Company's future
international sales. Any adverse change in the foregoing or other factors could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Due to the factors noted above, the Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis.
Past financial performance should not be considered a reliable indicator of
future performance, and investors should not use historical trends to anticipate
results or trends of future periods. Any shortfall in revenue or earnings could
have an immediate and significant adverse effect on the trading price of the
Company's common stock. Additionally, the Company may not learn of such
shortfall until late in a fiscal quarter, which could result in even more
immediate and adverse effect on the trading price of the Company's common stock.
Further, the Company operates in a highly dynamic industry, which often results
in volatility of the Company's common stock price.
Impact of the Year 2000 Issue
The 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.
18
<PAGE>
The Company is in the process of 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. While the
investigation has not yet been completed, based on the results thus far, the
Company does not believe the costs of making its products Year 2000 compliant
will be material. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Sigma's financial statements, the notes thereto, and the independent auditors'
report appear on pages F-1 through F-17 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item concerning the Company's directors and
executive officers is incorporated by reference from the information set forth
in the sections entitled "Election of Directors" and "Other Information"
contained in the Company's Proxy Statement relating to the 1998 Annual Meeting
of Shareholders to be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year pursuant to General
Instruction G(3) of Form 10-K (the "Proxy Statement"). Certain information
required by this item concerning the executive officers of the Company is
incorporated by reference to the information set forth in Part I of the Annual
Report on 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding executive compensation is
incorporated by reference from the information set forth in the sections
entitled "Election of Directors--Compensation of Directors" and "Other
Information--Executive Compensation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding security ownership of certain
beneficial owners and management is incorporated by reference from the
information set forth in the section entitled "Other Information--Security
Ownership of Certain Beneficial Owners and Management" contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1. Financial Statements
The following documents are filed as part of this report: Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of January 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended
January 31, 1998, 1997, and 1996 F-3
Consolidated Statements of Shareholders' Equity for the years
ended January 31, 1998, 1997, and 1996 F-4
Consolidated Statements of Cash Flows for the years ended
January 31, 1998, 1997, and 1996 F-6
Notes to Consolidated Financial Statements F-8
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this report:
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
All other schedules have been omitted as they are not required, not applicable,
or the required information is otherwise included.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended January 31,
1998.
(c) Exhibits
The exhibits listed on the accompanying index to exhibits immediately following
the financial statement schedules are incorporated by reference into this Annual
Report on Form 10-K.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of Fremont, State of
California, on the 29th day of April 1998.
SIGMA DESIGNS, INC.
By /s/ Thinh Q. Tran
----------------------------------
Chairman of the Board,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thinh Q. Tran and Kit Tsui, and each of them,
jointly and severally, his true and lawful attorneys-in-fact, each with full
power of substitution and resubstitution, for him in any and all capacities, to
sign any or all amendments to this Annual Report on Form 10-K, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do if personally present,
hereby ratifying and confirming all that each said attorney-in-fact and agent,
or his or her substitute or substitutes or any of them, may lawfully do or cause
to be done by virtue hereof.
<TABLE>
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:
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Thinh Q. Tran Chairman of the Board, President, and April 30, 1998
Chief Executive Officer (Principal
Executive Officer)
/s/ Kit Tsui Director of Finance, Chief April 30, 1998
Financial Officer and Secretary (Principal
Financial and Accounting Officer)
/s/ William J. Almon Director April 30, 1998
/s/ William Wang Director April 30, 1998
</TABLE>
22
<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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended January 31, 1998. Our audits also
include the financial statement schedule listed in Item 14(a)2. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sigma Designs, Inc. and
subsidiaries at January 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended January 31,
1998 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
February 26, 1998
F-1
<PAGE>
SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1998 AND 1997
(Dollars in thousands)
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1998 1997
CURRENT ASSETS:
Cash and equivalents $ 697 $ 6,945
Short-term investments 15,951 11,801
Accounts receivable (net of allowances of $3,331 and $892) 12,395 12,477
Inventories - net 7,314 4,880
Prepaid expenses and other assets 592 581
-------- --------
Total current assets 36,949 36,684
EQUIPMENT - Net 1,241 1,098
OTHER ASSETS 139 133
-------- --------
TOTAL $ 38,329 $ 37,915
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit $ 13,316 $ 10,831
Accounts payable 3,014 3,286
Accrued liabilities 1,324 2,066
Accrued facilities 243 302
Current portion of capital lease 93 35
-------- --------
Total current liabilities 17,990 16,520
-------- --------
ACCRUED FACILITIES - long term - 311
CAPITAL LEASE - long term 27 67
COMMITMENTS (Notes 9 and 10)
SHAREHOLDERS' EQUITY:
Preferred stock - no par value: 2,000,000 shares authorized;
shares outstanding: 1998, 26,550; 1997, none 2,715 -
Common stock - no par value: 20,000,000
shares authorized; shares outstanding:
1998, 11,645,876; 1997, 11,091,062 56,419 54,311
Accumulated deficit (38,762) (33,114)
Deferred stock compensation - (100)
Shareholder note receivable (63) (80)
Unrealized gain on securities available for sale 3 -
-------- --------
Shareholders' equity 20,312 21,017
-------- --------
TOTAL $ 38,329 $ 37,915
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-2
<PAGE>
SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JANUARY 31, 1998, 1997 and
1996 (In thousands, except per share amounts)
<CAPTION>
- -------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
NET SALES $ 36,982 $ 41,214 $ 26,374
COSTS AND EXPENSES:
Cost of sales 28,296 26,531 25,492
Research and development 4,948 4,688 4,499
Sales and marketing 4,371 5,541 7,952
General and administrative 5,166 2,987 4,208
Restructuring (credit) - - (350)
-------- -------- --------
Total costs and expenses 42,781 39,747 41,801
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS (5,799) 1,467 (15,427)
Interest income 820 594 449
Interest expense (927) (540) (396)
Gain from sale of investments - - 666
Other 6 8 -
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (5,900) 1,529 (14,708)
CREDIT (PROVISION) FOR INCOME TAXES 824 - -
-------- -------- --------
NET INCOME (LOSS) BEFORE DIVIDEND ON
PREFERRED STOCK (5,076) 1,529 (14,708)
DIVIDEND ON PREFERRED STOCK 572 - -
-------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (5,648) $ 1,529 $(14,708)
