sigma_10q-110108.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(MARK
ONE)
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended November 1, 2008
or
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from
to
Commission
file number 001-32207
Sigma
Designs, Inc.
(Exact name of registrant as
specified in its charter)
California
|
94-2848099
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1778
McCarthy Blvd.
Milpitas,
California 95035
(Address of principal executive
offices including Zip Code)
(408)
262-9003
(Registrant’s telephone number,
including area code)
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 requirements for the past 90
days. Yes R No £
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large
accelerated filer R
|
Accelerated
filer £
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
|
|
(Do
not check if a smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No
R
As of
December 9, 2008, the Company had 26,396,109 shares of Common Stock
outstanding.
SIGMA
DESIGNS, INC.
TABLE
OF CONTENTS
|
|
|
|
|
Page No.
|
PART
I. |
FINANCIAL
INFORMATION
|
|
|
|
|
Item 1. |
Unaudited
Condensed Consolidated Financial Statements:
|
|
|
|
|
|
Unaudited
Condensed Consolidated Balance Sheets as of November 1, 2008 and February
2, 2008
|
3
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations for the three months and
nine months ended November 1, 2008 and November 3, 2007
|
4
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the nine months ended
November 1, 2008 and November 3, 2007
|
5
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
7
|
|
|
|
Item 2. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
22
|
|
|
|
Item 3. |
Quantitative
and Qualitative Disclosures About Market Risk
|
32
|
|
|
|
Item 4. |
Controls
and Procedures
|
33
|
|
|
|
PART
II. |
OTHER
INFORMATION
|
|
|
|
|
Item 1. |
Legal
Proceedings
|
34
|
|
|
|
Item 1A. |
Risk
Factors
|
35
|
|
|
|
Item 2. |
Unregistered
Sales of Equity Securities and Use of Proceeds
|
47
|
|
|
|
Item 3. |
Defaults
Upon Senior Securities
|
47
|
|
|
|
Item 4. |
Submission
of Matters to a Vote of Security Holders
|
47
|
|
|
|
Item 5. |
Other
Information
|
47
|
|
|
|
Item 6. |
Exhibits
|
47
|
|
|
|
Signatures
|
|
48
|
|
|
|
Exhibit
index
|
|
49
|
PART
I.
|
FINANCIAL
INFORMATION
|
ITEM
1.
|
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
SIGMA
DESIGNS, INC.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands, except share amounts)
|
|
November
1,
|
|
|
February
2,
|
|
|
|
2008
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
90,782 |
|
|
$ |
174,089 |
|
Short-term
marketable securities
|
|
|
41,478 |
|
|
|
44,401 |
|
Accounts
receivable, net
|
|
|
26,817 |
|
|
|
40,205 |
|
Inventories
|
|
|
45,238 |
|
|
|
26,283 |
|
Deferred
tax assets
|
|
|
5,070 |
|
|
|
5,155 |
|
Prepaid
expenses and other current assets
|
|
|
6,584 |
|
|
|
5,547 |
|
Total
current assets
|
|
|
215,969 |
|
|
|
295,680 |
|
Long-term
marketable securities
|
|
|
65,021 |
|
|
|
57,242 |
|
Software,
equipment and leasehold improvements, net
|
|
|
16,702 |
|
|
|
8,783 |
|
Goodwill
|
|
|
7,254 |
|
|
|
5,020 |
|
Intangible
assets, net
|
|
|
12,044 |
|
|
|
4,303 |
|
Deferred
tax assets, net of current portion
|
|
|
6,052 |
|
|
|
7,513 |
|
Long-term
investments
|
|
|
263 |
|
|
|
263 |
|
Other
non-current assets
|
|
|
770 |
|
|
|
662 |
|
Total
assets
|
|
$ |
324,075 |
|
|
$ |
379,466 |
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
13,102 |
|
|
$ |
18,484 |
|
Accrued
liabilities
|
|
|
11,107 |
|
|
|
14,018 |
|
Total
current liabilities
|
|
|
24,209 |
|
|
|
32,502 |
|
Other
long-term liabilities
|
|
|
3,545 |
|
|
|
1,372 |
|
Total
liabilities
|
|
|
27,754 |
|
|
|
33,874 |
|
Commitments
and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock - no par value, 2,000,000 shares authorized; no shares issued or
outstanding
|
|
|
— |
|
|
|
— |
|
Common
stock and additional paid-in capital; no par value; 100,000,000 shares
authorized;
|
|
30,579,253
issued and 26,386,941 outstanding at November 1, 2008 and 30,031,060
shares issued and outstanding at February 2, 2008
|
|
|
358,848 |
|
|
|
341,194 |
|
Treasury
stock, at cost, 4,192,312 shares at November 1, 2008 and no shares at
February 2, 2008
|
|
|
(85,941 |
) |
|
|
— |
|
Accumulated
other comprehensive income (loss)
|
|
|
(17 |
) |
|
|
811 |
|
Retained
earnings
|
|
|
23,431 |
|
|
|
3,587 |
|
Total
shareholders' equity
|
|
|
296,321 |
|
|
|
345,592 |
|
Total
liabilities and shareholders' equity
|
|
$ |
324,075 |
|
|
$ |
379,466 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
SIGMA
DESIGNS, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
November
3,
|
|
|
November
1,
|
|
|
November
3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
revenue
|
|
$ |
46,760 |
|
|
$ |
66,244 |
|
|
$ |
161,854 |
|
|
$ |
144,808 |
|
Cost
of revenue
|
|
|
25,101 |
|
|
|
31,017 |
|
|
|
82,654 |
|
|
|
69,463 |
|
Gross
profit
|
|
|
21,659 |
|
|
|
35,227 |
|
|
|
79,200 |
|
|
|
75,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
11,131 |
|
|
|
7,488 |
|
|
|
32,364 |
|
|
|
21,941 |
|
Sales
and marketing
|
|
|
3,102 |
|
|
|
2,785 |
|
|
|
8,526 |
|
|
|
7,709 |
|
General
and administrative
|
|
|
3,837 |
|
|
|
2,541 |
|
|
|
13,939 |
|
|
|
9,246 |
|
Acquired
in-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
1,571 |
|
|
|
— |
|
Total
operating expenses
|
|
|
18,070 |
|
|
|
12,814 |
|
|
|
56,400 |
|
|
|
38,896 |
|
Income
from operations
|
|
|
3,589 |
|
|
|
22,413 |
|
|
|
22,800 |
|
|
|
36,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
1,150 |
|
|
|
1,446 |
|
|
|
4,382 |
|
|
|
2,166 |
|
Income
before income taxes
|
|
|
4,739 |
|
|
|
23,859 |
|
|
|
27,182 |
|
|
|
38,615 |
|
Provision
for income taxes
|
|
|
1,068 |
|
|
|
2,909 |
|
|
|
7,338 |
|
|
|
3,708 |
|
Net
income
|
|
$ |
3,671 |
|
|
$ |
20,950 |
|
|
$ |
19,844 |
|
|
$ |
34,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.14 |
|
|
$ |
0.80 |
|
|
$ |
0.73 |
|
|
$ |
1.43 |
|
Diluted
|
|
$ |
0.14 |
|
|
$ |
0.72 |
|
|
$ |
0.71 |
|
|
$ |
1.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,351 |
|
|
|
26,234 |
|
|
|
27,045 |
|
|
|
24,360 |
|
Diluted
|
|
|
27,084 |
|
|
|
28,958 |
|
|
|
27,971 |
|
|
|
27,532 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
SIGMA
DESIGNS, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
November
3,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
19,844 |
|
|
$ |
34,907 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,631 |
|
|
|
2,415 |
|
Acquired
in-process research and development
|
|
|
1,571 |
|
|
|
— |
|
Share-based
compensation
|
|
|
9,935 |
|
|
|
4,738 |
|
Shareholder
note receivable written off
|
|
|
— |
|
|
|
29 |
|
Provision
to record excess and obsolete inventory
|
|
|
1,844 |
|
|
|
316 |
|
Provision
for sales returns, discounts and doubtful accounts
|
|
|
2,425 |
|
|
|
1,427 |
|
Deferred
income taxes
|
|
|
1,546 |
|
|
|
— |
|
Losses
on disposal of software, equipment and leasehold
improvements
|
|
|
1 |
|
|
|
3 |
|
Gains
on sale of long-term investments
|
|
|
— |
|
|
|
(31 |
) |
Accretion
of contributed leasehold improvements
|
|
|
(93 |
) |
|
|
(98 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
13,502 |
|
|
|
(20,601 |
) |
Inventories
|
|
|
(17,562 |
) |
|
|
(3,207 |
) |
Prepaid
expenses and other current assets
|
|
|
(886 |
) |
|
|
(1,155 |
) |
Other
non-current assets
|
|
|
(108 |
) |
|
|
(59 |
) |
Accounts
payable
|
|
|
(5,612 |
) |
|
|
1,740 |
|
Accrued
liabilities
|
|
|
(4,616 |
) |
|
|
2,485 |
|
Other
long-term liabilities
|
|
|
2,265 |
|
|
|
345 |
|
Net
cash provided by operating activities
|
|
|
29,687 |
|
|
|
23,254 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of marketable securities
|
|
|
(85,135 |
) |
|
|
(161,141 |
) |
Sales
and maturities of marketable securities
|
|
|
79,736 |
|
|
|
71,750 |
|
Purchases
of software, equipment and leasehold improvements
|
|
|
(10,520 |
) |
|
|
(2,819 |
) |
Cash
paid in connection with acquisition
|
|
|
(18,576 |
) |
|
|
— |
|
Recovery
of long-term investment loss
|
|
|
— |
|
|
|
31 |
|
Net
cash used in investing activities
|
|
|
(34,495 |
) |
|
|
(92,179 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Treasury
stock purchases
|
|
|
(85,941 |
) |
|
|
— |
|
Repayment
of bank borrowings
|
|
|
— |
|
|
|
(242 |
) |
Collection
of shareholder notes receivable
|
|
|
— |
|
|
|
29 |
|
Net
proceeds from exercise of employee stock options and stock purchase
rights
|
|
|
3,260 |
|
|
|
7,205 |
|
Proceeds
from issuance of common stock, net of offering costs
|
|
|
— |
|
|
|
198,894 |
|
Excess
tax benefit on share-based compensation
|
|
|
4,459 |
|
|
|
3,363 |
|
Net
cash provided by (used in) financing activities
|
|
|
(78,222 |
) |
|
|
209,249 |
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
(277 |
) |
|
|
162 |
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(83,307 |
) |
|
|
140,486 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
174,089 |
|
|
|
24,413 |
|
Cash
and cash equivalents at end of period
|
|
$ |
90,782 |
|
|
$ |
164,899 |
|
SIGMA
DESIGNS, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In
thousands)
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
— |
|
|
$ |
10 |
|
Cash
paid for income taxes
|
|
|
104 |
|
|
|
284 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
SIGMA
DESIGNS, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Organization
and summary of significant accounting
policies
|
Organization and nature of
operations: Sigma Designs, Inc. (the “Company”)
specializes in integrated system-on-chip solutions for the IPTV, Blu-ray and
other media players, prosumer and industrial audio/video, HDTV and other
markets. The Company sells its products to manufacturers, designers
and to a lesser extent, to distributors who, in turn, sell to
manufacturers.
