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 April 30, 1998 or
( ) Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.
Commission File No. 0-15116
Sigma Designs, Inc.
(Exact name of Registrant as specified in its charter)
California 94-2848099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
46501 Landing Parkway, Fremont, California 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 770-0100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
------- -------
As of May 31, 1998 there were 11,973,850 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--April 30, 1998 and January 31, 1998 3
Condensed Consolidated Statements of Operations--Three months ended
April 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows--Three months ended
April 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 7
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)
April 30, January 31,
1998 1998*
-------- ---------
(Unaudited)
Current assets:
Cash and equivalents $ 1,036 $ 697
Short-term investments 19,520 15,951
Accounts receivable - net 13,280 12,395
Inventories 8,490 7,314
Prepaid expenses & other 451 592
-------- --------
Total current assets 42,777 36,949
Property and equipment, net 1,172 1,241
Other assets 117 139
-------- --------
Total assets $ 44,066 $ 38,329
======== ========
Liabilities and shareholders' equity
Current liabilities:
Bank line of credit $ 14,436 $ 13,316
Accounts payable 3,108 3,014
Accrued liabilities and other 1,402 1,417
Accrued facilities 168 243
-------- --------
Total current liabilities 19,114 17,990
Capital lease-long term 13 27
Shareholders' equity:
Preferred stock 6,698 2,715
Common stock 57,123 56,419
Accumulated deficit & other (38,819) (38,759)
Stockholder note receivable (63) (63)
-------- --------
Total shareholders' equity 24,939 20,312
-------- --------
Total liabilities and shareholders' equity $ 44,066 $ 38,329
======== ========
* Derived from audited balance sheet included in the Company's annual report on
Form 10-K for the year ended January 31, 1998.
See accompanying notes.
3
SIGMA DESIGNS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share data.)
Three months ended
April 30,
1998 1997
------- --------
Net sales $ 10,394 $ 8,507
Cost and expenses:
Cost of sales 7,392 5,931
Sales and marketing 1,130 1,294
Research and development 1,171 1,164
General and administrative 713 721
-------- --------
Total cost and expenses 10,406 9,110
Income (loss) from operations (12) (603)
Interest and other income, net (4) 5
-------- --------
Net loss before dividend on preferred stock (16) (598)
-------- --------
Dividend on preferred stock (40) --
Net loss available to
common shareholders $ (56) $ (598)
======== ========
Net loss per common share - basic and diluted $ (0.00) $ (0.06)
======== ========
Shares used in computation - basic and diluted 11,680 10,852
======== ========
See accompanying notes.
4
SIGMA DESIGNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
April 30,
1998 1997
---------- ---------
Cash flows from operating activities
Net loss $ (16) $ (598)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 96 152
Loss on disposal of assets 11 2
Changes in assets and liabilities:
Accounts receivable (885) 1,042
Inventories (1,176) (3,027)
Prepaid expenses and other 141 155
Accounts payable 50 269
Accrued liabilities (114) (188)
-------- --------
Net cash used for operating activities (1,849) (2,193)
Cash flows from investing activities
Purchase of short-term investments (16,574) (16,685)
Maturity of short-term investments 13,001 11,801
Equipment additions (38) (89)
Other 22 --
-------- --------
Net cash used for investing activities (3,589) (4,973)
Cash flows from financing activities
Preferred stock sold 4,653 --
Common stock sold 34 15
Repayment of capital lease obligations (30) (5)
Borrowings under lines of credit 1,120 1,650
-------- --------
Net cash provided by financing activities 5,777 1,660
Net increase (decrease) in cash and equivalents 339 (5,506)
Cash and equivalents, beginning of period 697 6,945
-------- --------
Cash and equivalents, end of period $ 1,036 $ 1,439
======== ========
Noncash financing activities
Series A preferred dividends 40 --
Conversion of Series A preferred stock
into common stock 652 --
Issuance costs for Series B preferred stock
paid for in company stock 18 --
<FN>
See accompanying notes
</FN>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Balance sheet information as of January 31, 1998 was derived from the
Company's audited consolidated financial statements. All other information is
unaudited, but in the opinion of management includes all adjustments necessary
to present fairly the results of the interim period. The results of operations
for the quarter ended April 30, 1998 are not necessarily indicative of results
to be expected for the entire year. This report on form 10-Q should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended January 31, 1998 and notes thereto included in the Form 10-K Annual
Report previously filed with the Commission.