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.51) $ 0.16 $ (1.88)
======== ======== ========
Diluted $ (0.51) $ 0.14 $ (1.88)
======== ======== ========
SHARES USED IN COMPUTATION:
Basic 11,012 9,853 7,822
======== ======== ========
Diluted 11,012 11,259 7,822
======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(Dollars in thousands)
<CAPTION>
- -------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
------------------------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balances, February 1, 1995 - $ - 7,479,943 $ 38,820
Common stock issued under stock plans 549,655 411
Conversion of subordinated notes
and issuance of warrants 1,134,323 6,276
Adjustment of E-Motions, Inc. purchase price 74
Deferred stock compensation 164
Issuance of stock 684,000 1,830
Unrealized gain on securities available for sale
Net loss ------- ------- ---------- --------
Balances, January 31, 1996 - - 9,847,921 47,575
Common stock issued under stock plans 827,221 3,719
Adjustment of E-Motions, Inc. purchase price 21
Exercise of warrants 415,920 3,011
Amortization of deferred stock compensation (15)
Unrealized loss on securities available for sale
Active Design, Inc. net loss for the month ended
February 29, 1996
Net income
------- ------- ---------- --------
Balances, January 31, 1997 - - 11,091,062 54,311
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Deferred Shareholder on Securities
Accumulated Stock Note Available
Deficit Compensation Receivable for Sale Total
<S> <C> <C> <C> <C> <C>
Balances, February 1, 1995 $ (20,036) $ - $ - $ (63) $ 18,721
Common stock issued under stock plans (80) 331
Conversion of subordinated notes
and issuance of warrants 6,276
Adjustment of E-Motions, Inc. purchase price 74
Deferred stock compensation (164)
Issuance of stock (25) 1,805
Unrealized gain on securities available for sale 82 82
Net loss (14,708) (14,708)
--------- ------ ------ ------ --------
Balances, January 31, 1996 (34,769) (164) (80) 19 12,581
Common stock issued under stock plans 3,719
Adjustment of E-Motions, Inc. purchase price 21
Exercise of warrants 3,011
Amortization of deferred stock compensation 64 49
Unrealized loss on securities available for sale (19) (19)
Active Design, Inc. net loss for the month ended
February 29, 1996 126 126
Net income 1,529 1,529
--------- ------ ------ ------ --------
Balances, January 31, 1997 (33,114) (100) (80) - 21,017
(Continued)
</TABLE>
F-4
<PAGE>
SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(Dollars in thousands)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
-------------------------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balances, January 31, 1997 - $ - 11,091,062 $ 54,311
Common stock issued under option plans 150,220 239
Amortization of deferred stock compensation
Cancellation of stock options (75)
Issuance of Series A preferred stock (private placement) 45,000 4,500
Discount for Series A shares 500
Private placement expenses - Series A (368) 10,000 44
Conversion of Series A preferred stock (18,450) (1,917) 445,745 1,917
Unrealized gain (loss) on securities available for sale
Series A dividends
Cancellation of Active Designs shares (51,151) (17)
Net loss
------ ------- ---------- --------
Balances, January 31, 1998 26,550 $ 2,715 11,645,876 $ 56,419
====== ======= ========== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Deferred Shareholder on Securities
Accumulated Stock Note Available
Deficit Compensation Receivable for Sale Total
<S> <C> <C> <C> <C> <C>
Balances, January 31, 1997 $ (33,114) $ (100) $ (80) $ - $ 21,017
Common stock issued under option plans 239
Amortization of deferred stock compensation 25 25
Cancellation of stock options 75 -
Issuance of Series A preferred stock (private placement) 4,500
Discount for Series A shares (500) -
Private placement expenses - Series A (324)
Conversion of Series A preferred stock -
Unrealized gain (loss) on securities available for sale 3 3
Series A dividends (72) (72)
Cancellation of Active Designs shares 17 -
Net loss (5,076) (5,076)
--------- ------ ----- ------ --------
Balances, January 31, 1998 $ (38,762) $ - $ (63) $ 3 $ 20,312
========= ====== ===== ====== ========
(Concluded)
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-5
<PAGE>
SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(In thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,076) $ 1,529 $ (14,708)
Active Design net loss for the one month ended February 28, 1997 - 126 -
Adjustments to reconcile net income (loss) to net cash used for operating
activities:
Depreciation and amortization 653 1,054 1,346
Gain from sale of investment - - (666)
Loss on disposal of assets - - 22
Amortization of deferred stock compensation 25 49 -
Reduction in restructuring costs previously recorded - - (350)
Changes in assets and liabilities:
Accounts receivable 82 (7,688) 7,169
Inventories (2,434) (2,836) 7,692
Prepaid expenses and other (85) (130) (76)
Accounts payable (272) 417 (6,464)
Accrued liabilities (1,160) (22) (243)
-------- ------- -------
Net cash used for operating activities (8,267) (7,501) (6,278)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (15,948) (11,801) (10,947)
Maturity of short-term investments 11,801 10,947 7,412
Sales of long-term investments - - 1,560
Equipment additions (553) (345) (786)
Title development costs (78) (188) (296)
Other assets (6) 7 (1)
-------- ------- -------
Net cash used for investing activities (4,784) (1,380) (3,058)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank line of credit borrowings, net 2,485 4,439 4,682
Common stock sold 239 6,751 2,136
Proceeds from sale of preferred stock 4,500 - -
Dividends paid (23) - -
Issuance costs (324) - -
Proceeds from issuance of convertible debt and warrants - net - - 6,276
Repayment of capital lease obligation (74) (11) (3)
Proceeds from shareholder advance - - 11
-------- ------- -------
Net cash provided by financing activities 6,803 11,179 13,102
-------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (6,248) 2,298 3,766
CASH AND EQUIVALENTS:
Beginning of period 6,945 4,647 881
-------- ------- -------
End of period $ 697 $ 6,945 $ 4,647
======== ======= =======
(Continued)
</TABLE>
F-6
<PAGE>
SIGMA DESIGNS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(In thousands)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH PAID FOR INTEREST $ - $ 511 $ 388
======= ======= =======
CASH PAID FOR INCOME TAXES $ - $ - $ 3
======= ======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 92 $ 113 $ 38
======= ======= =======
Issuance of common stock for notes receivable $ - $ - $ 80
======= ======= =======
Accretion of redeemable preferred stock redemption value $ - $ - $ 25
======= ======= =======
Deferred stock compensation $ - $ - $ 164
======= ======= =======
Conversion of subordinated debt to common stock
and issuance of warrants $ $ - $ 6,276
======= ======= =======
Adjustment of E-Motions, Inc. purchase price $ $ 21 $ 74
======= ======= =======
Series A preferred dividends $ 572 $ - $ -
======= ======= =======
Conversion of Series A preferred stock into common stock $ 1,917 $ - $ -
======= ======= =======
(Concluded)
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-7
<PAGE>
SIGMA DESIGNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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, 1998, substantially all business activity related to multimedia
devices and products. The Company sells its products to computer
manufacturers and to retail chains, distributors and value-added
resellers.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include Sigma Designs, Inc. and subsidiaries. Intercompany balances and
transactions are eliminated.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Pervasiveness of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Such
estimates include accruals, reserves and the valuation allowance on
deferred tax assets. Actual results could differ from those estimates.
Short-term investments represent government and corporate obligations with
maturities at the date of acquisition of more than three months.