Basis of
presentation: The unaudited condensed consolidated financial
statements include Sigma Designs, Inc. and its wholly owned
subsidiaries. All intercompany balances and transactions are
eliminated upon consolidation.
The
unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(“US GAAP”) for interim financial information and with the instructions to
Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of
SEC Regulation S-X. They do not include all of the information
and footnotes required by US GAAP for complete financial
statements. The information included in this Quarterly Report on Form
10-Q should be read in conjunction with the Company’s audited consolidated
financial statements and notes thereto for the year ended February 2, 2008
included in the Company’s Annual Report on Form 10-K.
The
condensed consolidated financial statements included herein are unaudited;
however, they contain all normal recurring accruals and adjustments that, in the
opinion of management, are necessary to present fairly the Company’s
consolidated financial position at November 1, 2008 and February 2, 2008, the
consolidated results of its operations for the three months and nine months
ended November 1, 2008 and November 3, 2007, and the consolidated cash flows for
the nine months ended November 1, 2008 and November 3, 2007. The
results of operations for the three months and nine months ended November 1,
2008 are not necessarily indicative of the results to be expected for future
quarters or the year.
Reclassifications: Certain
reclassifications have been made to prior year balances in order to conform to
the current year’s presentation.
Accounting
period: Each of the Company’s fiscal quarters presented herein
includes 13 weeks and ends on the last Saturday of the period. The
third quarter of fiscal 2009 ended on November 1, 2008. The third
quarter of fiscal 2008 ended on November 3, 2007.
Use of
estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America (“US GAAP”) requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. On an ongoing basis, the Company evaluates its estimates,
including those related to the collectability of accounts receivable, the
valuation of inventory on a lower of cost or market basis, the valuation of
share-based compensation, expected future cash flows and useful lives of
investments, goodwill, intangible assets and other long-lived assets, income
taxes, warranty obligations and litigation and settlement costs. The
Company bases its estimates on historical experience and on other assumptions
that its management believes are reasonable under the
circumstances. These estimates form the basis for making judgments
about the carrying values of assets and liabilities when those values are not
readily apparent from other sources. Actual results may differ
materially from management’s estimates.
Fair value of financial
instruments: For certain of the Company’s financial
instruments, including cash and cash equivalents, accounts receivable,
short-term marketable securities, accounts payable and other current
liabilities, the carrying amounts approximate their fair value due to the
relatively short maturity of these items.
Cash and cash
equivalents: The Company considers all highly liquid debt
instruments purchased with a remaining maturity of 90 days or less to be
cash equivalents.
Short- and long-term marketable
securities: Short-term marketable securities represent highly
liquid debt instruments with a remaining maturity date at acquisition date of
greater than 90 days but less than one year and are stated at fair
value. Long-term marketable securities represent securities with
contractual maturities greater than one year from the date of
acquisition. The Company’s marketable securities are classified as
available-for-sale because the sale of such securities may be required prior to
maturity. The differences between amortized cost (cost adjusted for
amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income) and fair value, representing unrealized holding
gains or losses, are recorded separately as a component of accumulated other
comprehensive income (loss) within shareholders’ equity. Any gains
and losses on the sale of debt securities are determined on a specific
identification basis.
The
Company’s marketable securities include primarily auction rate securities
(“ARS”) and corporate commercial paper and bonds. The Company
monitors these securities for impairment and recognizes an impairment charge if
a decline in the fair value of these marketable securities is judged to be
other-than-temporary. Significant judgment is used to identify events
or circumstances that would likely have a significant adverse effect on the
future value of the marketable securities. The Company considers
various factors in determining whether an impairment is other-than-temporary,
including the severity and duration of the impairment, forecasted recovery, and
its ability and intent to hold the marketable securities for a period of time
sufficient to allow for any anticipated recovery in market value. ARS
are bought and sold in the marketplace through a bidding process sometimes
referred to as a “Dutch auction.” After the initial issuance of the
securities, the interest rate on the securities resets periodically, at
intervals set at the time of issuance (e.g., every twenty-eight, thirty-five or
forty-two days, etc.), based on the market demand at the reset
period. These securities are generally classified as short-term
marketable securities due to the auction reset feature. However, if
ARS fail to clear at the reset auction and the Company is unable to estimate the
date the ARS will next clear, they are classified as long-term marketable
securities consistent with their stated contractual maturities. At
November 1, 2008 the Company held nine ARS, with an aggregate cost of $43.0
million, all of which failed to clear at recent auctions. The Company
does not expect to incur any decline in carrying value associated with these ARS
and has classified all ARS held at November 1, 2008 as long-term marketable
securities consistent with their stated maturities which range from 30 to 40
years.
The
Company’s nine ARS are securities backed by higher education student loan issued
by agencies of nine different states. All are backed by a guaranty
from a U.S. government agency. These instruments were purchased on
the Company’s behalf by its cash investment advisor, UBS. As a result
of the auction failures and lack of liquidity for these securities, UBS has
proposed and the Company has accepted a comprehensive settlement agreement for
its clients holding ARS, in which all the ARS currently in the Company’s
portfolio could be redeemed at par value. The offer to redeem will be
at the Company’s option during a two year period beginning in June
2010. The offer also gives UBS the discretion to buy any or all of
these securities from us at par value at any time.
Inventories: Inventories
are stated at the lower of standard cost (approximating a first-in, first-out
basis) or market value. The Company evaluates its ending inventories
for excess quantities and obsolescence on a quarterly basis. This
evaluation includes analysis of historical and forecasted sales levels by
product. A provision is recorded for inventories on hand in excess of
forecasted demand. In addition, the Company writes off inventories
that are considered obsolete. Obsolescence is determined from several
factors, including competitiveness of product offerings, market conditions and
product life cycles. Increases to the allowance for excess and
obsolete inventory are charged to cost of revenue. At the point of
the loss recognition, a new, lower-cost basis for that inventory is established,
and subsequent changes in facts and circumstances do not result in the
restoration or increase in that newly established cost basis. If this
lower-costed inventory is subsequently sold, the related allowance is matched to
the movement of related product inventory, resulting in lower costs and higher
gross margins for those products.
As a
result of this inventory review, the Company charged approximately $0.7 million
to cost of revenue for the three months ended November 1, 2008, while no
additional adjustment to the carrying costs was necessary as the provision
amount was insignificant for the three months ended November 3, 2007, and $1.8
million and $0.3 million for the nine months ended November 1, 2008 and November
3, 2007, respectively.
Software, equipment and leasehold
improvements: Software, equipment and leasehold improvements
are stated at cost. Depreciation and amortization are computed using
the straight-line method based on the useful lives of the assets (one to five
years) or the lease term if shorter. The allowance for leasehold
improvements received from the landlord for the Company’s current facility is
amortized using the straight-line method over the lesser of the remaining lease
term or the useful life of the leasehold improvements. Repairs and
maintenance costs are expensed as incurred.
Long-term
investments: Investments in private equity securities of 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. The Company evaluates its long-term investments for impairment
annually according to Emerging Issues Task Force Issue No. 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments (“EITF
03-01”). EITF 03-01 provides guidance for evaluating whether an
investment is other-than-temporarily impaired and requires certain disclosures
with respect to these investments. The guidance also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requirements for disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments.
Goodwill and Intangible
assets: Goodwill and intangible assets are recorded as the
difference, if any, between the aggregate consideration paid for an acquisition
and the fair value of the net tangible and intangible assets
acquired. The amounts and useful lives assigned to intangible assets
acquired, other than goodwill, impact the amount and timing of future
amortization.
The
Company reviews goodwill with indefinite lives for impairment annually and
whenever events or changes in circumstances indicate the carrying value may not
be recoverable in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets (“FAS 142”). Purchased intangible assets with finite
useful lives are amortized using the straight-line method over their estimated
useful lives and are reviewed for impairment under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“FAS 144”). Determining the
fair value of a reporting unit is judgmental in nature and involves the use of
significant estimates and assumptions. These estimates and
assumptions include revenue growth rates and forecasted operating margins used
to calculate projected future cash flows, risk-adjusted discount rates, future
economic and market conditions and determination of appropriate market
comparables. The Company bases its fair value estimates on
assumptions it believes to be reasonable. Actual future results may
differ from those estimates.
Revenue recognition: The
Company derives its revenue primarily from three principal sources: product
sales, product development contracts and service contracts. The
Company generally recognizes revenue for product sales and service contracts in
accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, under
which revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred or service has been rendered, the fee is fixed or
determinable, and collectability is reasonably assured.
Revenue
from product sales to OEMs, distributors and end users are generally recognized
upon shipment, as shipping terms are predominantly FOB shipping point, except
that revenue is deferred when management cannot reasonably estimate the amount
of returns or where collectability is not assured. In those
situations, revenue is recognized when collection subsequently becomes probable
and returns are estimable. Allowances for sales returns, discounts
and warranty costs are recorded at the time that revenue is
recognized.
Product
development agreements typically require that the Company provide customized
software to support customer-specific designs. Accordingly, this
revenue is accounted for under the AICPA Statement of Position (“SOP”) 97-2,
Software Revenue
Recognition. The Company offers post-contract customer support
(“PCS”) on a contractual basis for additional fees, typically with a one year
term. In instances where software is bundled with the PCS, vendor
specific objective evidence does not exist to allocate the total fee to all
undelivered elements of the arrangement and, therefore, revenue and related
costs are deferred until all elements, except PCS, are delivered. The
total fee is then recognized ratably over the PCS term (typically one year)
after the software is delivered. The Company classifies development
costs related to product development agreements as cost of
revenue. Product development revenue was approximately $0.1 million
and $0.5 million for the three months ended November 1, 2008 and November 3,
2007, respectively, and $0.2 million and $1.0 million for the nine months ended
November 1, 2008 and November 3, 2007, respectively.
Revenue
from service contracts consist of fees for providing engineering support
services, and are recognized ratably over the contract term. Expenses
related to support service revenue are included in cost of
revenue. Support service revenue was $7,500 and $0.2 million for the
three months ended November 1, 2008 and November 3, 2007, respectively, and
$48,000 and $0.9 million for the nine months ended November 1, 2008 and November
3, 2007, respectively.
