SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 31, 1997 or
( ) Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.
Commission File No. 0-15116
Sigma Designs, Inc.
(Exact name of Registrant as specified in its charter)
California 94-2848099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
46501 Landing Parkway, Fremont, California 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 770-0100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days. Yes__X__ No_____
As of November 30, 1997 there were 11,441,468 shares of the Registrant's Common
Stock issued and outstanding.
TABLE OF CONTENTS
SIGMA DESIGNS, INC.
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets--October 31, 1997 and January 31, 1997 3
Condensed Consolidated Statements of Operations--Three months and nine months ended
October 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows--Nine months ended
October 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements--October 31, 1997 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIGMA DESIGNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
October 31, January 31,
1997 1997
-------- --------
(Unaudited)
Current assets:
Cash and equivalents $ 1,418 $ 6,945
Short-term investments 17,018 11,801
Accounts receivable - net 11,383 12,477
Inventories 6,344 4,880
Prepaid expenses & other 384 581
-------- --------
Total current assets 36,547 36,684
Property and equipment, net 926 1,098
Other assets 117 133
-------- --------
Total assets $ 37,590 $ 37,915
======== ========
Liabilities and stockholders' equity
Current liabilities:
Bank line of credit $ 13,166 $ 10,831
Accounts payable 1,626 3,286
Accrued liabilities 1,605 2,101
Accrued facilities 319 302
-------- --------
Total current liabilities 16,716 16,520
Accrued facilities - long term -- 311
Capital lease-long term 33 67
Stockholders' equity:
Preferred stock 4,086 --
Common stock 54,976 54,311
Accumulated deficit & other (38,141) (33,114)
Deferred stock compensation -- (100)
Stockholder note receivable (80) (80)
-------- --------
Total stockholders' equity 20,841 21,017
-------- --------
Total liabilities and stockholders' equity $ 37,590 $ 37,915
======== ========
See accompanying notes.
3
SIGMA DESIGNS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share data.)
Three months ended Nine months ended
October 31, October 31,
1997 1996 1997 1996
-------- -------- -------- --------
Net sales $ 10,022 $ 12,727 27,122 31,541
Cost and expenses:
Cost of sales 6,711 8,219 21,240 20,472
Sales and marketing 973 1,534 3,414 4,250
Research and development 1,305 1,183 3,700 3,452
General and administrative 797 731 4,261 2,147
-------- -------- -------- --------
Total cost and expenses 9,786 11,667 32,615 30,321
Income (loss) from operations 236 1,060 (5,493) 1,220
Interest and other income, net 57 2 38 87
Income tax credits -- -- 824 --
-------- -------- -------- --------
Net income (loss) 293 1,062 (4,631) 1,307
-------- -------- -------- --------
Dividend on preferred stock (357) -- (437) --
Net income (loss) available to
common stockholders $ (64) $ 1,062 $ (5,068) $ 1,307
======== ======== ======== ========
Net income (loss) per common share $ (0.01) $ 0.09 $ (0.46) $ 0.12
======== ======== ======== ========
Shares used in computation 11,158 11,441 11,132 11,075
======== ======== ======== ========
See accompanying notes.
4
SIGMA DESIGNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
October 31,
1997 1996
-------- --------
Cash flows from operating activities
Net income (loss) $ (4,631) $ 1,307
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Depreciation and amortization 419 383
Active Design net loss for the month
ended February 29, 1996 -- 126
Loss on disposal of assets 28 --
Changes in assets and liabilities:
Accounts receivable 1,094 (10,260)
Inventories (1,464) (1,959)
Prepaid expenses and other 197 378
Accounts payable (1,660) 2,909
Accrued liabilities (1,040) (491)
Other 201 8
-------- --------
Net cash used for operating activities (6,856) (7,599)
-------- --------
Cash flows from investing activities
Purchase of short-term investments (16,977) (12,197)
Maturity of short-term investments 11,801 10,947
Equipment additions (175) (307)
Other 16 --
-------- --------
Net cash used for investing activities (5,335) (1,557)
-------- --------
Cash flows from financing activities
Preferred stock sold 4,190 --
Common stock sold 165 2,581
Repayment of capital lease obligations (26) --
Borrowings under lines of credit 2,335 2,589
-------- --------
Net cash provided by financing activities 6,664 5,170
-------- --------
Net decrease in cash and equivalents (5,527) (3,986)
Cash and equivalents, beginning of period 6,945 4,647
-------- --------
Cash and equivalents, end of period $ 1,418 $ 661
======== ========
See accompanying notes.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 31, 1997
1. Balance sheet information as of January 31, 1997 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 October 31, 1997 are not necessarily indicative of results
to be expected for the entire year. All financial information included herein
has been restated to reflect the combined operating results and financial
position of both Sigma Designs and Active Design Corporation (Active Design) in
connection with the merger transaction described in Note 4 below.
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, 1997
and notes thereto included in the Form 10-K Annual Report previously filed with
the Commission.
2. Inventories consist of the following:
(In thousands)
October 31 January 31
1997 1997
------- -------
Finished goods $ 2,537 $ 1,937
Work-in-process 3,391 3,333
Raw materials 4,274 2,064
Less: reserves (3,858) (2,454)
------- -------
$ 6,344 $ 4,880
======= =======
3. Net loss per share is based on the weighted average number of common shares
outstanding during the period. Common equivalent shares were not considered in
the computations for the 1997 periods since their inclusion would be
antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). The
Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1998 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted. SFAS 128 replaces
current EPS reporting requirements and requires a dual presentation of basic and
diluted EPS. Basic EPS excludes dilutive securities and is computed by dividing
net income available to common shareholders by the weighted average of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
6
If SFAS 128 had been in effect during the current and prior periods, basic
EPS would have been unchanged for the nine-month and three-month periods ended
October 31, 1997 and $0.13 and $0.10 for the nine-month and three-month periods
ended October 31, 1996, respectively. Diluted EPS under SFAS 128 would not have
been significantly different than EPS currently reported for each of the periods
presented.