Short-term investments, carried as available for sale securities, are
reported at fair market value with unrealized gains or losses reported as
a component of shareholders' equity. Such investments are classified as
current assets as all maturities are within one year. Short-term
investments consisted of the following (in thousands):
January 31, 1998
--------------------------------------------
Market Unrealized
Cost Value Gain
Certificates of deposit $ 12,001 $ 12,001 $ -
Corporate obligations 3,947 3,950 3
-------- -------- ---
$ 15,949 $ 15,951 $ 3
======== ======== ===
F-8
<PAGE>
Certificates of deposit at January 31, 1998 includes $11,981,000 which is
restricted as to use because it is security for a bank line of credit
(Note 8).
January 31, 1997
------------------------------------------
Market Unrealized
Cost Value Gain
Certificates of deposit $ 11,801 $ 11,801 $ -
======== ======== ====
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
$98,000 and $172,000, net of accumulated amortization of $67,000 and
$51,000 were included in prepaids and other assets as of January 31, 1998
and 1997, respectively. Amortization expense related to title development
costs was $151,000, $497,000, and $71,000 in the years ended January 31,
1998, 1997, and 1996 respectively.
Investments in 20% to 50% owned companies are accounted for using the
equity method. Investments in less than 20% owned companies are accounted
for using the cost method unless the Company can exercise significant
influence or the investee is economically dependent upon the Company, in
which case the equity method is used.
Equipment is stated at cost. Depreciation and amortization are computed
using the straight-line method based on the useful lives of the assets
(three to five years) or the lease term if shorter.
Revenue Recognition - Sales are recognized upon shipment. Allowances for
sales returns, price protection and warranty costs are recorded at the
time that sales are recognized.
Research and development expenses include costs associated with the design
and development of new products. To the extent that such costs include the
development of computer software, they are generally incurred prior to the
establishment of the technological feasibility of the related product that
is under development. Accordingly, software costs incurred after the
establishment of technological feasibility have not been material and
therefore have been expensed. All other research and development is
expensed as incurred.
Income Taxes - Deferred income taxes are provided for temporary
differences between financial statement and income tax reporting.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
cash and cash equivalents, short-term investments and accounts receivable.
The majority of the 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 Company maintains reserves for
estimated potential credit losses.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock issued to Employees.
Accounting Period - The Company's fiscal year ends on the Saturday closest
to January 31. For convenience, the financial statements are shown as
ending January 31, although the fiscal years ended on January 31, 1998,
February 1, 1997 and January 27, 1996, respectively. Fiscal 1998, 1997 and
1996 included 52, 53 and 52 weeks, respectively.
Net Income (Loss) per Share - During the fourth quarter of fiscal 1998,
the Company adopted Statement of Financial Accounting Standards No. 128,
Earnings per Share ("SFAS 128"), which replaces the previously reported
primary and fully diluted earnings per share with basic and diluted
earnings per share and requires a dual presentation of basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing net income by
the weighted average of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted into
common stock. Common share equivalents including stock options, warrants
and convertible preferred stock have been excluded for fiscal 1996 and
1998 as their effect would be antidilutive. All per share amounts for all
periods have been presented and, where necessary, restated to conform to
the SFAS 128 requirement.
Fair Value of Financial Instruments - In accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 107 "Disclosure
About Fair Value of Financial Instruments," which requires the disclosure
of fair value information about both on and off balance sheet financial
instruments where it is practicable to estimate the value, the Company has
estimated the fair value of its financial instruments. The Company
believes that carrying amounts reported in the balance sheet for cash and
cash equivalents and short-term investments as of January 31, 1998
approximate fair market value.
Recently Issued Accounting Standards - In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which
requires that an enterprise report by major components and as a single
total, the change in its net assets from nonowner sources; and 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 these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows, and any effect will be limited to the
form and content of its disclosures. Both statements are effective for
fiscal years beginning after December 15, 1997, with earlier application
permitted.
3. ACQUISITION OF ACTIVE DESIGN CORP.
On May 3, 1996, the Company acquired Active Design Corporation (Active
Design) in a transaction accounted for as a pooling of interests. Active
Design exchanged all of its outstanding common and preferred stock into
approximately 1,124,000 shares of the Company's common stock, based on the
exchange ratio of one share of Active Design into .22 share (exchange
ratio) of the Company. The Company also assumed all 1,042,000 outstanding
options to acquire shares of common stock of Active
F-10
<PAGE>
Design at the exchange ratio, resulting in 229,240 options to acquire the
Company's common stock. Active Design was incorporated on May 17, 1995 and
was a development stage company in the business of developing products for
the multimedia market. As the merger has been accounted for as a pooling
of interests, the consolidated financial statements have been restated to
reflect the combined operations of the two companies. As the Company and
Active Design had different year ends at the time of the acquisition, the
consolidated statements of operations combine the Company's year ended
January 31, 1997 and January 31, 1996 with Active Design's year ended
January 31, 1997 and the period from May 17, 1995 (inception) through
February 29, 1996, respectively. From its inception, through the date of
the acquisition, Active Design did not generate any revenues and its net
loss was $463,000 and $695,000 for the period from February 1, 1996
through May 3, 1996 (the date of merger) and for the period from May 17,
1995 (inception) through January 31, 1996, respectively.
<TABLE>
The following table shows the effect on the results of operations for the
years presented herein prior to the acquisition discussed above (in
thousands):
<CAPTION>
Net
Income
Net Sales (Loss)
<S> <C> <C>
Year ended January 31, 1996:
Active Design (May 17, 1995 through February 29, 1996) $ - $ (821)
Sigma Designs (year ended January 31, 1996) 26,374 (13,887)
-------- ----------
Combined $ 26,374 $ (14,708)
======== ==========
Year ended January 31, 1997:
Active Design $ - $ (463)
Sigma Designs (year ended January 31, 1997) 41,214 1,992
-------- ----------
Combined $ 41,214 $ 1,529
======== ==========
</TABLE>
4. RESTRUCTURING
During fiscal 1996, the Company recorded a $350,000 credit to the
restructuring account which was established in fiscal 1994. This credit
resulted from a new sublease agreement with more favorable terms. The
remaining accrual from this restructuring is a facilities accrual of
approximately $243,000 as of January 31, 1998 relates to the excess of the
Company's lease commitment over the expected sublease income for the term
of the lease.