Foreign
currency: The functional currency of the Company’s foreign
subsidiaries is the local currency of each country. Accordingly,
gains and losses from the translation of the financial statements of the foreign
subsidiaries are included in shareholders’ equity. Transaction gains
and losses, which are included in the other expenses, net, in the accompanying
consolidated statements of operations, have not been significant for all years
presented.
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 and long-term marketable securities, long-term
investments and accounts receivable. The majority of the Company’s
cash, cash equivalents and short-term and long-term marketable securities are on
deposit with three financial institutions. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral for sales on credit. The Company reviews its accounts
receivable balances to determine if any receivables will potentially be
uncollectible and includes any amounts that are determined to be uncollectible
in its allowance for doubtful accounts. As of November 1, 2008 and
February 2, 2008, four and three customers accounted for approximately 64% and
75%, respectively, of the Company’s net outstanding trade
receivables.
Income
taxes: Deferred income taxes reflect the net tax effects of
any temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes,
and any operating losses and tax credit carryforwards. Income taxes
are accounted for under an asset and liability approach in accordance with SFAS
No. 109, Accounting for
Income Taxes (“FAS 109”). Deferred tax liabilities are
recognized for future taxable amounts and deferred tax assets are recognized for
future deductions, net of a valuation allowance, to reduce deferred tax assets
to amounts that are more likely than not to be realized. The income
tax provision for the three months and nine months ended November 1, 2008 was
$1.1 million and $7.3 million, respectively. The income tax provision
for the three months and nine months ended November 3, 2007 was $2.9 million and
$3.7 million, respectively.
In July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting for
Uncertainty in Income
Taxes – An
Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS 109 and prescribes a
recognition threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a tax
return. Under FIN 48, the impact of an uncertain income tax position
on the income tax return must be recognized as the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained. Additionally,
FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. The Company adopted the provisions of FIN 48 on February
4, 2007, the beginning of its fiscal 2008. For the three months and
nine months ended November 1, 2008, the Company recorded a net increase of $0.2
million and $0.7 million, respectively, in unrecognized tax
benefits.
Share-based
compensation: The Company applies SFAS No. 123(R) Share-Based Payment, (“SFAS
123(R)”) to measure and recognize compensation expense for all share-based
payment awards made to employees and directors based on estimated fair
values.
SFAS 123(R)
requires companies to estimate the fair value of share-based payment awards on
the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service period in the Company’s unaudited condensed
consolidated statements of operations.
Share-based
compensation expense recognized in periods after January 28, 2006 is based on
the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. Share-based compensation expense
recognized in the Company’s unaudited condensed consolidated statements of
operations for periods after the adoption of SFAS 123(R) includes compensation
expense for share-based payment awards granted prior to, but not yet vested, as
of January 28, 2006 based on the grant date fair value estimated in
accordance with the pro forma provisions of SFAS 123 and compensation
expense for the share-based payment awards granted subsequent to
January 28, 2006 based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R). As share-based compensation
expense recognized in the unaudited condensed consolidated statements of
operations for fiscal 2008 and for the first three quarters of fiscal 2009 is
based on awards ultimately expected to vest, it has been adjusted for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
The
effect of recording employee share-based compensation expense on the unaudited
condensed consolidated statements of operations for the three months and nine
months ended November 1, 2008 and November 3, 2007 was as follows (in thousands,
except per share amounts):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1, 2008
|
|
|
November
3, 2007
|
|
|
November
1, 2008
|
|
|
November
3, 2007
|
|
Share-based
compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
2,596 |
|
|
$ |
1,380 |
|
|
$ |
9,440 |
|
|
$ |
3,973 |
|
Employee
stock purchase plan
|
|
|
166 |
|
|
|
96 |
|
|
|
448 |
|
|
|
309 |
|
Total
share-based compensation expense
|
|
|
2,762 |
|
|
|
1,476 |
|
|
|
9,888 |
|
|
|
4,282 |
|
Tax
effect of share-based compensation expense
|
|
|
(810 |
) |
|
|
(204 |
) |
|
|
(2,919 |
) |
|
|
(305 |
) |
Net
effect on net income
|
|
$ |
1,952 |
|
|
$ |
1,272 |
|
|
$ |
6,969 |
|
|
$ |
3,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
on net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.07 |
|
|
$ |
0.05 |
|
|
$ |
0.26 |
|
|
$ |
0.16 |
|
Diluted
|
|
$ |
0.07 |
|
|
$ |
0.04 |
|
|
$ |
0.25 |
|
|
$ |
0.14 |
|
Long-lived assets: The Company
accounts for long-lived assets, including purchased intangible assets, in
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Long-lived assets are evaluated
for impairment whenever events or changes in circumstances, such as a change in
technology, indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when the sum of
the undiscounted future net cash flows expected to result from the use of the
asset and its eventual disposal is less than its carrying amount.
Research and development and software
development costs: Costs incurred in the research and development of the
Company’s products are expensed as incurred. Costs associated with
the development of computer software are expensed prior to the establishment of
technological feasibility and capitalized in certain cases thereafter until the
product is available for general release to customers.
Recent accounting
pronouncements: In February 2008, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)
No. 157-2, Effective Date
of FASB Statement No.157 (“FSP 157-2), which delays the effective date of
SFAS No. 157, Fair Value
Measurements (“SFAS 157”), for all non-recurring fair value measurements
of non-financial assets and non-financial liabilities until fiscal years
beginning after November 15, 2008. The Company is currently evaluating the
financial impact of FSP 157-2 on its financial position and results of
operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
("SFAS 141R"). SFAS 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination and requires related acquisition
costs to be expensed in the period incurred. SFAS 141R is effective
for fiscal years beginning after December 15, 2008. The Company
is currently evaluating the potential impact, if any, of the adoption of SFAS
141R on its condensed consolidated results of operations and financial
condition.
2.
|
Cash, cash equivalents and marketable
securities
|
Cash,
cash equivalents and marketable securities consist of the following (in
thousands):
|
|
November
1, 2008
|
|
|
February
2, 2008
|
|
|
|
Book
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Book
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Value
|
|
|
Gain/(Loss)
|
|
|
Value
|
|
|
Value
|
|
|
Gain/(Loss)
|
|
|
Value
|
|
Money
market funds
|
|
$ |
68,070 |
|
|
$ |
— |
|
|
$ |
68,070 |
|
|
$ |
165,719 |
|
|
$ |
— |
|
|
$ |
165,719 |
|
Corporate
commercial paper
|
|
|
23,532 |
|
|
|
(20 |
) |
|
|
23,512 |
|
|
|
33,354 |
|
|
|
35 |
|
|
|
33,389 |
|
Corporate
bonds
|
|
|
14,165 |
|
|
|
(239 |
) |
|
|
13,926 |
|
|
|
17,177 |
|
|
|
180 |
|
|
|
17,357 |
|
US
agency discount notes
|
|
|
37,993 |
|
|
|
(17 |
) |
|
|
37,976 |
|
|
|
4,926 |
|
|
|
25 |
|
|
|
4,951 |
|
US
agency non-callable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,000 |
|
|
|
30 |
|
|
|
7,030 |
|
Auction
rate securities
|
|
|
43,000 |
|
|
|
— |
|
|
|
43,000 |
|
|
|
43,900 |
|
|
|
— |
|
|
|
43,900 |
|
Total
cash equivalents and marketable securities
|
|
$ |
186,760 |
|
|
$ |
(276 |
) |
|
$ |
186,484 |
|
|
$ |
272,076 |
|
|
$ |
270 |
|
|
$ |
272,346 |
|
Cash
on hand held in the United States
|
|
|
|
|
|
|
|
|
|
|
3,220 |
|
|
|
|
|
|
|
|
|
|
|
2,257 |
|
Cash
on hand held overseas
|
|
|
|
|
|
|
|
|
|
|
7,577 |
|
|
|
|
|
|
|
|
|
|
|
1,129 |
|
Total
cash on hand
|
|
|
|
|
|
|
|
|
|
|
10,797 |
|
|
|
|
|
|
|
|
|
|
|
3,386 |
|
Total
cash, cash equivalents and marketable securities
|
|
|
|
|
|
|
|
|
|
$ |
197,281 |
|
|
|
|
|
|
|
|
|
|
$ |
275,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
$ |
90,782 |
|
|
|
|
|
|
|
|
|
|
$ |
174,089 |
|
Short-term
marketable securities
|
|
|
|
|
|
|
|
|
|
|
41,478 |
|
|
|
|
|
|
|
|
|
|
|
44,401 |
|
Long-term
marketable securities
|
|
|
|
|
|
|
|
|
|
|
65,021 |
|
|
|
|
|
|
|
|
|
|
|
57,242 |
|
|
|
|
|
|
|
|
|
|
|
$ |
197,281 |
|
|
|
|
|
|
|
|
|
|
$ |
275,732 |
|
The
amortized cost and estimated fair value of cash equivalents and marketable
securities, by contractual maturity as measured on the date of purchase, are
shown below (in thousands). Actual maturities may differ from
contractual maturities.
|
|
November
1, 2008
|
|
|
February
2, 2008
|
|
|
|
Book
|
|
|
Fair
|
|
|
Book
|
|
|
Fair
|
|
(In
thousands)
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Due
in 1 year or less
|
|
$ |
121,547 |
|
|
$ |
121,463 |
|
|
$ |
214,959 |
|
|
$ |
215,104 |
|
Due
in greater than 1 year
|
|
|
65,213 |
|
|
|
65,021 |
|
|
|
57,117 |
|
|
|
57,242 |
|
Total
|
|
$ |
186,760 |
|
|
$ |
186,484 |
|
|
$ |
272,076 |
|
|
$ |
272,346 |
|
Historically,
the Company classified its auction rate securities (“ARS”) as short-term
marketable securities because the Company was able to liquidate them at its
discretion at the reset period. As of November 1, 2008, the carrying
value of the Company’s nine ARS totaled $43.0 million. During
the first, second and third quarters of fiscal 2009, all of the auctions
associated with these ARS failed. These failures are not believed to
be a credit issue, but rather caused by a lack of liquidity. The ARS
held by the Company are primarily backed by student loans and are
over-collateralized, and substantially insured and guaranteed by the United
States Federal Department of Education. In addition, all ARS held by
the Company are rated by major independent rating agencies as either AAA or
Aaa. Under the contractual terms, the issuer is obligated to pay
penalty interest rates should an auction fail. The Company does not
expect to need to access these funds in the short-term; however, in the event
the Company needed to access these funds, they are not expected to be accessible
until one of the following occurs: a successful auction occurs, the issuer
redeems the issue, a buyer is found outside of the auction process or the
underlying securities mature. In October 2008, the Company’s cash
investment advisor, UBS, acknowledged the Company’s acceptance of its proposal
of a comprehensive settlement agreement, in which all the ARS currently in the
Company’s portfolio could be redeemed at par value. The offer to
redeem will be at the Company’s option during a two year period beginning in
June 2010. The offer also gives UBS the discretion to buy any or all
of these securities from us at par value at any time. The Company
does not expect to incur any decline in carrying value associated with these ARS
and has classified all ARS held at November 1, 2008 as long-term marketable
securities consistent with their stated maturities which range from 30 to 40
years. Additionally, the proposed solution by UBS to the lack of
liquidity of the Company’s ARS included a commitment effective October 2008
through June 2010 to loan an amount up to the full par value of the
ARS. The interest charged on such loan would be equal to the amount
of interest being paid by the issuers of the ARS borrowed against.