2. Inventories consist of the following:
(In thousands)
April 30 January 31
1998 1998
------- -------
Finished goods $ 3,805 $ 3,366
Work-in process 4,135 3,497
Raw materials 4,233 4,291
Less: reserves (3,683) (3,840)
------- -------
$ 8,490 $ 7,314
======= =======
3. During the fourth quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" and, retroactively,
restated prior period earnings per share (EPS) for the change. SFAS 128 requires
a dual presentation of basic and diluted EPS. Basic EPS for the periods
presented is computed by dividing net loss available to common shareholders by
the weighted average of common shares outstanding (excluding shares subject to
repurchase). Diluted EPS for the periods presented is the same as basic EPS
since all other potential dilutive securities are excluded as they are
antidilutive.
The following table sets forth the computation of basic and diluted net loss per
share:
Three Months Ended
---------------------------
April 30, April 30,
1998 1997
---------------------------
(In Thousands Except
Per Share Data)
---------------------------
Numerator (for basic and diluted net loss per
common share):
Net loss applicable to common shareholders $ (56) $ (598)
===========================
Denominator:
Weighted average shares outstanding 11,797 11,102
Less: Shares subject to repurchase (117) (250)
---------------------------
Denominator for basic and diluted net loss
per common share 11,680 10,852
===========================
Net loss per common share - basic and diluted $ (0.00) $ (0.06)
===========================
4. In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
which requires that an enterprise report, by major components and as a single
total, the change in net assets during the period from nonowner sources.
Adoption of SFAS No. 130 did not impact the Company's consolidated financial
position, results of operations or cash flows. The reconciliation of net loss to
comprehensive net loss is as follows (in thousands):
Three Months Ended
April 30,
----------------------
1998 1997
----- -----
Net loss available to common shareholders $ (16) $(598)
Other comprehensive loss-net unrealized
gain (loss) on short-term investments (4) --
----- -----
Total comprehensive loss $ (20) $(598)
===== =====
In June 1997, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of this statement will not impact the Company's consolidated financial
position, results of operations or cash flows. The Company will adopt this
statement in its financial statements for the year ending January 31, 1999.
5. 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 expires on April 30, 2001.
6. In February 1998, two class action complaints were filed against the Company
in the United States District Court, Northern District of California. The
actions were filed on behalf of putative classes of purchasers of the Company's
common stock during the period October 24, 1995 through February 13, 1997. The
complaints allege that Sigma Designs, Inc. and certain of its officers and/or
directors violated federal securities laws in connection with various public
statements made during the putative class period. The complaints do not specify
the amount of damages sought by the plantiffs. The plantiffs have filed a motion
to consolidate the complaints. The Company believes that it has meritorious
defenses to the allegations made in the complaints and intends to conduct a
vigorous defense.
The Company is also party to various claims against it. Although the ultimate
outcome of these matters is not presently determinable, management believes that
the resolution of all such pending matters will not have a material adverse
effect on the Company's financial position or results of operations.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
The Company had a net loss available for common shareholders of $56,000 ($0.00
per share) on net sales of $10,394,000 for the fiscal quarter ended April 30,
1998 compared to a net loss of $598,000 ($0.06 per share) on net sales of
$8,507,000 for the same quarter in the prior year. Excluding the dividend on
preferred stock, the Company reported a net loss of $16,000 for the first
quarter of fiscal 1999. Revenues for the first quarter of fiscal 1999 were also
an improvement over the immediate prior quarter ended January 31, 1998, in which
the Company reported net sales of $9,860,000.