5. INVENTORIES
Inventories at January 31 consist of:
1998 1997
(In thousands)
Finished goods $ 3,366 $ 1,937
Work in process 3,497 3,333
Raw materials 4,291 2,064
Less reserves (3,841) (2,454)
------- -------
Inventory - net $ 7,314 $ 4,880
======= =======
F-11
<PAGE>
6. EQUIPMENT
Equipment at January 31 consists of:
1998 1997
(In thousands)
Computers and equipment $ 2,128 $ 2,608
Furniture and fixtures 1,240 1,542
Other 390 403
------- -------
Total 3,758 4,553
Accumulated depreciation and amortization (2,517) (3,455)
------- -------
Equipment - net $ 1,241 $ 1,098
======= =======
7. ACCRUED LIABILITIES
Accrued liabilities at January 31 consist of:
1998 1997
(In thousands)
Other accrued liabilities $ 838 $ 1,623
Accrued salary and benefits 485 443
------- -------
Total $ 1,323 $ 2,066
======= =======
8. BANK LINES OF CREDIT
The Company has $11,980,760 outstanding at January 31, 1998 under a
$12,000,000 bank line of credit that expires in October 1998, bears
interest at the bank's index rate (4.55% at January 31, 1998) plus 2.0%,
and is secured by funds on deposit in accounts which have been assigned to
the lender. The Company also has $1,335,000 outstanding at January 31,
1998 under a $6,000,000 bank line of credit that expires in October 1998,
bears interest at the bank's prime rate (8.5% at January 31, 1998) plus
1.25%, 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's primary facility is leased under a noncancelable lease which
expires in March 1999. In addition, the Company leases certain equipment
under capital lease arrangements. Future minimum annual payments under
capital and operating leases are as follows:
Fiscal Year Ending Capital Operating
January 31, Leases Leases
1999 $ 95 $ 1,318
2000 33 82
---- --------
Total minimum lease payments 128 $ 1,400
========
Amount representing interest at a rate of 10.5% 8
----
Present value of minimum lease payments 120
Current portion 93
----
Long-term portion $ 27
====
Approximately $243,000 of the operating lease commitment is included in
accrued facilities as of January 31, 1998.
Rent expense was $266,000, $351,000 and $316,000 for fiscal 1998, 1997 and
1996, respectively.
10. COMMITMENTS
The Company pays royalties for the right to sell certain products under
various license agreements. During the years ended January 31, 1998, 1997
and 1996, the Company recorded royalty expense of $425,000, $742,000 and
$643,000, 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
Preferred Stock
In July 1997, the Company issued 45,000 shares of Series A nonvoting
convertible preferred stock and warrants to purchase 64,285 shares of the
Company's common stock for net proceeds of approximately $4,176,000 (net
of issuance costs of approximately $324,000). The warrants are exercisable
at $9.425 per share beginning in January 1998 and expire in January 2001.
Subsequent to January 31, 1998, the Company issued 5,000 shares of Series
B nonvoting convertible preferred stock for $1,000 per share and warrants
to purchase 50,000 shares of the Company's common stock for proceeds of
approximately $5,000,000. The warrants are exercisable at 130% of the
average closing bid prices of the Company's common stock for the five
trading days ending April 30, 1998 and expire on April 30, 2001.
F-13
<PAGE>
The significant terms of the Series A and Series B convertible preferred
stock are as follows:
o Beginning 120 days from the date of issuance, each share of Series A
preferred stock is convertible into common stock at a 10% discount
from the low reported market price of the Company's common stock for
the five days preceding the date of conversion (subject to certain
limitations as defined). Under certain conditions, the Company may
elect to repurchase the Series A preferred stock for a cash amount
equivalent to the value of the converted common stock that would have
been obtained upon conversion as described above. Any shares of Series
A preferred stock outstanding on the second anniversary of their
original issuance date will automatically convert into shares of the
Company's common stock at the conversion rate described above.
o Beginning 180 days from the date of issuance, each share of Series B
preferred stock is convertible into common stock based on the average
of the lowest six daily market prices of the Company's common stock
during the twenty-day trading period preceding the date of conversion
(subject to certain limitations as defined). Under certain conditions,
the Company may elect to repurchase the Series B preferred stock. Any
shares of Series B preferred stock outstanding on January 30, 2000
will automatically convert into shares of the Company's common stock
at the conversion rate described above.
o The holders of Series A preferred stock are entitled to receive
quarterly dividends in cash or common stock of the Company at a rate
of 3% per annum of the original issuance price. Series B preferred
stock does not bear dividends.
o In the event of any liquidation, dissolution, or winding up of the
Company "an Event," either voluntarily or involuntarily:
- The holders of the Series A preferred stock shall be entitled to
receive, prior and in preference to any distribution of assets and
surplus funds of the Company to the holders of the common stock an
amount equal to the original purchase price of the Series A
preferred stock, plus an amount equal to accrued and unpaid
dividends to the date of liquidation. After payment has been made
to the holders of the Series A preferred stock, the holders of the
Company's common stock shall be entitled to receive the remaining
assets of the Company.
- The holders of Series B preferred stock shall be entitled to an
amount equal to the original purchase price of the Series B
preferred stock plus three percent per annum of the original
issuance price. However, in the case that there are no shares of
Series A preferred stock outstanding at the time of an Event,
Series B preferred stockholders will be entitled to an amount equal
to 115% of the amount described in the preceding sentence.
The 10% discount on conversion of Series A preferred stock into common
stock as described above is considered a deemed preferential dividend to
the holders of Series A preferred stock and, accordingly, a $500,000
deemed dividend has been accreted which for purposes of computing earnings
per share reduces income available to common stockholders over the minimum
conversion period of seven months.
During fiscal 1998, holders of Series A preferred stock converted 18,450
shares of preferred stock into 445,745 shares of common stock.
Each share of common stock incorporates a purchase right which entitles
the shareholder to buy, under certain circumstances, one newly issued
share of the Company's common stock at an exercise price per share of $75.
The rights become exercisable if a person or group acquires 20% or more of
the Company's common stock or announces a tender or exchange offer for 30%
or more of the Company's common stock under certain circumstances. In the
event of certain merger or sale transactions, each Right will then
F-14
<PAGE>
entitle the holder to acquire shares having a value of twice the Right's
exercise price. The Company may redeem the Rights at $.01 per Right prior
to the earlier of the expiration of the Rights on November 27, 1999 or at
the time that 20% or more of the Company's common stock has been acquired
by a person or group. Until the Rights become exercisable, they have no
dilutive effect on the earnings of the Company.
Stock Option Plan
The Company's 1994 stock option plan provides for the granting of options
to purchase up to 3,400,000 shares of common stock at the fair market
value on the date of grant. Of this amount, 1,000,000 shares were
authorized for grant by the Board of Directors in both fiscal year 1997
and fiscal year 1998. Generally, options granted under the 1994 plan
become exercisable over a five-year period and expire no more than ten
years from the date of grant (all options outstanding at January 31, 1998
expire six to ten years from date of grant). On April 22, 1997, the
Company repriced 1,167,779 options to purchase common stock to $2.31, the
market price on that date. The repriced options are treated as canceled
and regranted; however, they retain their original vesting terms.
<TABLE>
Stock option activity and balances are summarized as follows:
<CAPTION>
Weighted
Number Average Exercise
of Shares Price Per Share
<S> <C> <C>
Balances, February 1, 1995 (470,514 exercisable
at a weighted-average price of $3.86) 1,643,341 $ 4.28
Granted (weighted-average fair value of $2.60) 1,046,295 3.55
Canceled (366,222) 4.50
Exercised (98,990) 2.78
--------- ------
Balances, January 31, 1996 (701,938 exercisable
at a weighted-average price of $4.17) 2,224,424 3.97
Granted (weighted-average fair value of $4.22) 326,000 7.71
Canceled (144,509) 4.78
Exercised (813,536) 4.21
--------- ------
Balances, January 31, 1997 (441,362 exercisable
at a weighted-average price of $4.17) 1,592,379 4.57
Granted (weighted-average fair value of $1.37) 2,235,779 2.38
Canceled (1,441,776) 5.01
Exercised (111,554) 0.98
--------- ------
Balances, January 31, 1998
(Includes repricing of 1,167,779 options) 2,274,848 $ 2.34
========= ======
</TABLE>
F-15
<PAGE>
<TABLE>
At January 31, 1998, options to purchase 663,709 shares were exercisable
and 987,580 shares were available for future grant.