Although
there is uncertainty with regard to the short-term liquidity of these ARS, the
Company continues to believe that the carrying value represents the fair value
of these marketable securities because of the overall quality of the underlying
investments and the anticipated future market for such
investments. In addition, subject to UBS’ right to sell the ARS prior
to June 2010, the Company has the intent and ability to hold these ARS until the
earlier of: the market for ARS stabilizes, the issuer refinances the underlying
security, a buyer is found outside of the auction process at acceptable terms,
or the Company request UBS to redeem the ARS under the settlement
agreement. UBS provided an estimated value as of November 1, 2008 of
approximately $36.9 million with an unrealized loss of $6.1
million. The Company has reviewed the assumptions underlying this
valuation change and has not recorded this unrealized loss of $6.1 million. The
Company does not believe the valuation calculated by the investment firm
represents an other than temporary decline in fair value and accordingly the
Company has not recorded an unrealized loss for these adjustments.
Based
on the cash, cash equivalents and short-term marketable securities balance of
$132.3 million and expected positive operating cash flows, the Company does not
anticipate the potential lack of liquidity associated with the ARS will
adversely affect the Company’s ability to conduct business.
3.
|
Fair
values of assets and
liabilities
|
On
February 3, 2008, the Company adopted Statement of Financial Accounting
Standards 157, Fair Value
Measurements, (“SFAS 157”). The standard defines fair value as
“the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price).” The standard establishes a consistent
framework for measuring fair value and expands disclosure requirements about
fair value measurements. SFAS 157, among other things, requires the
Company to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.
Fair
Value Hierarchy
SFAS 157
discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flow), and
the cost approach (cost to replace the service capacity of an asset or
replacement cost). The statement utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those
three levels:
|
·
|
Level 1 - Valuation is
based upon quoted prices for identical instruments traded in active
markets.
|
|
·
|
Level 2 - Valuation is
based upon quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant
assumptions are observable in the
market.
|
|
·
|
Level 3 - Valuation is
generated from model-based techniques that use significant assumptions not
observable in the market. These unobservable assumptions
reflect management’s estimates of assumptions that market participants
would use in pricing the asset or liability. Valuation
techniques include use of option pricing models, discounted cash flows
models and similar techniques.
|
Determination
of Fair Value
The
Company’s cash equivalents and marketable securities, with the exception of ARS,
are classified within Level 1 of the fair value hierarchy because they are
valued using quoted market prices, broker or dealer quotations, or alternative
pricing sources with reasonable levels of price transparency. The
types of marketable securities valued based on quoted market prices in active
markets include most U.S. government and agency securities, sovereign government
obligations, and money market securities. ARS are classified within
Level 3 as significant assumptions are not observable in the
market. During the three and nine months ended November 1, 2008, the
Company recorded no impairment loss relating to the value of
ARS. There were no realized gain or losses recorded for these ARS in
the three and nine months ended November 1, 2008.
The table
below presents the balances of the Company’s assets measured at fair value on a
recurring basis (in thousands):
|
|
Fair
Value Measurement at Reporting Date
|
|
|
|
|
|
|
Quoted
Prices In Active Markets for Identical Assets
|
|
|
Significant
Observable Inputs
|
|
|
Significant
Unobservable Inputs
|
|
|
|
Fair Value
|
|
|
(Level )1
|
|
|
(Level 2)
|
|
|
Level 3
|
|
Money
market funds
|
|
$ |
68,070 |
|
|
$ |
68,070 |
|
|
$ |
— |
|
|
$ |
— |
|
Corporate
commercial paper
|
|
|
23,512 |
|
|
|
23,512 |
|
|
|
— |
|
|
|
— |
|
Corporate
bonds
|
|
|
13,926 |
|
|
|
13,926 |
|
|
|
— |
|
|
|
— |
|
US
agency discount notes
|
|
|
37,976 |
|
|
|
37,976 |
|
|
|
— |
|
|
|
— |
|
Auction
rate securities
|
|
|
43,000 |
|
|
|
— |
|
|
|
— |
|
|
|
43,000 |
|
Total
cash equivalents and marketable securities
|
|
$ |
186,484 |
|
|
$ |
143,484 |
|
|
$ |
— |
|
|
$ |
43,000 |
|
The
Company’s financial assets measured at fair value on a reoccurring basis,
consisting of ARS, using significant unobservable inputs (Level 3) for the three
months ended November 1, 2008 had no activity.
Inventories
consist of the following (in thousands):
|
|
November
1,
|
|
|
February
2,
|
|
|
|
2008
|
|
|
2008
|
|
Raw
materials
|
|
$ |
22,376 |
|
|
$ |
12,838 |
|
Work-in-process
|
|
|
5,937 |
|
|
|
2,735 |
|
Finished
goods
|
|
|
16,925 |
|
|
|
10,710 |
|
Total
|
|
$ |
45,238 |
|
|
$ |
26,283 |
|
VXP
acquisition
On
February 8, 2008, the Company acquired certain assets and assumed certain
liability obligations of the VXP Image Processing business (“VXP”), which
specializes in video processing technology that the Company intends to use to
bring studio quality video to consumer television, from Gennum Corporation for
$18.6 million in cash including transaction costs. Forty-four employees
joined the Company as part of the acquisition.
In
connection with the VXP acquisition, the Company obtained a valuation of the
intangible assets acquired in order to allocate the purchase price in accordance
with SFAS No. 141, Business Combinations
(“SFAS 141”). In accordance with SFAS 141, the total
purchase price was allocated to VXP’s net tangible and intangible assets based
upon its fair values as of February 8, 2008. The excess purchase
price over the value of the net tangible and identifiable intangible assets was
recorded as goodwill. Approximately $0.1 million of the goodwill is
deductible for tax purposes. The purchase price in the transaction
was allocated as follows (in thousands):
|
|
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Useful
Life
|
|
Cash
consideration
|
|
$ |
18,200 |
|
|
|
|
Transaction
costs
|
|
|
376 |
|
|
|
|
Total
consideration
|
|
$ |
18,576 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
tangible assets
|
|
$ |
4,555 |
|
|
|
|
Identifiable
intangible assets:
|
|
|
|
|
|
|
|
Developed
technology
|
|
|
8,504 |
|
|
2
to 7 years
|
|
In
process research and development
|
|
|
1,571 |
|
|
|
N/A |
|
Customer
relationships
|
|
|
1,123 |
|
|
7
years
|
|
Trademarks
|
|
|
298 |
|
|
5
years
|
|
Software
license
|
|
|
291 |
|
|
8
years
|
|
Goodwill
|
|
|
2,234 |
|
|
|
|
|
Total
consideration
|
|
$ |
18,576 |
|
|
|
|
|
6.
|
Goodwill
and Intangible assets
|
Goodwill
Total
goodwill as of November 1, 2008 was $7.3 million. Goodwill
attributable to the February 8, 2008 VXP acquisition was approximately $2.2
million and the remaining goodwill balance was attributable to the fiscal 2007
Blue7 acquisition.
Intangible
assets
Acquired
intangible assets, subject to amortization, were as follows as of November 1,
2008 (in thousands, except for years):
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Cost
|
|
|
|
Amortization
|
|
|
|
Net
|
|
|
|
Useful
Life
|
|
Developed
technology
|
|
$ |
13,803 |
|
|
$ |
(3,157 |
) |
|
$ |
10,646 |
|
|
|
2
to 7 years |
|
Noncompete
agreements
|
|
|
1,400 |
|
|
|
(1,264 |
) |
|
|
136 |
|
|
|
3
years |
|
Customer
relationships
|
|
|
1,123 |
|
|
|
(116 |
) |
|
|
1,007 |
|
|
|
7
years |
|
Trademarks
|
|
|
298 |
|
|
|
(43 |
) |
|
|
255 |
|
|
|
5
years |
|
|
|
$ |
16,624 |
|
|
$ |
(4,580 |
) |
|
$ |
12,044 |
|
|
|
|
|
Amortization
expense related to acquired intangible assets was $0.7 million and $2.2 million
for the three months and nine months ended November 1, 2008, respectively, and
$0.3 million and $0.9 million for the three months and nine months ended
November 3, 2007, respectively. As of November 1, 2008, the Company
expects the amortization expense in future periods to be as shown below (in
thousands):
|
|
Developed
|
|
|
Noncompete
|
|
|
Customer
|
|
|
|
|
|
|
|
Fiscal
year
|
|
Technology
|
|
|
Agreements
|
|
|
Relationships
|
|
|
Trademarks
|
|
|
Total
|
|
Remainder
of fiscal 2009
|
|
$ |
570 |
|
|
$ |
117 |
|
|
$ |
40 |
|
|
$ |
15 |
|
|
$ |
742 |
|
2010
|
|
|
2,280 |
|
|
|
19 |
|
|
|
160 |
|
|
|
60 |
|
|
|
2,519 |
|
2011
|
|
|
2,125 |
|
|
|
— |
|
|
|
160 |
|
|
|
60 |
|
|
|
2,345 |
|
2012
|
|
|
2,121 |
|
|
|
— |
|
|
|
160 |
|
|
|
60 |
|
|
|
2,341 |
|
2013
|
|
|
2,121 |
|
|
|
— |
|
|
|
160 |
|
|
|
60 |
|
|
|
2,341 |
|
Thereafter
|
|
|
1,429 |
|
|
|
— |
|
|
|
327 |
|
|
|
— |
|
|
|
1,756 |
|
|
|
$ |
10,646 |
|
|
$ |
136 |
|
|
$ |
1,007 |
|
|
$ |
255 |
|
|
$ |
12,044 |
|
In
general, the Company sells products with a one-year limited warranty that its
products will be free from defects in materials and
workmanship. Warranty cost is estimated at the time revenue is
recognized, based on historical activity and additionally for any specific known
product warranty issues. Accrued warranty cost includes estimated
hardware repair and/or replacement and software support costs and is included in
accrued liabilities on the unaudited condensed consolidated balance
sheets.
