-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M834xvrPJ2tJ6vMQy6PaTxvmhX47WEfZhg9AE/OPg5boBlTGzuOltQqXCZNuSnCo u2ltkc7aa32ocMasyHMLnw== 0000950005-98-000421.txt : 19980504 0000950005-98-000421.hdr.sgml : 19980504 ACCESSION NUMBER: 0000950005-98-000421 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980501 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGMA DESIGNS INC CENTRAL INDEX KEY: 0000790715 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 952848099 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15116 FILM NUMBER: 98608148 BUSINESS ADDRESS: STREET 1: 46501 LANDING PKWY CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5107700100 MAIL ADDRESS: STREET 1: 46501 LANDING PKWY STREET 2: 46501 LANDING PKWY CITY: FREMONT STATE: CA ZIP: 94538 10-K 1 FORM 10-K 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. 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. 2 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 3 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. 4 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. 5 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." 6 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. 7 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. 8 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 9 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 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 The executive officers and directors of the Company and their ages as of April 1, 1998 are as follows:
Name Age Position ---- --- -------- 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 - --------------------------------------------------------------------------------------------------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee
11 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 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 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. ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Five-Year Data Year ended January 31 (In thousands, except per share data 1998 1997 1996 1995 1994 and number of employees) -------------------------------------------------------- - ------------------------ 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
14 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 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 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 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 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 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 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 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. 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:
Signature Title Date /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
22 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 SIGMA DESIGNS, INC. CONSOLIDATED BALANCE SHEETS JANUARY 31, 1998 AND 1997 (Dollars in thousands)
- ------------------------------------------------------------------------------------------------ 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 ======== ======== See notes to consolidated financial statements.
F-2 SIGMA DESIGNS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JANUARY 31, 1998, 1997 and 1996 (In thousands, except per share amounts)
- ------------------------------------------------------------------------------------------- 1998 1997 1996 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 ======== ======== ======== See notes to consolidated financial statements.
F-3 SIGMA DESIGNS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED JANUARY 31, 1998, 1997 AND 1996 (Dollars in thousands)
- ------------------------------------------------------------------------------------------------- Preferred Stock Common Stock ------------------------------------------ Shares Amount Shares Amount 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
Unrealized Gain (Loss) Deferred Shareholder on Securities Accumulated Stock Note Available Deficit Compensation Receivable for Sale Total 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)
F-4 SIGMA DESIGNS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED JANUARY 31, 1998, 1997 AND 1996 (Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock ------------------------------------------- Shares Amount Shares Amount 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 ====== ======= ========== ======== See notes to financial statements.
Unrealized Gain (Loss) Deferred Shareholder on Securities Accumulated Stock Note Available Deficit Compensation Receivable for Sale Total 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) See notes to financial statements.
F-5 SIGMA DESIGNS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 1998, 1997 AND 1996 (In thousands)
- ---------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 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)
F-6 SIGMA DESIGNS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 1998, 1997 AND 1996 (In thousands)
- ----------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 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) See notes to consolidated financial statements.
F-7 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 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 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 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. The following table shows the effect on the results of operations for the years presented herein prior to the acquisition discussed above (in thousands):
Net Income Net Sales (Loss) 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 ======== ==========
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 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 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 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 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. Stock option activity and balances are summarized as follows:
Weighted Number Average Exercise of Shares Price Per Share 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 ========= ======
F-15 At January 31, 1998, options to purchase 663,709 shares were exercisable and 987,580 shares were available for future grant.
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 $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 ================= ========= ==== ====== ======= ======
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 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. The tax effects of significant items comprising the Company's deferred taxes are as follows:
January 31, ------------------------------ 1998 1997 (In thousands) Deferred tax assets: 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 $ - $ - ======== ========
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 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 - The Company's effective tax rate differs from the federal statutory rate as follows:
1998 1997 1996 (In thousands) 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) $ - $ - ======== ===== ========
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 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 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
BALANCE AT DEDUCTIONS: BEGINNING OF WRITE OFFS OF BALANCE AT CLASSIFICATION YEAR ADDITIONS ACCOUNTS(1) END OF YEAR - -------------- --------------------------------------------- ----------- 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 (1) Amount written off, net of recoveries.
S-1 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION 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. - --------------------------------------------------------------------------------------------------------------------- (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. (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.
EX-10.9 2 BUSINESS LOAN AGREEMENT 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. 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 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 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 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 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 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 ---------------------------------------- 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 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 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 EX-23.1 3 INDEPENDENT AUDITORS' CONSENT 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 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JAN-31-1998 FEB-01-1997 JAN-31-1998 697 15,951 15,727 3,332 7,314 36,949 1,241 503 38,329 17,989 0 0 2,715 56,419 (38,821) 38,329 36,982 36,982 28,296 28,296 14,485 2,600 97 (5,648) 0 (5,648) 0 0 0 (5,648) (.51) (.51)
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