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------- -------------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise January 31, Remaining Exercise January 31, Exercise
Prices 1998 Life Price 1998 Price
<S> <C> <C> <C> <C> <C>
$0.0875 - $0.2272 110,382 7.81 $ 0.21 15,892 $ 0.10
$2.31 - $3.06 2,092,603 9.26 2.34 624,954 2.32
$3.50 - $5.02 69,363 7.60 4.56 21,613 4.48
$6.38 2,500 7.42 6.38 1,250 6.38
----------------- --------- ---- ------ ------- ------
$0.0875 - $6.38 2,274,848 9.14 $ 2.31 663,709 $ 2.34
================= ========= ==== ====== ======= ======
</TABLE>
The Company uses the intrinsic value method specified by Accounting
Principles Board Opinion No. 25 to calculate compensation expense
associated with issuing stock options and, accordingly, has recorded no
such expense through January 31, 1998 as such issuances have been at the
fair value of the Company's common stock at the date of grant.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma
net income and earnings per share had the Company adopted the fair value
method as of the beginning of fiscal 1996. Under SFAS 123, the fair value
of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect
the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions for the years ended January 31, 1998 and 1997, respectively:
expected life, 14 and 13 months following vesting; stock volatility, 89%
and 87%; risk free interest rates, 5.6% and 5.6%; and no dividends during
the expected term. The Company's calculations are based on a multiple
option valuation approach and forfeitures are recognized as they occur. If
the computed fair values of awards in fiscal 1998 and 1997 had been
amortized to expense over the vesting period of the awards, pro forma net
income (loss) would have been $(7,283,000) (a loss of $0.66 per share) and
$347,000 (income of $0.03 per share). However, the impact of outstanding
non-vested stock options granted prior to February 1, 1995 has been
excluded from the pro forma calculation; accordingly, the pro forma
adjustments for the years ended January 31, 1998 and 1997 are not
indicative of future period pro forma adjustments, when the calculation
will apply to all applicable stock options.
Employee Stock Purchase Plan
The Company's 1986 Employee Stock Purchase Plan provides for the sale of
up to 100,000 shares of common stock. Eligible employees may authorize
payroll deductions of up to 10% of their regular base salaries to purchase
common stock at 85% of the fair market value at the beginning or end of
each six-month offering period. During fiscal 1998, 1997 and 1996, 38,666,
13,685 and 10,905 shares were purchased at an average price of $3.35,
$7.63 and $5.15 per share, respectively.
F-16
<PAGE>
Issuance of Common Stock and Warrants
On December 15, 1995, the Company issued convertible debt and warrants to
purchase 415,921 shares of common stock at an exercise price of $7.62 per
share for proceeds of $6,276,000 (net of issuance costs of $374,000). All
such debt was converted to 1,134,323 shares of common stock on the same
day. In addition, the warrants were fully exercised in the year ended
January 31, 1997 for total proceeds of $3,170,000 which have been shown in
the statement of shareholders' equity for the year ended January 31, 1997
net of $159,000 of additional costs related to the original issuance of
the convertible debt and the warrant.
12. INCOME TAXES
As a result of net operating loss carryforwards and net losses in fiscal
1998 and 1997, respectively, the Company recorded no income tax provision
for any of the years presented.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) operating losses and tax credit carryforwards.
<TABLE>
The tax effects of significant items comprising the Company's deferred
taxes are as follows:
<CAPTION>
January 31,
------------------------------
1998 1997
(In thousands)
Deferred tax assets:
<S> <C> <C>
Net operating losses and tax credit carryforwards $ 18,904 $ 16,803
Reserves not currently deductible 2,118 2,177
Capitalized R&D expenditures 147 195
Other 170 338
-------- --------
21,339 19,513
Deferred tax liabilities:
Capitalized software and title development - (69)
-------- --------
21,339 19,444
Valuation allowance (21,339) (19,444)
-------- --------
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
F-17
<PAGE>
limited number of suppliers and manufacturing contractors, management
believes that recognition of the deferred tax assets arising from the
above-mentioned future tax benefits is currently not appropriate and,
accordingly, has provided a valuation allowance.
Net operating losses and tax credit carryforwards as of January 31, 1998
are as follows:
Expiration
(In thousands) Years
Net operating losses, federal $ 44,000 2009-2012
Net operating losses, state 22,000 1998-2002
Tax credits, federal 735 2006-2012
Tax credits, state 380 2003-2012
Net operating losses, foreign 2,970 -
<TABLE>
The Company's effective tax rate differs from the federal statutory rate
as follows:
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Computed at 35% $ (2,053) $ 535 $ (4,860)
Valuation allowance 1,895 (144) 5,014
Other 158 (391) (154)
Benefit of net operating loss carryback refund (824) - -
-------- ----- --------
Total $ (824) $ - $ -
======== ===== ========
</TABLE>
13. CUSTOMER AND GEOGRAPHIC INFORMATION
No domestic customer accounted for more than 10% of net sales in fiscal
1998, while one domestic customer accounted for 11% of net sales in fiscal
1997 and 1996. In fiscal 1998, one international customer accounted for
39% of net sales. In fiscal 1997, two international customers accounted
for 23% and 20% of net sales, respectively. No international customers
accounted for more than 10% of net sales in fiscal 1996. 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.
1998 1997 1996
(In thousands)
Net sales:
Domestic $ 13,349 $ 11,636 $ 9,642
Export sales:
Asia Pacific 20,833 26,708 13,274
Europe 2,429 2,400 3,243
Canada 371 470 215
-------- -------- ---------
Total $ 36,982 $ 41,214 $ 26,374
======== ======== =========
Taiwan accounted for 40% of net sales in fiscal 1998. Taiwan accounted for
42% of net sales in fiscal 1997. No international country accounted for
more than 10% of net sales in fiscal 1996.
F-18
<PAGE>
14. CONTINGENCY
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 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.
* * * * *
F-19
<PAGE>
<TABLE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<CAPTION>
BALANCE AT DEDUCTIONS:
BEGINNING OF WRITE OFFS OF BALANCE AT
CLASSIFICATION YEAR ADDITIONS ACCOUNTS(1) END OF YEAR
- -------------- --------------------------------------------- -----------
<S> <C> <C> <C> <C>
Allowance for returns and doubtful accounts,
price protection, and sales returns:
Year ended January 31,
1998 $ 892,000 $2,600,000 $ 160,000 $3,332,000
1997 892,000 165,000 165,000 892,000
1996 1,101,000 134,000 343,000 892,000
Inventory reserves
Year ended January 31,
1998 $2,455,000 $1,753,000 $ 416,000 $3,792,000
1997 3,454,000 41,000 1,040,000 2,455,000
1996 5,620,000 5,588,000 7,754,000 3,454,000
<FN>
(1) Amount written off, net of recoveries.