4. On May 3, 1996, the Company completed its merger with Active Design in a
transaction accounted for as a pooling of interests. The pooling-of-interests
method of accounting requires the Company to report financial results as though
the transaction had occurred at the beginning of all periods presented.
Accordingly, the Company's financial information for all periods presented
reflects the combined financial position and results of operations of both
companies.
5. In July 1997 the Company issued 45,000 shares of Series A Non-voting
Convertible Preferred Stock and warrants to purchase 64,285 shares of the
Company's Common Stock for net proceeds of approximately $4,190,000 (net of
issuance costs of approximately $310,000). The warrants are exercisable at
$9.425 per share beginning in January 1998 and expire in January 2001.
The significant terms of the Series A 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
in the Agreement). 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 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.
o In the event of any liquidation, dissolution, or winding up of the Company,
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 the 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.
7
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. At October 31, 1997, $111,000 of deemed dividend remains to reduce
future income available to common stockholders.
In October 1997, holders of Series A Preferred Stock converted 4,800 shares
of Preferred Stock into 97,116 shares of Common Stock.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
The Company had a net loss of $64,000 ($0.01 per share) on net sales of
$10,022,000 for the fiscal quarter ended October 31, 1997 compared to net income
of $1,062,000 ($0.09 per share) on net sales of $12,727,000 for the same quarter
in the prior year. Excluding the dividend on preferred stock, the Company
reported income of $293,000 for the third quarter of fiscal 1998. Revenues for
the third quarter of fiscal 1998 were a significant improvement over the
immediate prior quarter ended July 31, 1997, in which the Company reported net
sales of $8,593,000.
The following table sets forth the Company's net sales by product group:
Three Months Ended
October 31,
1997 1996
------- -------
MPEG Boards $ 5,290 $ 4,884
MPEG & Graphic Chipsets 4,474 7,438
Accessories & other 258 405
------- -------
$10,022 $12,727
======= =======
MPEG-based boards and chipsets represented 97% of net sales for the fiscal
quarter ended October 31, 1997, unchanged from the same quarter last year. The
decrease in the Company's sales of chipsets reflected the Company's technology
transition to focus on the next generation of MPEG2-based product lines. During
the third quarter of fiscal 1998, the Company discontinued its graphics
development business. The Company introduced its first DVD/MPEG-2 product during
the first quarter of the fiscal year ending January 31, 1998. MPEG1- and
MPEG2-based products accounted for 53% and 35% of net sales, respectively, in
the third quarter ended October 31, 1997 as compared to 41% and 52%,
respectively, in the second quarter ended July 31, 1997. Sales to one
international customer and one domestic customer accounted for 45% and 10% of
net sales, respectively, in the fiscal quarter ended October 31, 1997. The
Company's international sales represented 66% of net sales in the quarter ended
October 31, 1997 as compared with 64% in the comparable quarter of the prior
year.
The Company's gross margin as a percentage of net sales for the quarter
ended October 31, 1997 was 33.0% as compared with 35.4% for the same quarter
last year. The decrease in gross margin was primarily due to a reduction in
chipset sales, which have higher profit margins.
Sales and marketing expenses for the fiscal quarter ended October 31, 1997
decreased by $561,000 (37%) as compared to the same period last year. The
decrease was largely due to a reduction in advertising-related expenses, less
commission- and personnel-related expenses as the Company concentrated more on
OEM and corporate markets. Research and development
9
expenses increased by $122,000 (10%) as compared to the corresponding period of
the prior year. This increase was consistent with the Company's strategy of
focusing on development efforts for its new generation of DVD/MPEG2-based
products. General and administration expenses increased by $66,000 (9%) as
compared to the same corresponding period of the prior year. The increase in
general and administration costs was primarily due to higher legal and personnel
expenses as well as expenses associated with elimination of the Company's
graphics development business.
Liquidity and Capital Resources
The Company had cash and short-term investments of $18.4 million at October 31,
1997, as compared with $18.8 million at January 31, 1997. The Company's primary
sources of funds to date have been cash generated from operations, proceeds
generated from the issuance of stock, and bank borrowings under lines of credit.
The Company believes that its current cash and short-term investments reserve,
combined with the availability of funds under its existing cash and asset-based
banking arrangements will be sufficient to satisfy its cash needs for the next
twelve months. Beyond the next twelve-month period, the Company believes that to
the extent it does not generate positive cash flow from operations, it may have
to raise additional capital through either public or private offerings of its
common or preferred stock or other securities, or from additional bank
financing. The Company is considering alternatives for raising additional
capital. There can be no assurance that such capital will be available to the
Company.
Factors Affecting Future Operating Results
The Company's quarterly results have in the past and may in the future fluctuate
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;
reductions 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; or loss
of key sales, marketing, or research and development personnel. 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 levels of 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.
In addition to other areas of this Management's Discussion and Analysis of
Financial Condition and Results of Operations, the Liquidity and Capital
Resources section contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
Due to the factors noted above, the Company's future earnings and stock prices
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. Further, the Company operates in a highly dynamic
industry, which often results in volatility of the Company's common stock price.
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the quarter
ended October 31 1997.
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: December 15, 1997 SIGMA DESIGNS, INC.
/s/ Thinh Q. Tran
-----------------------------
Chairman of the Board,
President and Chief Executive
Officer
(Principal Executive Officer)
/s/ Kit Tsui
-----------------------------
Director of Finance, Chief
Financial Officer and
Secretary (Principal
Financial and Accounting
Officer)
Article 5: Financial Data Schedule
11