UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
for the quarterly period ended April 30, 1999 or
( ) Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.
Commission File No. 0-15116
Sigma Designs, Inc.
(Exact name of Registrant as specified in its charter)
California 94-2848099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
355 Fairview Way, Milpitas, California 95035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 262-9003
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes [X] No [ ]
As of May 31, 1999 there were 15,673,438 shares of the Registrant's
Common Stock issued and outstanding.
TABLE OF CONTENTS
SIGMA DESIGNS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets--April 30, 1999 and January 31, 1999
Condensed Consolidated Statements of Operations--Three months
ended April 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows--Three months ended
April 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIGMA DESIGNS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
April 30, January 31,
1999 1999*
------------ ------------
(Unaudited)
Assets
Current assets:
Cash and equivalents.............................. $3,148 $2,946
Short-term investments............................ 16,698 15,112
Accounts receivable - net......................... 10,037 13,648
Inventories....................................... 11,071 10,418
Prepaid expenses & other.......................... 513 629
------------ ------------
Total current assets.................. 41,467 42,753
Equipment, net...................................... 1,527 1,311
Other assets........................................ 156 156
------------ ------------
Total assets........................................ $43,150 $44,220
============ ============
Liabilities and shareholders' equity
Current liabilities:
Bank line of credit............................... $12,391 $13,716
Accounts payable.................................. 3,111 4,109
Accrued liabilities and other..................... 1,919 1,350
------------ ------------
Total current liabilities............. 17,421 19,175
Capital lease obligations........................... 274 274
Shareholders' equity:
Preferred stock................................... 1,138 1,536
Common stock...................................... 65,263 64,699
Shareholder notes receivable...................... (12) (12)
Accumulated deficit and other..................... (40,934) (41,452)
------------ ------------
Total shareholders' equity............ 25,455 24,771
------------ ------------
Total liabilities and shareholders' equity.......... $43,150 $44,220
============ ============
<FN>
See notes to unaudited condensed consolidated financial statements.
* Derived from audited balance sheet included in the Company's annual report
on Form 10-K for the year ended January 31, 1999
</FN>
SIGMA DESIGNS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
April 30,
---------------------
1999 1998
---------- ----------
Net sales......................... $13,783 $10,394
Costs and expenses:
Cost of sales................. 9,740 7,391
Sales and marketing............ 1,300 1,130
Research and development....... 1,290 1,172
General and administrative..... 882 713
---------- ----------
Total costs and expenses.... 13,212 10,406
---------- ----------
Income (loss) from operations..... 571 (12)
Interest and other income
(expense), net.................. (8) (4)
---------- ----------
Income (loss) before income taxes. 563 (16)
Provision for income taxes........ 23 --
---------- ----------
Income (loss) before dividend
on preferred stock............. 540 (16)
Dividend on preferred stock....... (28) (40)
---------- ----------
Net income (loss) available
to common shareholders......... $512 ($56)
========== ==========
Net loss per common share--basic
and diluted.................... $0.03 $0.00
========== ==========
Shares used in computation:
Basic.......................... 15,509 11,680
========== ==========
Diluted........................ 17,488 11,680
========== ==========
See notes to unaudited condensed consolidated financial statements.