</FN>
</TABLE>
S-1
<PAGE>
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1(10) Agreement and Plan of Reorganization by and among the Registrant, Sigma Acquisition
Corporation and Active Design Corp. dated as of April 23, 1996.
3.1(1) Restated Articles of Incorporation, as amended.
3.2(2) Bylaws of Registrant, as amended.
10.1(3) Distribution Agreement dated September 10, 1985.
10.2(4) Registrant's 1986 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement
10.3(5) Lease dated October 31, 1990 between Registrant and Renco Investment Company.
10.4(6) Industrial Space Lease dated February 16, 1994 by and between the Registrant and
Renco Bayside Investors.
10.5(6) Sublease dated February 16, 1994 by and between the Registrant and Media
Vision Technology, Inc.
10.6(7) Registrant's 1994 Stock Plan and form of Stock Option Agreement.
10.7(8) Registrant's 1994 Director Stock Option Pan and form of Director Option Agreement.
10.8(9) Form of Subscription Agreement, by and between the Registrant and certain purchasers.
10.9 Registrant's 1995 Business Loan Agreement with Silicon Valley Bank, as amended.
23.1 Independent Auditors' Consent of Deloitte & Touch LLP.
24.1 Power of Attorney (included on page 22).
27 Financial Data Schedule.
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Incorporated by reference to exhibit filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1988.
(2) Incorporated by reference to exhibit filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1989.
(3) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-4131) filed March 19, 1986,
Amendment No. 1 thereto filed April 28, 1986 and Amendment No. 2 thereto
filed May 15, 1986, which Registration Statement became effective May 15,
1986.
(4) Incorporated by reference to exhibit filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1992.
(5) Incorporated by reference to exhibit filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1991.
(6) Incorporated by reference to exhibit filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1995.
(7) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (No. 33-81914) filed July 25, 1994.
<PAGE>
(8) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 33-74308) filed on January 28,
1994, Amendment No. 1 thereto filed February 24, 1994, Amendment No. 2
thereto filed March 3, 1994, Amendment No. 3 thereto filed March 4, 1994
and Amendment No. 4 thereto filed March 8, 1994.
(9) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-3 (No. 333-883) filed on February 2, 1996,
Amendment No. 1 thereto Filed April 30, 1996, Amendment No. 2 thereto filed
May 14, 1996 and Amendment No. 3 thereto filed May 17, 1996.
(10) Incorporated by reference to exhibit filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1996.
</FN>
</TABLE>
BUSINESS LOAN AGREEMENT
BORROWER: SIGMA DESIGNS, INC. LENDER: SILICON VALLEY BANK
46501 Landing Parkway Santa Clara/Pacific Rim
Fremont, CA 94538 3000 Lakeside Drive
Santa Clara, CA 95054
================================================================================
THIS BUSINESS LOAN AGREEMENT between SIGMA DESIGNS, INC. ("Borrower") and
Silicon Valley Bank ("Lender") is made and executed on the following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans". Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of June 20, 1995, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Business Loan Agreement, as this
Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
Borrower. The word "Borrower" means SIGMA DESIGNS, INC. The word "Borrower"
also includes, as applicable, all subsidiaries and affiliates of Borrower as
provided below in the paragraph titled "Subsidiaries and Affiliates".
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such Indebtedness may
be or hereafter may become barred by any statute of limitations; and whether
such Indebtedness may be or hereafter may become otherwise unenforceable.
Lender. The word "Lender" means Silicon Valley Bank, its successors and
assigns.
<PAGE>
BUSINESS LOAN AGREEMENT
CONTINUED
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrowers receivables.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrowers
promissory note or notes, if any, evidencing Borrowers Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings
or other agreements, whether created by law, contract, or otherwise,
evidencing, governing, representing, or creating a Security Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act
of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
indebtedness owed by Borrower to Lender in form and substance acceptable to
Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but
including leaseholds and leasehold improvements) less total Debt.
Working Capital. The words Working Capital mean Borrower's current assets,
excluding prepaid expenses, less Borrower's current liabilities.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as of
the date of this Agreement and as of the date of each disbursement of Loan
proceeds:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California.
Borrower has the full power and authority to own its properties and to
transact the businesses in which it is presently engaged or presently
proposes to engage. Borrower also is duly qualified as a foreign corporation
and is in good standing in all states in which the failure to so qualify
would have a material adverse effect on its businesses or financial
condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not conflict
with, result in a violation of, or constitute a default under (a) any
provision of its articles of incorporation or organization, or bylaws, or
any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA" "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq.,
Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety
Code, Section 25100, et seq., or other applicable state or Federal laws,
rules, or regulations adopted pursuant to any of the foregoing. Except as
disclosed to and acknowledged by Lender in writing, Borrower represents and
warrants that: (a) During the period of Borrower's ownership of the
properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste or
substance by any person on, under, or about any of the properties. (b)
Borrower has no knowledge of, or reason to believe that there has been (i)
any use, generation, manufacture, storage, treatment, disposal, release, or
threatened release of any hazardous waste or substance
2
<PAGE>
BUSINESS LOAN AGREEMENT
CONTINUED
by any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person relating
to such matters. (c) Neither Borrower nor any tenant, contractor, agent or
other authorized user of any of the properties shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste or
substance on, under, or about any of the properties; and any such activity
shall be conducted in compliance with all applicable federal, state, and
local laws, regulations, and ordinances, including without limitation those
laws, regulations and ordinances described above. Borrower authorizes Lender
and its agents to enter upon the properties to make such inspections and
tests as Lender may deem appropriate to determine compliance of the
properties with this section of the Agreement. Any inspections or tests made
by Lender shall be at Borrower's expense and for Lender's purposes only and
shall not be construed to create any responsibility or liability on the part
of Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste. Borrower hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other costs
under any such laws, and (b) agrees to indemnify and hold harmless Lender
against any and all claims, losses, liabilities, damages, penalties, and
expenses which Lender may directly or indirectly sustain or suffer resulting
from a breach of this section of the Agreement or as a consequence of any
use, generation, manufacture, storage, disposal, release or threatened
release occurring prior to Borrower's ownership or interest in the
properties, whether or not the same was or should have been known to
Borrower. The provisions of this section of the Agreement, including the
obligation to indemnify, shall survive the payment of the Indebtedness and
the termination or expiration of this Agreement and shall not be affected by
Lender's acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which may
materially adversely affect Borrower's financial condition or properties,
other than litigation, claims, or other events, if any, that have been
disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith in
the ordinary course of business and for which adequate reserves have been
provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or affecting
any of the Collateral directly or indirectly securing repayment of
Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
Binding Effect. This Agreement, the Note and all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note are
binding upon Borrower as well as upon Borrower's successors, representatives
and assigns, and are legally enforceable in accordance with their respective
terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERlSA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, and (iii) no steps have been taken to terminate
any such plan.
