Sigma Designs, Shareholder, Trade Barbs as Annual Meeting Approaches

Potomac has proposed Sigma’s board be increased to seven members from four, consisting of three of its nominees, three incumbents and one agreed upon by both sides. The change would counter what Potomac said is an “unacceptably low” number of board members and “wildly irresponsible” granting of stock options to Sigma executives. The options were approved after a “thorough review” by the board’s audit committee, Sigma said. Sigma had agreed to a five-member board with two Potomac representatives, Sigma said. Potomac claimed Sigma rejected its proposals unless the company’s incumbent directors kept majority control of the board.

The Potomac nominees don’t have the “knowledge or experience” to implement a strategic plan, crafted from acquisitions, that’s “starting to bear fruit,” Sigma said. Potomac assembled a board slate including Eric Singer, Potomac co-managing director; Mark Bonney, Direct Brands chief financial officer; and Mark Fitzgerald, private investor. Potomac owns 7.9 percent of Sigma.

"We have serious concerns about the future of Sigma if the Potomac nominees were in control of the board,” Sigma said. “Now is not the time to turn over control of your company to a hedge fund operator and his hand-picked nominees who do not have the knowledge and experience to oversee the successful implementation of this program and who refuse to tell you their plans if they do gain control of the board and company.” Sigma, which built the company around video processors for IP set-top boxes and Blu-ray players, acquired Zensys and Coppergate, branching into the Z-Wave and HomePlug AV businesses. It also added Gennum Communications VXP video processors, seeking to build a business based on the “digitally connected home,” Sigma said. Sigma had a $13.7 million net loss in Q1 ending April 28, as revenue plunged to $40.2 million from $60.6 million a year earlier. It recently bought bankrupt Trident Microsystem’s DTV processor business for $21 million.

"Unless the existing board has a different agenda, it should not be concerned that the addition of two or three new directors, one of which would be mutually agreed upon, would impair its ability to oversee the Company’s strategic plan unless that plan is contrary to the best interests of shareholders,” Potomac said.

While Sigma chided Potomac’s nominees for having little operating experience, the hedge fund argued Sigma’s board has a “history of poor compensation practices,” approving discretionary bonuses regardless of the company’s performance.

Granting Potomac 40 percent representation on Sigma’s board is reasonable given the hedge fund’s 7.9 percent stake in the company, Sigma said. But Sigma also is pushing for continued control by a board whose members own less than 2 percent of the company’s outstanding shares, Potomac said. Sigma directors own 822,076 shares or 2.5 percent of common stock and have options for another 627,277, Sigma said. The board members have total beneficial ownership of 1.39 million shares, Sigma said.

Potomac also criticized the Sigma board’s history of “self-dealing,” including liquidating a $300,000 investment in MPEG-4 system developer Envivio, a company that three Sigma directors invested in (CED June 8 p1). Potomac cited $5 million invested in an unidentified privately held company in 2009 and 2010 that four Sigma board members had equity investments or financial interest in. Sigma took a $5.2 million charge to write down that investment. Sigma countered that in both cases “non-interested” directors reviewed the investments and required a “non-interested” committee approve the deals.