SIGMA DESIGNS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
April 30,
---------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income (loss)............................... $540 ($16)
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization................. 194 96
Loss on disposal of assets.................... -- 11
Changes in assets and liabilities:
Accounts receivable....................... 3,568 (885)
Inventories............................... (653) (1,176)
Prepaid expenses and other................ 159 141
Accounts payable.......................... (998) 94
Accrued liabilities....................... 527 (114)
---------- ----------
Net cash provided by (used for) operating
activities..................................... 3,337 (1,849)
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets........................ (327) (38)
Purchase of short-term investments.............. (3,561) (16,574)
Maturity of short-term investments.............. 1,980 13,001
Other assets.................................... -- 22
---------- ----------
Net cash used for investing activities............ (1,908) (3,589)
---------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock.............. 159 34
Recovery from cost of Preferred C filing........ 8 --
Proceeds from sale of preferred stock, net...... -- 4,653
Repayment of capital lease obligations.......... (69) (30)
Bank borrowings, net............................ (1,325) 1,120
---------- ----------
Net cash provided by (used for) financing
activities..................................... (1,227) 5,777
---------- ----------
Net increase in cash and equivalents.............. 202 339
Cash and equivalents, beginning of period......... 2,946 697
---------- ----------
Cash and equivalents, end of period............... $3,148 $1,036
========== ==========
Noncash investing and financing activities:
Equipment acquired under capital leases....... $83 $ --
Dividends on preferred stock.................. $28 $40
Conversion of preferred stock into
common stock................................ $406 $652
Issuance costs for preferred stock paid
for in common stock......................... $ -- $18
See notes to unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Balance sheet information as of January 31, 1999 was derived from the
Company's audited consolidated financial statements. All other
information is unaudited, but in the opinion of management includes all
adjustments necessary to present fairly the results of the interim
period. The results of operations for the quarter ended April 30, 1999
are not necessarily indicative of results to be expected for the entire
year. This report on form 10-Q should be read in conjunction with the
Company's audited consolidated financial statements for the year ended
January 31, 1999 and notes thereto included in the Form 10-K Annual
Report previously filed with the Commission.
2. Inventories consist of the following:
(In thousands)
April 30, January 31,
1999 1999
----------- -----------
Raw materials ..................... $3,280 $3,728
Work-in process ................... 3,712 3,086
Finished goods .................... 4,079 3,604
----------- -----------
Inventories - net .................. $11,071 $10,418
=========== ===========
3. The Company had $11,195,000 outstanding as of April 30, 1999 under a
$12,000,000 bank line of credit that expires in October 1999, bears
interest at the bank's index rate (5.06% at April 30, 1999) plus 1%, and
is secured by funds on deposit in accounts that have been assigned to the
lender. The Company also had $1,196,000 outstanding at April 30, 1999
under a $6,000,000 bank line of credit that expires in October 1999,
bears interest at the bank's prime rate (6.49% at April 30, 1999) plus
1.25%, and is secured by the Company's accounts receivable, inventories,
equipment and intangibles, and restricts the Company's ability to declare
or pay dividends.
4. SFAS 128 requires a dual presentation of basic and diluted EPS. Basic
EPS for the periods presented is computed by dividing net income (loss)
available to common shareholders by the weighted average of common shares
outstanding (excluding shares subject to repurchase). Diluted EPS for
the periods presented is computed by including shares subject to
repurchase as well as outstanding options and warrants granted.
The following table sets forth the basic and diluted EPS computation for the
periods presented (in thousands except per share data):
Three Months Ended
April 30,
---------------------
1999 1998
---------- ----------
Numerator:
Net income (loss) available
to common shareholders......... $512 ($56)
========== ==========
Denominator:
Weighted average shares
outsatnding.................... 15,567 11,797
Common shares subject to
repurchase..................... (58) (117)
---------- ----------
Shares used in computing basic.... 15,509 11,680
Common shares subject to
repurchase..................... 58 --
Stock options and warrants........ 1,921 --
---------- ----------
Shares used in computing diluted.. 17,488 11,680
========== ==========
Basic earnings (loss) per
common share................... $0.03 $0.00
========== ==========
Diluted earnings (loss) per
common share................... $0.03 $0.00
========== ==========
The Company excluded certain potentially dilutive securities each period from
its diluted EPS computation because inclusion of such securities would be
antidilutive. A summary of the excluded potential dilutive securities as of
the end of each fiscal period follows (in thousands):
Three Months Ended
April 30,
---------------------
1999 1998
---------- ----------
Common shares subject to
repurchase..................... -- 117
Stock options..................... 3 2,570
Stock warrants.................... -- 114
Cinvertible preferred stock....... 1 25
5. The reconciliation of net income (loss) before dividends on preferred stock
to comprehensive income (loss) is as follows (in thousands):
Three Months Ended
April 30,
---------------------
1999 1998
---------- ----------
Income (loss) before dividend
on preferred stock............. $540 ($16)
Other comprehensive income
(loss) -- net unrealized gain
(loss) on short-term
investments.................... 6 (4)
---------- ----------
Total comprehensive income (loss). $546 ($20)
========== ==========
6. The Company follows the requirements of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The
Company's operating segments consist of its geographically based
entities in the United States and Hong Kong. All such operating
entities segments have similar economic characteristics, as defined in
SFAS No. 131, and accordingly, it is the Company's opinion that it
operates in one reportable segment. Adoption of this statement does
not impact the Company's consolidated financial position, results of
operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issues Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires
that all derivatives be carried at fir value, and provides for hedging
accounting when certain conditions are met. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. On
a forward-looking basis, although the Company has not fully assessed the
implications of this new statement, the Company does not believe adoption
of this statement will have a material impact on the Company's financial
position or results of operations.