Details
of the change in accrued warranty as of November 1, 2008 and November 3, 2007
are as follows (in thousands):
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
End
of
|
|
Three
Months Ended
|
|
of
Period
|
|
|
Additions
|
|
|
Deductions
|
|
|
Period
|
|
November
1, 2008
|
|
$ |
1,590 |
|
|
$ |
641 |
|
|
$ |
(581 |
) |
|
$ |
1,650 |
|
November
3, 2007
|
|
|
755 |
|
|
|
233 |
|
|
|
(106 |
) |
|
|
882 |
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
November
1, 2008
|
|
$ |
1,564 |
|
|
$ |
1,175 |
|
|
$ |
(1,089 |
) |
|
$ |
1,650 |
|
November
3, 2007
|
|
|
556 |
|
|
|
717 |
|
|
|
(391 |
) |
|
|
882 |
|
8.
|
Commitments
and contingencies
|
Commitments
Leases
The
Company’s primary facility is leased under a non-cancelable lease which expires
in September 2012. The Company also leases facilities in Canada,
France, Hong Kong and Singapore under non-cancelable leases. Future
minimum annual payments under operating leases are as follows (in
thousands):
|
|
Operating
|
|
Fiscal
years
|
|
Leases
|
|
Remainder
of fiscal 2009
|
|
$ |
386 |
|
2010
|
|
|
1,488 |
|
2011
|
|
|
1,489 |
|
2012
|
|
|
1,536 |
|
2013
|
|
|
1,249 |
|
Thereafter
|
|
|
3,142 |
|
Total
minimum lease payments
|
|
$ |
9,290
|
|
Purchase
commitments
The
Company places non-cancelable orders to purchase semiconductor products from its
suppliers on an eight to twelve week lead-time basis. The total
amount of outstanding non-cancelable purchase orders was approximately $4.0
million as of November 1, 2008.
Indemnifications
The
Company’s standard terms and conditions of sale include a patent infringement
indemnification provision for claims from third parties related to the Company’s
intellectual property. The terms and conditions of sale generally
limit the scope of the available remedies to a variety of industry-standard
methods including, but not limited to, a right to control the defense or
settlement of any claim, procure the right for continued usage, and a right to
replace or modify the infringing products to make them
non-infringing. Such indemnification provisions are accounted for in
accordance with SFAS No. 5, Accounting for Contingencies
(“FAS 5”). To date, the Company has not incurred or accrued any costs
related to any claims under such indemnification provisions.
401(k)
tax deferred savings plan
The
Company maintains a 401(k) tax deferred savings plan for the benefit of
qualified employees who are U.S. based. Under the 401(k) tax deferred
savings plan, U.S. based employees may elect to reduce their current annual
taxable compensation up to the statutorily prescribed limit, which is $15,500 in
calendar year 2008. Employees age 50 or over may elect to
contribute an additional $5,000. In January 2008, the Company
implemented a matching contribution program whereby it matches employee
contributions made by each employee at a rate of $0.25 per $1.00
contributed. The matching contributions to the 401(k) Plan totaled
$0.1 million and $0.4 million for the three months and nine months ended
November 1, 2008, respectively.
Group
Registered Retirement Savings Plan
The
Company maintains a Group Registered Retirement Savings Plan (GRRSP) for the
benefit of qualified employees who are based in Canada. Under the
Registered Retirement Savings Plan (RRSP), Canadian based employees may elect to
reduce their annual taxable compensation up to the statutorily prescribed limit
which is $20,000
Canadian in calendar year 2008. In April 2008, the Company
implemented a matching contribution program under the GRRSP whereby it matches
employee contributions made by each employee up to 2.5% of their annual salary.
The matching contributions to the GRRSP totaled $25,000 and $51,000 for
the three months and nine months ended November
1, 2008, respectively.
Contingencies
Litigation
Certain
current and former directors and officers of the Company were named as
defendants in several shareholder derivative actions filed in the United States
District Court for the Northern District of California, which were consolidated
under the caption In re Sigma
Designs, Inc. Derivative Litigation (the “Federal Action”) and in a
substantially similar shareholder derivative action filed in the Superior Court
for Santa Clara County, California captioned Korsinsky v. Tran, et al.
(the “State Action”).
Plaintiffs
in the Federal and State Actions alleged that the individual defendants breached
their fiduciary duties to the Company in connection with the alleged backdating
of stock option grants during the period from 1994 through 2005 and that certain
defendants were unjustly enriched. Plaintiffs in the Federal Action
asserted derivative claims against the individual defendants based on alleged
violations of Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of
1934, and Rules 10b-5 and 14a-9 promulgated thereunder. They also
alleged that the individual defendants aided and abetted one another’s alleged
breaches of fiduciary duty and violated California Corporations Code section
25402 and brought claims for an accounting and rescission. In the
State Action, plaintiffs also alleged that the individual defendants wasted
corporate assets. Both Actions sought to recover unspecified money
damages, disgorgement of profits and benefits and equitable
relief. The Federal Action also sought treble damages, rescission of
certain defendants’ option contracts, imposition of a constructive trust over
executory option contracts and attorney’s fees. The Company was named
as a nominal defendant in both the Federal and State Actions; thus, no recovery
against the Company was sought.
In
January 2007, the Company filed a motion to dismiss the Federal Action on the
ground that the plaintiffs had not made a pre-litigation demand on its Board of
Directors and had not demonstrated that such a demand would have been
futile. The defendant directors and officers joined in that motion,
and filed a motion to dismiss the Federal Action for failure to state a claim
against each of them. Pursuant to a joint stipulation, plaintiffs
filed an Amended Consolidated Shareholder Derivative Complaint (“Amended
Complaint”) on August 13, 2007. On September 19, 2007, the Company
and the individual defendants each filed a motion to dismiss the Amended
Complaint on the same grounds as their previous motions to
dismiss. Plaintiffs filed oppositions to the motions to dismiss on
October 19, 2007. Defendants filed replies in support of their
motions to dismiss on November 5, 2007. Thereafter, the parties
reached an agreement to settle the action. On May 28, 2008, the
parties to both the Federal Action and the State Action executed a definitive
settlement agreement which, if approved, would result in the dismissal of both
the Federal Action and the State Action. On September 15, 2008, the
Court entered an Order and Final Judgment approving the settlement and
dismissing the Federal Action with prejudice.
In
January 2007, the Company also filed a motion to dismiss or stay the State
Action in favor of the earlier filed Federal Action. The defendant
directors and officers joined in that motion. Pursuant to a joint
stipulation, the Court ordered that the State Action be stayed in favor of the
earlier-filed Federal Action. Thereafter, as stated above, the
parties to the Federal Action reached an agreement to settle that
action. On May 28, 2008, the parties to both the Federal Action and
the State Action executed a definitive settlement agreement. Pursuant
to the settlement agreement, after the Order and Final Judgment approving the
settlement was entered in the Federal Action, Plaintiff requested that the State
Action be dismissed with prejudice. The Court granted this request on
September 22, 2008. All amounts due under the settlement were accrued
as of February 2, 2008.
The
Company has previously disclosed in press releases that the Securities and
Exchange Commission (“SEC”) has initiated an informal inquiry into the Company’s
stock option granting practices. The SEC requested that the Company
voluntarily produce documents relating to, among other things, its stock option
practices. The Company responded to the SEC's requests in July and
August of 2006 and has received no further requests since that
time. While the Company has no reason to believe that the SEC inquiry
is still active, the Company intends to continue cooperating with the SEC should
the Company receive any additional requests.
In May
2007, the IRS began an employment tax audit for the Company’s fiscal 2004 and
2005. The Company also requested that fiscal 2006 be included in this
audit cycle and the IRS agreed. The focus of the IRS employment tax
audit related to tax issues connected to the Company’s granting stock options
with exercise prices per share that were less than the fair market value per
share of the common stock underlying the option on the option's measurement date
for financial reporting purposes. The Company has recently settled
this IRS audit (including the year 2006), although the Company is still waiting
to receive the notice of assessment resulting from such settlement for interest
on the agreed tax and penalty amounts. The settlement amounts were in
alignment with the amounts previously provided for. The Company has
reported these IRS adjustments to the California Employment Development
Department (“EDD”) and is communicating with the EDD in order to resolve the
corresponding state tax, penalty and/or interest adjustments.
In August
2007, the IRS began an income tax audit for the Company’s fiscal
2005. The IRS has proposed several adjustments. The
Company has accepted most of the adjustments, which will not have a material
financial impact to the Company’s operations and financial
condition. The Company is in discussions with the IRS concerning an
additional proposed adjustment, which concerns an area that is not
complete. The Company intends to perform additional development work
to resolve this proposed adjustment.
Basic net
income per share for the periods presented is computed by dividing net income by
the weighted average number of common shares outstanding. Diluted net
income per share for the periods presented is computed by including shares
subject to repurchase as well as dilutive options.
The
following table sets forth the basic and diluted net income per share computed
for the three months and nine months ended November 1, 2008 and November 3, 2007
(in thousands, except per share amounts):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1, 2008
|
|
|
November
3, 2007
|
|
|
November
1, 2008
|
|
|
November
3, 2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$ |
3,671 |
|
|
$ |
20,950 |
|
|
$ |
19,844 |
|
|
$ |
34,907 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
26,351 |
|
|
|
26,234 |
|
|
|
27,045 |
|
|
|
24,360 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
733 |
|
|
|
2,724 |
|
|
|
926 |
|
|
|
3,172 |
|
Shares
used in computation - diluted
|
|
|
27,084 |
|
|
|
28,958 |
|
|
|
27,971 |
|
|
|
27,532 |
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.14 |
|
|
$ |
0.80 |
|
|
$ |
0.73 |
|
|
$ |
1.43 |
|
Diluted
|
|
$ |
0.14 |
|
|
$ |
0.72 |
|
|
$ |
0.71 |
|
|
$ |
1.27 |
|
A summary
of the excluded potentially dilutive securities for the three months and nine
months ended November 1, 2008 and November 3, 2007 are as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1, 2008
|
|
|
November
3, 2007
|
|
|
November
1, 2008
|
|
|
November
3, 2007
|
|
Stock
options excluded because exercise price in excess of average stock
price
|
|
|
1,987 |
|
|
|
239 |
|
|
|
1,617 |
|
|
|
262 |
|
The
reconciliation of net income to total comprehensive income is as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
November
3,
|
|
|
November
1,
|
|
|
November
3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
3,671 |
|
|
$ |
20,950 |
|
|
$ |
19,844 |
|
|
$ |
34,907 |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on available-for-sale securities
|
|
|
(230 |
) |
|
|
12 |
|
|
|
(545 |
) |
|
|
(1 |
) |
Foreign
currency translation adjustment
|
|
|
(422 |
) |
|
|
95 |
|
|
|
(283 |
) |
|
|
156 |
|
Total
comprehensive income
|
|
$ |
3,019 |
|
|
$ |
21,057 |
|
|
$ |
19,016 |
|
|
$ |
35,062 |
|
Stock
option plans
The
Company has adopted stock option plans that provide for the grant of stock
option awards to employees and directors, which are designed to reward employees
and directors for their long-term contributions to the Company and provide an
incentive for them to remain with the Company. As of November 1,
2008, the Company had two stock option plans: the 2003 Director Stock Option
Plan (the “2003 Director Plan”) and the 2001 Employee Stock Option Plan (the
“2001 Option Plan”).