Location of Borrower's Offices and Records. The chief place of business of
Borrower and the office or offices where Borrower keeps its records
concerning the Collateral is located at 46501 Landing Parkway, Fremont, CA
94538.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which such
information is dated or certified; and none of such information is or will
be incomplete by omitting to state any material fact necessary to make such
information not misleading.
Survival of Representation and Warranties. Borrower understands and agrees
that Lender is relying upon the above representations and warranties in
extending Loan Advances to Borrower. Borrower further agrees that the
foregoing representations and warranties shall be continuing in nature and
shall remain in full force and effect until such time as Borrower's Loan and
Note shall be paid in full, or until this Agreement shall be terminated in
the manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all litigation and claims
and all threatened litigation and claims affecting Borrower or any Guarantor
which could materially affect the financial condition of Borrower or the
financial condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis, and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement, audited by a certified public
accountant satisfactory to Lender and 10K Reports, and, as soon as
available, but in no event later than 15 days after filing with the
Securities and Exchange Commission, Borrower's 1OQ Reports. All financial
reports required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
3
<PAGE>
BUSINESS LOAN AGREEMENT
CONTINUED
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender
may request from time to time.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be canceled or diminished without at
least ten (10) days prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Borrower
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest for the Loans, Borrower
will provide Lender with such loss payable or other endorsements as Lender
may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the name
of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the
properties insured; (e) the then current property values on the basis of
which insurance has been obtained, and the manner of determining those
values; and (f) the expiration date of the policy. In addition, upon request
of Lender (however not more often than annually), Borrower will have an
independent appraiser satisfactory to Lender determine, as applicable, the
actual cash value or replacement cost of any Collateral.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed
upon Borrower or its properties, income, or profits, prior to the date on
which penalties would attach, and all lawful claims that, if unpaid, might
become a lien or charge upon any of Borrower's properties, income, or
profits. Provided however, Borrower will not be required to pay and
discharge any such assessment, tax, charge, levy, lien or claim so long as
(a) the legality of the same shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on its books adequate
reserves with respect to such contested assessment, tax, charge, levy, lien,
or claim in accordance with generally accepted accounting practices.
Borrower, upon demand of Lender, will furnish to Lender evidence of payment
of the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at any
time a written statement of any assessments, taxes, charges, levies, liens
and claims against Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in all other instruments and agreements
between Borrower and Lender in a timely manner, and promptly notify Lender
if Borrower learns of the occurrence of any event which constitutes an Event
of Default under this Agreement.
Operations. Substantially maintain its present executive and management
personnel; conduct its business affairs in a reasonable and prudent manner
and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards and
other requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender
with copies of any records it may request, at all Borrower's expense.
Environmental Compliance and Reports. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all
Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
4
<PAGE>
BUSINESS LOAN AGREEMENT
CONTINUED
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, dissolve or transfer or sell
Collateral out of the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower becomes insolvent, files a petition in
bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a
material adverse change in Borrower's financial condition, in the financial
condition of any Guarantor, or in the value of any Collateral securing any Loan;
or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or
revoke such Guarantor's guaranty of the Loan or any other loan with Lender.
LOAN ADVANCES. Lender, in its discretion, will make loans to Borrower, in
amounts determined by Lender, up to the amounts as defined and permitted in the
Agreement and Related Documents, including but not limited to any Promissory
Notes, executed by Borrower (the "Credit Limit"). The Borrower is responsible
for monitoring the total amount of Loans and Indebtedness outstanding from time
to time, and Borrower shall not permit the same, at any time to exceed the
Credit Limit. If at any time the total of all outstanding Loans and Indebtedness
exceeds the Credit Limit, the Borrower shall immediately pay the amount of the
excess to Lender, without notice or demand.
LETTER OF CREDIT SUBLIMIT. Subject to the terms of the Loan Agreement, as
amended from time to time, Lender shall issue or cause to be issued under the
Note standby and commercial letters of credit for the account of Borrower in an
aggregate face amount not to exceed $4,000,000.00. Each such letter of credit
shall have an expiry date of no later than June 19, 1996. All such letters of
credit shall be, in form and substance, acceptable to Lender in its sole
discretion and shall be subject to the terms and conditions of Lender's form
application and letter of credit agreement
DEFAULT RATE. Upon default, including failure to pay upon final maturity,
Lender, at its option, may do one or both of the following: (a) increase the
variable interest rate on the Note to five percentage points (5.000%) over the
Interest Rate otherwise payable thereunder, and (b) add any unpaid accrued
interest to principal and such sum will bear interest therefrom until paid at
the rate provided in the Note.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due on
the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained
in this Agreement or in any of the Related Documents, or failure of Borrower
to comply with or to perform any other term, obligation, covenant or
condition contained in any other agreement between Lender and Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and
for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent or any Guarantor revokes any guaranty of the
Indebtedness.
Change In Ownership. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
Loans immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional.
MISCELLANEOUS PROVISlONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Agreement. No alteration of or amendment to this Agreement
shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
5
<PAGE>
BUSINESS LOAN AGREEMENT
CONTINUED
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of Santa
Clara County, the State of California. (Initial Here__________) Lender and
Borrower hereby waive the right to any jury trial in any action, proceeding,
or counterclaim brought by either Lender or Borrower against the other. This
Agreement shall be governed by and construed in accordance with the laws of
the State of California.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's sale
or transfer, whether now or later, of one or more participation interests in
the Loans to one or more purchasers, whether related or unrelated to Lender.
Lender may provide, without any limitation whatsoever, to any one or more
purchasers, or potential purchasers, any information or knowledge Lender may
have about Borrower or about any other matter relating to the Loan, and
Borrower hereby waives any rights to privacy it may have with respect to
such matters. Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of any
such participation interests will be considered as the absolute owners of
such interests in the Loans and will have all the rights granted under the
participation agreement or agreements governing the sale of such
participation interests. Borrower further waives all rights of offset or
counterclaim that it may have now or later against Lender or against any
purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any
interest in the Loans. Borrower further agrees that the purchaser of any
such participation interests may enforce its interests irrespective of any
personal claims or defenses that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
out-of-pocket expenses, including without limitation attorneys' fees,
incurred in connection with the preparation, execution, enforcement and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans and
to enforce this Agreement, and Borrower will pay that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Borrower also will pay any court costs,
in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing and shall be effective when actually delivered or when
deposited with a nationally recognized overnight courier or deposited in the
United States mail, first class, postage prepaid, addressed to the party to
whom the notice is to be given at the address shown above. Any party may
change its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is to
change the party's address. To the extent permitted by applicable law, if
there is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower agrees to keep Lender
informed at all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of this
Agreement in all other respects shall remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other financial
accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
Time Is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
6
<PAGE>
BUSINESS LOAN AGREEMENT
CONTINUED
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THlS AGREEMENT IS DATED AS OF JUNE
20, 1995.