7. In February 1998, two class action complaints were filed against the
Company in the United States District Court, Northern District of
California. The actions were filed on behalf of putative classes of
purchasers of the Company's common stock during the period October 24,
1995 through February 13, 1997. The complaints allege that Sigma Designs,
Inc. and certain of its officers and/or directors violated federal
securities laws in connection with various public statements made during
the putative class period. The complaints do not specify the amount of
damages sought by the plaintiffs. The plaintiffs have filed a motion to
consolidate the complaints. The Company believes that it has meritorious
defenses to the allegations made in the complaints and intends to conduct
a vigorous defense.
The Company is also party to another claim against it. Although the ultimate
outcome of this matter 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
The Company reported net income available to common shareholders of
$512,000 ($0.03 per share) on net sales of $13,783,000 for the fiscal
quarter ended April 30, 1999 compared to a net loss available to common
shareholders of $56,000 on net sales of $10,394,000 for the same quarter
in the prior year. Net sales for the first quarter of fiscal 2000
increased 33% as compared to the same period last year. The increase was
primarily attributable to increased sales of the Company's proprietary
MPEG-2 decoding chipsets. OEM chipset sales for the first quarter of
fiscal 2000 increased 67% to $8,006,0900 as compared with the same period
last year.
The following table sets forth the Company's net sales in each product
group and market segment (in thousands):
Three Months Ended
April 30,
-------------------
1999 1998
--------- ---------
By Product Group:
Boards............................. $5,570 $5,310
Chipsets........................... 8,023 4,815
Accessories & other................ 190 269
--------- ---------
$13,783 $10,394
========= =========
By Market Segment:
Internet/Intranet Video Networking. $574 $3,423
PC-DVD Upgrade kit................. 4,996 1,862
OEM Chipsets....................... 8,006 4,788
Videoconferencing.................. -- 112
Other.............................. 207 209
--------- ---------
$13,783 $10,394
========= =========
MPEG-based boards and chipsets represented 99% of net sales for the
quarter ended April 30, 1999 as compared with 97% for the same quarter
last year. The increase in revenues primarily came from increased sales
of the Company's Hollywood Plus cards used in the DVD upgrade kit market
and the Company's proprietary single-chip DVD/MPEG-2 decoder used in the
PC-DVD market. By market group, OEM chipsets, PC-DVD upgrade kits, and
video networking products accounted for 58%, 36%, and 4% of total net
sales, respectively, in the first quarter of fiscal 2000 as compared with
46%, 18%, and 33% of total net sales, respectively, in the same quarter
last year. The board level product line is targeted at OEM customers in
the PC-DVD market and system integrators addressing the internet/intranet
video networking market for corporate and home consumer applications. The
chipsets are targeted at add-in card manufacturers and large-volume OEMs
building interactive multimedia products for business and consumer markets.