A total
of 207,500 shares of common stock are currently reserved for issuance under the
2003 Director Plan of which 97,500 have been granted as of November 1,
2008.
The total
stock option activity is summarized as follows:
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Weighted
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term
|
|
|
Value
|
|
|
|
Outstanding
|
|
|
Per
Share
|
|
|
(Years)
|
|
|
(in
thousands)
|
|
Balance,
February 2, 2008
|
|
|
3,941,819 |
|
|
$ |
16.78 |
|
|
|
|
|
|
|
Granted
|
|
|
293,680 |
|
|
|
29.62 |
|
|
|
|
|
|
|
Cancelled
|
|
|
(14,021 |
) |
|
|
33.05 |
|
|
|
|
|
|
|
Exercised
|
|
|
(368,517 |
) |
|
|
5.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
May 3, 2008
|
|
|
3,852,961 |
|
|
$ |
18.80 |
|
|
|
|
|
|
|
Granted
|
|
|
76,000 |
|
|
|
19.86 |
|
|
|
|
|
|
|
Cancelled
|
|
|
(68,968 |
) |
|
|
29.79 |
|
|
|
|
|
|
|
Exercised
|
|
|
(45,704 |
) |
|
|
5.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
August 2, 2008
|
|
|
3,814,289 |
|
|
|
18.78 |
|
|
|
|
|
|
|
Granted
|
|
|
45,780 |
|
|
|
9.35 |
|
|
|
|
|
|
|
Cancelled
|
|
|
(75,200 |
) |
|
|
26.95 |
|
|
|
|
|
|
|
Exercised
|
|
|
(76,340 |
) |
|
|
3.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
November 1, 2008
|
|
|
3,708,529 |
|
|
|
18.81 |
|
|
|
7.07 |
|
|
|
6,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Vested and Expected to Vest
|
|
|
3,558,619 |
|
|
$ |
18.50 |
|
|
|
7.01 |
|
|
$ |
6,779 |
|
Ending
Exercisable
|
|
|
1,714,276 |
|
|
$ |
11.47 |
|
|
|
5.75 |
|
|
$ |
5,807 |
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on the Company’s closing stock price of $11.09 as of
November 1, 2008, which would have been received by the option holders had all
options holders exercised their options as of that date. The
aggregate exercise date intrinsic value of options that were exercised under its
stock option plans was $0.9 million and $23.2 million for the three months ended
November 1, 2008 and November 3, 2007, respectively, determined as of the date
of option exercise. The aggregate exercise date intrinsic value of
options that were exercised under its stock option plans was $12.2 million and
$52 million for the nine months ended November 1, 2008 and November 3, 2007,
respectively, determined as of the date of option exercise. The total fair value
of options, which vested during the three months ended November 1, 2008 and
November 3, 2007 was $2.4 million and $2.0 million, respectively. The
total fair value of options, which vested during the nine months ended November
1, 2008 and November 3, 2007 was $8.2 million and $3.9 million,
respectively. At November 1, 2008, 784,837 shares were
available for future grants.
The
options outstanding and currently exercisable at November 1, 2008 were in the
following exercise price ranges:
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range of Exercise Prices
|
|
|
Number of Shares Outstanding at November 1,
2008
|
|
|
Weighted Average Remaining Life
(Years)
|
|
|
Weighted
Average
Exercise Price Per
Share
|
|
|
Number of Shares Exercisable at November 1,
2008
|
|
|
Weighted Average Exercise Price Per
Share
|
|
$ |
0.95 |
|
|
$ |
3.40 |
|
|
|
379,650 |
|
|
|
4.20 |
|
|
$ |
2.34 |
|
|
|
355,915 |
|
|
$ |
2.28 |
|
$ |
3.50 |
|
|
$ |
7.32 |
|
|
|
374,549 |
|
|
|
3.72 |
|
|
$ |
5.21 |
|
|
|
315,075 |
|
|
$ |
5.14 |
|
$ |
7.40 |
|
|
$ |
9.89 |
|
|
|
547,431 |
|
|
|
6.30 |
|
|
$ |
8.72 |
|
|
|
287,252 |
|
|
$ |
8.34 |
|
$ |
11.06 |
|
|
$ |
11.06 |
|
|
|
554,916 |
|
|
|
7.55 |
|
|
$ |
11.06 |
|
|
|
237,695 |
|
|
$ |
11.06 |
|
$ |
11.40 |
|
|
$ |
13.88 |
|
|
|
399,715 |
|
|
|
6.90 |
|
|
$ |
11.70 |
|
|
|
220,515 |
|
|
$ |
11.67 |
|
$ |
15.91 |
|
|
$ |
25.70 |
|
|
|
392,468 |
|
|
|
8.58 |
|
|
$ |
20.76 |
|
|
|
75,499 |
|
|
$ |
18.81 |
|
$ |
27.83 |
|
|
$ |
28.63 |
|
|
|
153,900 |
|
|
|
8.47 |
|
|
$ |
28.53 |
|
|
|
55,965 |
|
|
$ |
28.53 |
|
$ |
31.57 |
|
|
$ |
31.57 |
|
|
|
161,500 |
|
|
|
8.75 |
|
|
$ |
31.57 |
|
|
|
40,214 |
|
|
$ |
31.57 |
|
$ |
41.58 |
|
|
$ |
41.58 |
|
|
|
100,000 |
|
|
|
9.28 |
|
|
$ |
41.58 |
|
|
|
100,000 |
|
|
$ |
41.58 |
|
$ |
45.83 |
|
|
$ |
45.83 |
|
|
|
644,400 |
|
|
|
9.01 |
|
|
$ |
45.83 |
|
|
|
26,146 |
|
|
$ |
45.83 |
|
$ |
0.95 |
|
|
$ |
45.83 |
|
|
|
3,708,529 |
|
|
|
7.07 |
|
|
$ |
18.81 |
|
|
|
1,714,276 |
|
|
$ |
11.47 |
|
As of
November 1, 2008, the unrecorded share-based compensation balance related to
stock options outstanding excluding estimated forfeitures was $39.8 million
and will be recognized over an estimated weighted average amortization period of
3.07 years. The amortization period is based on the expected
vesting term of the options.
Employee
stock purchase plan
Under the
Company’s 2001 Employee Stock Purchase Plan (the “2001 Purchase Plan”),
employees are granted the right to purchase shares of common stock at a price
per share that is 85% of the fair market value at the beginning or end of each
six-month offering period, whichever is lower. As of November 1, 2008,
196,796 shares under the 2001 Purchase Plan remain available for future
purchase.
Valuation
of share-based compensation
The fair
value of share-based compensation awards is estimated at the grant date using
the Black-Scholes option valuation model. The determination of fair
value of share-based compensation awards on the date of grant using an
option-pricing model is affected by the Company’s stock price as well as
assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to the
Company’s expected stock price volatility over the term of the awards, and
actual employee stock option exercise behavior.
The
weighted-average estimated values of employee stock options granted during the
three months ended November 1, 2008 and November 3, 2007 was $13.70 and $37.48
per share, respectively. The weighted-average estimated values of
employee stock options granted during the nine months ended November 1, 2008 and
November 3, 2007 was $17.02 and $22.66 per share, respectively. The
weighted-average estimated fair value of employee stock purchase rights granted
pursuant to the employee stock purchase plan during the three months ended
November 1, 2008 and November 3, 2007 was $5.92 and $8.47, per share,
respectively. The weighted-average estimated fair value of employee
stock purchase rights granted pursuant to the employee stock purchase plan
during the nine months ended November 1, 2008 and November 3, 2007 was $5.92 and
$8.47, per share, respectively. The fair value of each option and
employee stock purchase right grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
|
Three
Months Ended
|
|
November
1, 2008
|
|
November
3, 2007
|
|
Stock
Options
|
|
Stock
Purchase Plan
|
|
Stock
Options
|
|
Stock
Purchase Plan
|
Expected
volatility
|
67.86%
|
|
95.06%
|
|
67.00%
|
|
60.00%
|
Risk-free
interest rate
|
3.03%
|
|
2.17%
|
|
4.01%
|
|
4.93%
|
Expected
term (in years)
|
5.94
|
|
0.50
|
|
6.10
|
|
0.50
|
Dividend
yield
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
November
1, 2008
|
|
November
3, 2007
|
|
Stock
Options
|
|
Stock
Purchase Plan
|
|
Stock
Options
|
|
Stock
Purchase Plan
|
Expected
volatility
|
70.07%
|
|
95.06%
|
|
67.00%
|
|
60.00%
|
Risk-free
interest rate
|
3.31%
|
|
2.17%
|
|
4.45%
|
|
4.93%
|
Expected
term (in years)
|
5.74
|
|
0.50
|
|
6.05
|
|
0.50
|
Dividend
yield
|
None
|
|
None
|
|
None
|
|
None
|
The
computation of the expected volatility assumptions used in the Black-Scholes
calculations for new grants and purchase rights is based on the historical
volatility of the Company’s stock price, measured over a period equal to the
expected term of the grants or purchase rights. The risk-free
interest rate is based on the yield available on U.S. Treasury Strips with
an equivalent remaining term. The expected term life of employee
stock options represents the weighted-average period that the stock options are
expected to remain outstanding and was determined based on historical experience
of similar awards, giving consideration to the contractual terms of the
share-based awards and vesting schedules. The expected term life of
purchase rights is the period of time remaining in the current offering
period. The dividend yield assumption is based on the Company’s
history of not paying dividends and assumption of not paying dividends in the
future.
For
options granted prior to January 29, 2006 and valued in accordance with
SFAS 123, forfeitures were recognized as they occurred and the graded-vested
method continues to be used for expense attribution related to options that were
unvested as of January 29, 2006. For options granted after
January 29, 2006 and valued in accordance with SFAS 123(R), forfeitures are
estimated such that the Company only recognizes expense for those shares
expected to vest, and adjustments are made if actual forfeitures differ form
those estimates. The straight-line method is being used for expense
attribution of all awards granted on or after January 29,
2006.