The following table sets forth the Company's net sales by product and market
segments:
- ---------------------------------------------------------------------------
By Product Group Three Months Ended
- ---------------------------------------------------------------------------
April 30
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
MPEG Boards $ 5,310 $ 3,431
- ---------------------------------------------------------------------------
MPEG & Graphic Chipsets 4,815 3,133
- ---------------------------------------------------------------------------
Accessories & other 269 1,943
- ---------------------------------------------------------------------------
$ 10,394 $ 8,507
- ------------------------------------------------===========================
By Market Segment
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Internet/Intranet Video Networking $ 3,423 $ 2,430
- ---------------------------------------------------------------------------
PC-DVD Upgrade 1,862 1,340
- ---------------------------------------------------------------------------
MPEG Chipsets 4,788 1,832
- ---------------------------------------------------------------------------
Videoconferencing 112 2,392
- ---------------------------------------------------------------------------
Other 209 513
- ---------------------------------------------------------------------------
$ 10,394 $ 8,507
- ------------------------------------------------===========================
Total revenues for the quarter ended April 30, 1998 were $10,394,000, up 22%
from $8,507,000 reported for the same period in fiscal 1998. MPEG-based boards
and chipsets represented 97% of net sales for the quarter ended April 30, 1998
as compared with 77% for the same quarter last year. The increase in revenues
primarily came from increased sales of video networking products in the
corporate market and the Company's proprietary single-chip REALmagic
DVD/MPEG-2/MPEG-1 decoder in the PC-DVD market. The board level product line is
targeted at OEM customers and system integrators to address the
internet/intranet video networking market for corporate and home consumer
applications. The chipsets are targeted at add-in card manufacturers and
large-volume OEMs building interactive multimedia products for business and
consumer markets.
7
The Company's international sales represented 69% of net sales in the quarter
ended April 30, 1998 as compared with 66% in the comparable quarter of the prior
year. Revenues generated from international sales were concentrated in two Asian
countries--Taiwan and Hong Kong--which accounted for 38% and 12% of net sales,
respectively, for the quarter ended April 30, 1998. Sales to one international
customer and one domestic customer accounted for 23% and 11%, respectively, of
net sales in the first quarter ended April 30, 1998. The Company's gross margin
as a percentage of net sales for the quarter ended April 30, 1998 was 29% as
compared with 30% for the same quarter last year.
Sales and marketing expenses for the first quarter ended April 30, 1998
decreased by $164,000 (13%) as compared to the same quarter last year. The
decrease was largely due to a reduction in outside sales representatives and
sales support related expenses as the Company continued to focus more on OEM and
corporate markets instead of retail channels. Overall research and development
expenses for the fiscal quarter ended April 30, 1998 stood at relatively the
same level as compared to the corresponding period of the prior year. The slight
increase in R&D spending was the result of a combination of increases in MPEG
decoding chipset development costs offset by the elimination of research and
development expenses in graphics products as a result of the Company's
discontinuance of its graphics business during the third quarter of fiscal 1998.
General and administration expenses for the fiscal quarter ended April 30, 1998
remained relatively consistent with the same period last year.
Liquidity and Capital Resources
The Company had cash and equivalents and short-term investments of $20.6 million
at April 30, 1998, as compared with $16.6 million at January 31, 1998. The
increase in cash and short-term investments during the first quarter of fiscal
1999 was primarily the result of the Company's sale of preferred stock. In
February 1998, the Company raised an additional $5 million in equity capital
through the sale of convertible preferred stock in a private placement. These
proceeds are expected to be used to finance manufacturing capability for the
Company's DVD/MPEG-2 and Internet/intranet networked video product offerings.
However, actual uses may vary, depending on the Company's business strategy. In
April 1998, the Company modified the pricing terms of its $12 million bank
revolving line of credit, which may generate favorable savings in interest
costs. 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 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
8
needed. The estimate of time the Company's cash and other resources will last is
a forward-looking statement that is subject to the risks and uncertainties set
forth below, as well as other factors, and the actual results may differ as a
result of such factors.
Factors Affecting Future Operating Results
The Company's quarterly results have in the past and may in the future vary
significantly due to a number of factors, including but not limited to new
product introductions by the Company and its competitors; market acceptance of
the technology embodied in the 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.
9
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 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.
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 April 30 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: June 12, 1998 SIGMA DESIGNS, INC.
/s/ Thinh Q. Tran
------------------------------------------
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Kit Tsui
------------------------------------------
Director of Finance, Chief
Financial Officer and Secretary (Principal
Financial and Accounting Officer)