The Company's international sales represented 72% of net sales in the
quarter ended April 30, 1999 as compared with 69% in the comparable
quarter of the prior year. Revenues generated from international sales
were concentrated in two countries-Singapore and Taiwan accounted for
28% and 27% of net sales, respectively, for the quarter ended April 30,
1999. For the quarter ended April 30, 1998, revenues generated from
international sales were concentrated in Taiwan and Hong Kong-which
accounted for 38% and 12% of net sales, respectively. Sales to two
international customers accounted for approximately 52% of net sales in
the first quarter ended April 30, 1999. The Company's customers in
Taiwan are primarily computer board manufacturers, while the Company's
customer in Singapore is a global OEM customer building interactive
multimedia products to sell in worldwide, global markets.
The Company's gross margin as a percentage of net sales for the quarter
ended April 30, 1999 was 29%, which was consistent with the same period
last year.
Sales and marketing expenses for the first quarter ended April 30, 1999
increased by $170,000 (15%) as compared to the same quarter last year.
The increase was primarily due to the addition of business development
staff and the increase in trade show expenses for the China market.
Research and development expenses for the fiscal quarter ended April 30,
1999 increased $119,000 (10%) as compared to the corresponding period of
the prior year. The increase in research and development spending was
the result of a combination of increases in depreciation expense
associated with research and development equipment and tools acquired
during fiscal 1999, and technical support expenses for development of the
Company's MPEG-2 decoding chipset and board products. General and
administrative expenses for fiscal quarter ended April 30, 1999 increased
$169,000 (24%) as compared to the same period last year. The increase
was primarily due to non-recurring moving expenses associated with
relocation of the Company's headquarters from Fremont, California to
Milpitas, California during the first quarter of fiscal 2000.
Liquidity and Capital Resources
The Company had cash and short-term investments of $20 million at April 30,
1999, as compared with $18 million at January 31, 1999. The increase in cash
and short-term investments during the first quarter of fiscal 2000 was
primarily generated from operating activities, as accounts receivable decreased
by $3.6 million during the first quarter of fiscal 2000. Cash used in
investing activities and financing activities during the quarter ended April
30, 1999 was $1.9 million and $1.2 million, respectively. The primary
investing activities during the quarter included purchases of short-term
investments; the primary financing activities were repayments of bank lines of
credit. In January 1999, the Company issued 1,900 shares of Series C nonvoting
convertible preferred stock for $1,000 per share and warrants to purchase
95,000 shares of the Company's common stock. At April 30, 1999, 1,400 shares
of Series C preferred stock remained outstanding.
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 working
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 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. Furthermore, the Company
operates in a highly dynamic industry, which often results in volatility of
the Company's common stock price.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has tested its products, and management believes that the Company's
products are not date-sensitive and, therefore, are Year 2000 ready. The
Company has also conducted a review of its exposure to the Year 2000 problem,
including working with computer systems and software vendors. Although the
full impact of the Year 2000 problem is unknown at this time, management
believes that the Company's internal information systems are Year 2000
compliant and does not expect to further incur any significant operating
expenses or invest in additional computer systems to resolve issues relating to
the Year 2000 problem, with respect to both our information technology as well
as product and service functions.
The Company has also been in contact with its significant suppliers and vendors
to determine whether the products or services supplied by them are Year 2000
compliant, and there were no negative responses. However, significant
uncertainty remains concerning the effects of the Year 2000 problem, including
uncertainty regarding assurances made by vendors. In addition, the Company has
not investigated Year 2000 compliance of other entities who are not major
vendors of the Company or who are vendors or purchasers of our product. The
Company cannot assume that third parties will be Year 2000 compliant, and if
they are not, we cannot assume that we will not be subject to actions,
liabilities, or damages associated with these failures. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No significant changes have occurred since the filing by the Registrant
on Form 10-K for the year ended January 31,1999. Reference is made to
Part II, Item 7A, Quantitative and Qualitative Disclosures about Market
Risk, in the Registrant's annual report on Form 10-K for the year ended
January 31, 1999.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the quarter
ended April 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: June 14, 1999 SIGMA DESIGNS, INC.
/s/ Thinh Q. Tran
-------------------------------------------
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Kit Tsui
-------------------------------------------
Director of Finance, Chief
Financial Officer and Secretary (Principal
Financial and Accounting Officer)