Non-employee
related share-based compensation expense
In
accordance with the provisions of SFAS 123(R) and Emerging Issues Task
Force, Issue 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees For Acquiring, or
in Conjunction With Selling, Goods or Services (“EITF 96-18”), the
Company recorded share-based compensation expense for options issued to
non-employees based on the fair value of the options as estimated on the
measurement date which is typically the grant date, using the Black-Scholes
option pricing model. The Black-Scholes option pricing model applied
to non-employee equity awards includes assumptions regarding expected stock
price volatility of 67.86%, risk-free interest rates of 3.13%, expected term of
options of 6.21 years and dividend yields of zero percent for the three months
ended November 1, 2008. The Black-Scholes option pricing model
applied to non-employee equity awards includes assumptions regarding expected
stock price volatility of 68.86%, risk-free interest rates of 3.32%, expected
term of options of 6.47 years and dividend yields of zero percent for the nine
months ended November 1, 2008. Total non-employee share-based
compensation recorded during the three and nine months ended November 1, 2008
was $15,000 and $47,000, respectively. Total non-employee share-based
compensation recorded during the three and nine months ended November 3, 2007
was $223,000 and $456,000, respectively.
12.
|
Significant
customers
|
For the
three months ended November 1, 2008, three customers accounted for 17%, 12% and
11%, respectively, of net revenue. During the three months ended
November 1, 2008, one of the customers, Cisco Systems, outsourced its
manufacturing to two subcontractors, which totaled 12% of net
revenue. For the three months ended November 3, 2007, three customers
accounted for 29%, 22% and 14%, respectively, of net revenue. For the
nine months ended November 1, 2008, two customers accounted for 21% and 20%,
respectively, of net revenue. For the nine months ended November 3,
2007, four customers accounted for 20%, 19%, 13% and 11%, respectively, of net
revenue.
Four
customers accounted for 27%, 13%, 13% and 10%, respectively, of total accounts
receivable at November 1, 2008. Three customers accounted for 46%,
15% and 14%, respectively, of total accounts receivable at February 2,
2008.
13.
|
Related
party transactions
|
During
June 2005, the Company loaned $0.5 million to Blue7, a California corporation,
in which the Company had invested $1.0 million, for an approximately 17%
ownership interest. One of the Company’s board members had invested
$0.1 million for a 2% ownership interest during fiscal 2005. In
November 2005 and January 2006, the Company loaned an additional $0.3 million
and $0.2 million, respectively, to Blue7. During fiscal 2007, the
total loan balance of $0.9 million was forgiven and accounted for as part of the
Blue7 acquisition cost. Also, related to the Blue7 acquisition in
fiscal 2007, 2,645 shares of stock options were granted to a Blue7 consultant,
who was one of the Company’s board members. During the first quarter
of fiscal 2008, 1,984 of these shares were exercised and remaining 661 shares
were cancelled.
The
Company maintains an investment in Envivio, Inc., in which the Company has
current invested capital of $0.3 million for an ownership fraction of less than
1%. Three of the Company’s board members have investments in this
same firm, with an aggregate ownership fraction of less than 1%. The
Company’s Chairman and Chief Executive Officer (“CEO”), Thinh Tran, is a member
of Envivio’s Board of Directors.
14.
|
Segment
and geographical information
|
SFAS
No. 131, Disclosures
About Segments of an Enterprise and Related Information (“SFAS 131”)
provides annual and interim reporting standards for an enterprise’s business
segments and related disclosures about its products, services, geographical
areas and major customers.
Operating
segments are defined as components of an enterprise for which separate financial
information is available and evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. The Company is organized as, and operates in, one
reportable segment. The Company’s operating segment consists of its
geographically based entities in the United States, Canada, Singapore, Hong Kong
and France. The Company’s chief operating decision-maker reviews
consolidated financial information, accompanied by information about revenue by
product group, target market and geographic region. The Company does
not assess the performance of its product groups, target markets geographic
regions on other measures of income or expense, such as depreciation and
amortization, gross margin or net income.
The
following table sets forth net revenue to each geographic region, and the
percentage of net revenue represented by each geographic region (in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
%
of
|
|
|
November
3,
|
|
|
%
of
|
|
|
November
1,
|
|
|
%
of
|
|
|
November
3,
|
|
|
%
of
|
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
Asia
|
|
$ |
26,287 |
|
|
|
56% |
|
|
$ |
50,939 |
|
|
|
77% |
|
|
$ |
86,927 |
|
|
|
54% |
|
|
$ |
99,148 |
|
|
|
68% |
|
Europe
|
|
|
16,881 |
|
|
|
36% |
|
|
|
12,329 |
|
|
|
19% |
|
|
|
64,634 |
|
|
|
40% |
|
|
|
37,505 |
|
|
|
26% |
|
North
America
|
|
|
3,584 |
|
|
|
8% |
|
|
|
2,972 |
|
|
|
4% |
|
|
|
10,248 |
|
|
|
6% |
|
|
|
8,068 |
|
|
|
6% |
|
Other
regions
|
|
|
8 |
|
|
|
* |
|
|
|
4 |
|
|
|
* |
|
|
|
45 |
|
|
|
* |
|
|
|
87 |
|
|
|
* |
|
Net
revenue
|
|
$ |
46,760 |
|
|
|
100% |
|
|
$ |
66,244 |
|
|
|
100% |
|
|
$ |
161,854 |
|
|
|
100% |
|
|
$ |
144,808 |
|
|
|
100% |
|
|
*
|
These
regions provided less than 1% of our net revenue in these
periods
|
The
following table sets forth net revenue of significant countries (in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
November
3,
|
|
|
November
1,
|
|
|
November
3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Singapore
|
|
$ |
7,949 |
|
|
$ |
19,238 |
|
|
$ |
33,484 |
|
|
$ |
29,450 |
|
France
|
|
|
7,586 |
|
|
|
7,915 |
|
|
|
21,410 |
|
|
|
24,217 |
|
Taiwan
|
|
|
7,487 |
|
|
|
2,603 |
|
|
|
12,870 |
|
|
|
8,673 |
|
China
|
|
|
6,178 |
|
|
|
5,371 |
|
|
|
16,470 |
|
|
|
11,185 |
|
Netherland
|
|
|
3,067 |
|
|
|
229 |
|
|
|
24,813 |
|
|
|
336 |
|
Hungary
|
|
|
2,661 |
|
|
|
1,985 |
|
|
|
7,437 |
|
|
|
3,428 |
|
Belgium
|
|
|
2,649 |
|
|
|
1,012 |
|
|
|
8,230 |
|
|
|
6,748 |
|
Korea
|
|
|
1,901 |
|
|
|
14,290 |
|
|
|
8,909 |
|
|
|
27,722 |
|
Japan
|
|
|
1,212 |
|
|
|
9,414 |
|
|
|
10,646 |
|
|
|
20,195 |
|
Rest
of the world
|
|
|
6,070 |
|
|
|
4,187 |
|
|
|
17,585 |
|
|
|
12,854 |
|
|
|
$ |
46,760 |
|
|
$ |
66,244 |
|
|
$ |
161,854 |
|
|
$ |
144,808 |
|
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
You
should read the following discussion in conjunction with our unaudited condensed
consolidated financial statements and related notes in this Form 10-Q and our
Form 10-K previously filed with the Securities and Exchange
Commission. Except for historical information, the following
discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. In some cases, you can identify
forward-looking statements by terms such as “may,” “expect,” “might,” “will,”
“intend,” “should,” “could,” and “estimate,” or the negative of these terms, and
similar expressions intended to identify forward-looking
statements. These forward-looking statements, include, among other
things, statements regarding our capital resources and needs, including the
adequacy of our current cash reserves, revenue, our expectations that our
operating expenses will increase in absolute dollars as our revenue grows and
our expectations that our gross margin will vary from period to
period. These forward-looking statements involve risks and
uncertainties. Our actual results may differ significantly from those
projected in the forward-looking statements. Factors that might cause
future results to differ materially from those discussed in the forward-looking
statements include, but are not limited to, those discussed under Part II,
Item 1A “Risk Factors” in this Form 10-Q as well as other information found
in the documents we file from time to time with the Securities and Exchange
Commission. Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this Form
10-Q. Unless required by U.S. Federal securities laws, we do not
intend to update any of these forward-looking statements to reflect
circumstances or events that occur after the statement is made.
Overview
We are a
leading fabless provider of highly integrated system-on-chip, or SoC, solutions
that are used to deliver multimedia entertainment throughout the
home. Our SoC solutions combine our semiconductors and software and
are a critical component of multiple high-growth, consumer applications that
process digital video and audio content, including IPTV set-top boxes, Blu-ray
DVD players, high definition televisions (HDTV), media communication devices and
other products. Our semiconductors are capable of a range of media
processing and communication functions, including high definition digital video
decoding for multiple compression standards, graphics acceleration, video image
processing, audio decoding, wireless communications, CPU and display
control. Our software provides system control as well as media
processing and system security management. Together, our
semiconductors and software form a complete SoC solution that we believe
provides our customers with a foundation to quickly develop feature-rich
consumer entertainment products. We believe we are the leading
provider of digital media processor SoCs for set-top boxes in the IPTV market
and one of the leading providers of such SoCs for the Blu-ray player
market, in terms of units shipped.
Our
primary target markets are IPTV, Blu-ray and other media players, prosumer and
industrial audio/video and HDTV markets. The IPTV market consists of
consumer and commercial products that distribute and receive streaming video
using internet protocol, or IP. The Blu-ray and other media players
market consists primarily of consumer Blu-ray DVD players, multi-function
products and portable media devices that perform playback of digital media
stored on optical or hard disk formats. The prosumer and industrial
audio/video market consists of studio quality audio/video receivers and
monitors, digital projectors and medical video monitors. The HDTV market
consists of digital television sets offering high definition capability,
including flat-panel and projection devices. We also sell products
into other markets such as the PC-based add-in market. We currently
derive minor revenues from sales of our products into these other
markets.
Our
primary product group consists of our SoC solutions. To a much lesser
extent, we provide other products, such as customized development boards and
wireless devices. For the nine months ended November 1, 2008 and
November 3, 2007, we derived 99% and 97%, respectively, of our net revenue from
our SoC solutions. Our SoC solutions consist of highly integrated
semiconductors and software that process digital video and audio
content. Our net revenue from sales of our SoC solutions increased
$20.2 million, or 14%, for the nine months ended November 1, 2008 as
compared to the corresponding period in the prior fiscal year. This
increase in our SoCs sales was in part attributable to many of our customers
commercially launching products incorporating our SoCs after successful initial
trials. We began volume shipments in January 2006 of our SMP8630
series, which is our latest SoC solution for our target markets. This
product series represented 83% and 79% of our net revenue for the nine months
ended November 1, 2008 and November 3, 2007, respectively. We believe
our success with the SMP8630 series product demonstrates our success in the
growing IPTV market and to a lesser extent, the recently emerging Blu-ray player
market.
We do not
enter into long-term commitment contracts with our customers and receive
substantially all of our net revenue based on purchase orders. We
forecast demand for our products based not only on our assessment of the
requirements of our direct customers, but also on the anticipated requirements
of the telecommunications carriers that our customers serve. We work
with both our direct customers and these carriers to address the market demands
and the necessary specifications for our technologies. However, our
failure to accurately forecast demand can lead to product shortages that can
impede production by our customers and harm our relationship with these
customers or lead to excess inventory, which could negatively impact our gross
margins in a particular period.