BORROWER:
SIGMA DESIGNS, INC.
By: /s/ Q. Binh Trinh
--------------------------------------------
Name: Q. Binh Trinh
------------------------------------------
Title: Vice President of Finance & CFO
-----------------------------------------
LENDER:
Silicon Valley Bank
By: /s/ Daniel Quon
-------------------------------------------
Name: Daniel Quon
-----------------------------------------
Title: Vice President / Manager
----------------------------------------
<PAGE>
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of April 23, 1998, by and
between Sigma Designs, Inc. ("Borrower") whose address is 46501 Landing Parkway,
Fremont, CA 94538, and Silicon Valley Bank ("Lender") whose address is 3003
Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Lender, Borrower is indebted to Lender pursuant to, among
other documents, a Promissory Note, dated June 20, 1995, in the original
principal amount of Ten Million and 00/100 Dollars ($10,000,000.00), as amended
from time to time (the "Cash Secured Note") and a Promissory Note, dated October
1, 1996, in the original principal amount of Six Million and 00/100 Dollars
($6,000,000.00) (the "Accounts Receivable Note"). The Cash Secured Note and the
Account Receivable Note are collectively referred to herein as the "Notes." The
Cash Secured Note has been modified pursuant to, among other documents, a Loan
Modification Agreement dated September 17, 1996, pursuant to which, among other
things, the principal amount was increased to Twelve Million and 00/100 Dollars
($12,000,000.00). The Notes, together with other promissory notes from Borrower
to Lender, are governed by the terms of an Amended and Restated Business Loan
Agreement, dated October 1, 1996, as such agreement may be amended from time to
time, between Borrower and Lender (the "Loan Agreement"). Defined terms used but
not otherwise defined herein shall have the same meanings as in the Loan
Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by a Commercial Security Agreement, dated October 1, 1996, a Collateral
Assignment, Patent Mortgage and Security Agreement, dated October 1, 1996
(collectively, the "Security Agreements"), and an Assignment of Deposit Account,
dated June 20, 1995 (the "Assignment").
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents." Hereinafter, the Security
Documents, together with all other documents evidencing or securing the
Indebtedness shall be referred to as the "Existing Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS.
A. Waiver of Default.
1. Lender hereby waives Borrower's existing default under the Loan
Agreement by virtue of Borrower's failure to comply with the
profitability covenant as of the quarter ended January 31, 1998.
Lender's waiver of Borrower's compliance of this covenant shall
apply only to the foregoing period. Accordingly, for the quarter
ending April 30, 1998, Borrower shall be in compliance with this
covenant
Lender's agreement to waive the above-described default (1) in no way
shall be deemed an agreement by the Lender to waive Borrower's
compliance with the above-described covenant as of all other dates
and (2) shall not limit or impair the Lender's right to demand
strict performance of this covenant as of all other dates and (3)
shall not limit or impair the Lender's right to demand strict
performance of all other covenants as of any date.
B. Modification(s) to Cash Secured Note.
1. The paragraph entitled "Variable Interest Rate" is hereby amended in
its entirety to read as follows:
1
<PAGE>
The interest rate on the Cash Secured Note is subject to change from
time to time based on changes in the Index which is the LIBOR Rate,
as described in that certain Supplement to Promissory Note, attached
hereto as Exhibit "A" and incorporated herein, plus forty (.40)
basis points, effective as of this date. The interest rate shall be
determined by the timing of the request for advance and the pledging
of the Treasury Bill to Lender.
2. The paragraph entitled "Advance Rate" is hereby amended to read as
follows:
Funds shall be advanced under the Note according to Advance Rate, as
determined by Lender, defined as follows: the lesser of (i)
$12,000,000.00 or (ii) one hundred percent (100%) against the
discounted amount of the Treasury Bill at the time of issuance, (not
the face value), minus the face amount of all outstanding Letters of
Credit, (including drawn but unreimbursed Letters of Credit). The
obligation of Lender to make each advance is subject to Borrower
pledging to Lender a three month Treasury Bill equal to one hundred
percent (100%) of such advance.
3. The following definition is hereby incorporated into the Cash
Secured Note:
"Maturity Date" is October 30, 1998.
C. Modification(s) to Loan Agreement.
1. The paragraph entitled "Borrowing Base Formula" is hereby amended in
part to provide that (i) cash-in-advance and (ii) "debit memos"
shall be deemed ineligible under the Borrowing Base.
D. Modification(s) to Assignment of Deposit Account.
1. The paragraph entitled Collateral is hereby amended in part to
described the following Collateral:
All three month Treasury Bills pledged to Lender and held by Lender
in an amount not less than (i) $12,000,000.00 or (ii) the current
outstanding balance of the Cash Secured Note.
E. Modification(s) to the Notes.
1. For purposes of determining the priority of advances and principal
payments, any and all advances requested from the Notes shall be
first advanced from the Cash Secured Note and then, once the Cash
Secured Note is fully disbursed then advances shall be made from the
Accounts Receivable Note. Any and all principal payments shall be
applied first to the Accounts Receivable Note and then, once the
Accounts Receivable Note is fully paid to zero, principal payments
shall be applied to the Cash Secured Note.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount of One
Thousand Five Hundred and 00/100 Dollars ($1,500.00) (the "Loan Fee"), plus all
out-of-pocket expenses.
2
<PAGE>
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any amounts
under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing indebtedness, Lender is
relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement the terms of the Existing Loan Documents remain
unchanged and in full force and effect Lender's agreement to modifications to
the existing Indebtedness pursuant to this Loan Modification Agreement in no way
shall obligate Lender to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the Indebtedness. It is the intention of Lender and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Lender in writing. No maker, endorser, or guarantor will
be released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon (i) Lenders receipt of the Loan Fee and (ii) Borrower's
execution and Lender's receipt of the Supplement to Promissory Note.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: LENDER:
SIGMA DESIGNS, INC. SILICON VALLEY BANK
By: Kit Tsui By: Ellen Chao
----------------------------- -----------------------------
Name: Kit Tsui Name: Ellen Chao
--------------------------- ---------------------------
Title: CFO Title: VP
-------------------------- --------------------------
3
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, Registration Statement No. 333-0083 and Amendment
Nos. 1, 2 and 3 thereto, on Form S-3, Registration Statements Nos. 333-48023 and
333-47835 on Form S-3, Registration Statements Nos. 333-33147 and 333-11779 and
Amendment No. 1 thereto on Form S-3 and Registration Statements Nos. 33-20226,
33-23699, 33-33571, 33-41330, 33-81914 and 333-04041 on Form S-8 of our report
dated February 26, 1998 appearing in this Annual Report on Form 10-K of Sigma
Designs, Inc. for the year ended January 31, 1998.
San Jose, California
April 29, 1998
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