Many of
our target markets are characterized by intense price competition. In
addition, the semiconductor industry is highly competitive and, as a result, we
expect our average selling prices to decline over time. However, on
occasion, we have reduced our prices for individual customer volume orders as
part of our strategy to obtain a competitive position in our target
markets. The willingness of customers to design our SoCs into their
products depends to a significant extent upon our ability to sell our products
at competitive prices. If we are unable to reduce our costs
sufficiently to offset any declines in product selling prices or are unable to
introduce more advanced products with higher margins in a timely manner, we
could see declines in our market share or gross margins. We expect
our gross margins will vary from period to period due to changes in our average
selling prices, volume order discounts, mix of product sales, our costs, the
extent of development fees, changes in estimated useful lives of production
testing equipment and provisions for inventory obsolescence.
Share
Repurchase Program
On
February 27, 2008, we announced that our Board of Directors had approved a share
repurchase program that authorized us to repurchase up to 2.0 million shares of
our common stock. On March 18, 2008, we announced that our Board of
Directors had approved an increase of 3.0 million additional shares to the
program, resulting in a total amount authorized to be repurchased under the
share repurchase program of 5.0 million shares. The amount and timing
of specific repurchases are subject to market conditions, applicable legal
requirements and other factors, including management’s
discretion. Repurchases may be conducted in the open market or in
privately negotiated transactions and the repurchase program may be modified,
extended or terminated by the Board of Directors at any time. There
is no guarantee as to the exact number of shares that will be repurchased under
the program. As of November 1, 2008, we had purchased a cumulative
total of approximately 4.2 million shares of our common stock pursuant to the
repurchase program for an aggregate purchase price of $85.9 million at an
average price of $20.50 per share.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of financial condition and results of operations are
based on our unaudited condensed consolidated financial statements, which have
been prepared in accordance with United States generally accepted accounting
principles. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the unaudited condensed consolidated financial statements, and the reported
amounts of revenue and expenses during the period reported. By their
nature, these estimates and judgments are subject to an inherent degree of
uncertainty. Management bases its estimates and judgments on
historical experience, market trends, and other factors that are believed to be
reasonable under the circumstances. These estimates form the basis
for judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from
what we anticipate, and different assumptions or estimates about the future
could change our reported results. Management believes the critical
accounting policies as disclosed in our Annual Report on Form 10-K for the year
ended February 2, 2008 reflect the more significant judgments and estimates used
in preparation of our financial statements. Except for the update
provided in our Quarterly Report on Form 10-Q for the quarter ended August 2,
2008 on the valuation of inventory, management believes there have been no
material changes to our critical accounting policies and estimates during the
three months ended November 1, 2008 compared with those discussed in our Annual
Report on Form 10-K for the year ended February 2, 2008.
Results
of Operations
The
following table is derived from our unaudited condensed consolidated financial
statements and sets forth our historical operating results as a percentage of
net revenue for each of the periods indicated (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
% of
|
|
|
November
3,
|
|
|
% of
|
|
|
November
1,
|
|
|
% of
|
|
|
November
3,
|
|
|
% of
|
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
Net
revenue
|
|
$ |
46,760 |
|
|
|
100% |
|
|
$ |
66,244 |
|
|
|
100% |
|
|
$ |
161,854 |
|
|
|
100% |
|
|
$ |
144,808 |
|
|
|
100% |
|
Cost
of revenue
|
|
|
25,101 |
|
|
|
54% |
|
|
|
31,017 |
|
|
|
47% |
|
|
|
82,654 |
|
|
|
51% |
|
|
|
69,463 |
|
|
|
48% |
|
Gross
profit
|
|
|
21,659 |
|
|
|
46% |
|
|
|
35,227 |
|
|
|
53% |
|
|
|
79,200 |
|
|
|
49% |
|
|
|
75,345 |
|
|
|
52% |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
11,131 |
|
|
|
24% |
|
|
|
7,488 |
|
|
|
11% |
|
|
|
32,364 |
|
|
|
20% |
|
|
|
21,941 |
|
|
|
15% |
|
Sales
and marketing
|
|
|
3,102 |
|
|
|
7% |
|
|
|
2,785 |
|
|
|
4% |
|
|
|
8,526 |
|
|
|
5% |
|
|
|
7,709 |
|
|
|
5% |
|
General
and administrative
|
|
|
3,837 |
|
|
|
8% |
|
|
|
2,541 |
|
|
|
4% |
|
|
|
13,939 |
|
|
|
9% |
|
|
|
9,246 |
|
|
|
6% |
|
Acquired
in-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,571 |
|
|
|
1% |
|
|
|
— |
|
|
|
— |
|
Total
operating expenses
|
|
|
18,070 |
|
|
|
39% |
|
|
|
12,814 |
|
|
|
19% |
|
|
|
56,400 |
|
|
|
35% |
|
|
|
38,896 |
|
|
|
26% |
|
Income
from operations
|
|
|
3,589 |
|
|
|
7% |
|
|
|
22,413 |
|
|
|
34% |
|
|
|
22,800 |
|
|
|
14% |
|
|
|
36,449 |
|
|
|
26% |
|
Interest
income and other income, net
|
|
|
1,150 |
|
|
|
2% |
|
|
|
1,446 |
|
|
|
2% |
|
|
|
4,382 |
|
|
|
3% |
|
|
|
2,166 |
|
|
|
1% |
|
Income
before income taxes
|
|
|
4,739 |
|
|
|
9% |
|
|
|
23,859 |
|
|
|
36% |
|
|
|
27,182 |
|
|
|
17% |
|
|
|
38,615 |
|
|
|
27% |
|
Provision
for income taxes
|
|
|
1,068 |
|
|
|
2% |
|
|
|
2,909 |
|
|
|
4% |
|
|
|
7,338 |
|
|
|
5% |
|
|
|
3,708 |
|
|
|
3% |
|
Net
income
|
|
$ |
3,671 |
|
|
|
7% |
|
|
$ |
20,950 |
|
|
|
32% |
|
|
$ |
19,844 |
|
|
|
12% |
|
|
$ |
34,907 |
|
|
|
24% |
|
Net
revenue
Our net
revenue for the three and nine months ended November 1, 2008 decreased
approximately $19.5 million and increased approximately $17.0 million,
respectively, as compared to the corresponding periods in the prior fiscal
year. The decrease in net revenue for the three months ended November
1, 2008 compared to the prior year period was primarily due to lower demand for
our SoCs primarily as a result of current macroeconomic conditions and loss of
market share in the Blu-ray market. The increase in net revenue for
the nine months ended November 1, 2008 compared to the prior year period was
primarily due to strong growth in our SoCs sold into the IPTV market in the
first half of 2009 compared to the first half of 2008.
Net
revenue by target market
We sell
our products into four primary markets, which are the IPTV market, the Blu-ray
and other media players market, the prosumer and industrial audio/video market
and the HDTV market. We also sell our products, to a lesser extent,
into several other markets, such as the PC-based add-in market, which we refer
to collectively as our other market. The following table sets forth
our net revenue by target market and the percentage of net revenue represented
by our product sales to each target market (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
%
of
|
|
|
November
3,
|
|
|
%
of
|
|
|
November
1,
|
|
|
%
of
|
|
|
November
3,
|
|
|
%
of
|
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
IPTV
|
|
$ |
35,708 |
|
|
|
77% |
|
|
$ |
47,714 |
|
|
|
72% |
|
|
$ |
127,892 |
|
|
|
79% |
|
|
$ |
104,023 |
|
|
|
72% |
|
Blu-ray
and other media players
|
|
|
7,621 |
|
|
|
16% |
|
|
|
16,660 |
|
|
|
25% |
|
|
|
23,357 |
|
|
|
14% |
|
|
|
34,755 |
|
|
|
24% |
|
Prosumer
and industrial audio/video
|
|
|
2,035 |
|
|
|
4% |
|
|
|
— |
|
|
|
— |
|
|
|
5,863 |
|
|
|
4% |
|
|
|
— |
|
|
|
— |
|
HDTV
|
|
|
384 |
|
|
|
1% |
|
|
|
571 |
|
|
|
1% |
|
|
|
870 |
|
|
|
1% |
|
|
|
3,381 |
|
|
|
2% |
|
Other
|
|
|
1,012 |
|
|
|
2% |
|
|
|
1,299 |
|
|
|
2% |
|
|
|
3,872 |
|
|
|
2% |
|
|
|
2,649 |
|
|
|
2% |
|
Net
revenue
|
|
$ |
46,760 |
|
|
|
100% |
|
|
$ |
66,244 |
|
|
|
100% |
|
|
$ |
161,854 |
|
|
|
100% |
|
|
$ |
144,808 |
|
|
|
100% |
|
IPTV: The decrease of
$12.0 million, or 25% in net revenue from sales into the IPTV market for the
three months ended November 1, 2008 as compared to the corresponding period in
the prior fiscal year was primarily attributable to overall slowdown in the IPTV
market as a result of current macroeconomic conditions. The increase
of $23.9 million, or 23% in net revenue from sales into the IPTV market for the
nine months ended November 1, 2008 as compared to the corresponding period in
the prior fiscal year was primarily attributable to the increased volume of SoCs
shipped to our customers in the IPTV market incorporating our SoCs into their
products, primarily our SMP8630 SoC series, in the first half of 2009 compared
to the first half of 2008.
Blu-ray and other
media players: The decrease of
$9.0 million, or 54%, and $11.4 million, or 33% in net revenue from Blue-ray and
other media players for the three and nine months ended November 1, 2008,
respectively, compared to the corresponding period in the prior fiscal year was
primarily attributable to our loss of market share in this segment resulting in
decreased sales volume of our SoCs.
Prosumer and
industrial audio/video: Our net revenue
from sales into the prosumer and industrial audio/video market increased $2.0
million, or 100%, and $5.9 million, or 100% for the three and nine months ended
November 1, 2008, respectively, compared to the corresponding periods in the
prior fiscal year. These increases were driven by our entry into
these markets through our acquisition of the VXP product line in February
2008.
HDTV: Our net revenue
from sales into the HDTV market decreased $0.2 million, or 33%, for the three
months ended November 1, 2008 compared to the corresponding period in the prior
fiscal year. Our net revenue from sales into the HDTV market
decreased $2.5 million, or 74%, for the nine months ended November 1, 2008
compared to the corresponding period in the prior fiscal year.
Other: Our other markets
consist of PC add-ins and other ancillary markets. Sales to our other
markets for the three months ended November 1, 2008 decreased $0.3 million, or
22%, compared to the corresponding period in the prior year. Sales to
our other markets for the nine months ended November 1, 2008 increased $1.2
million, or 46%, compared to the corresponding period in the prior
year.
Net
revenue by product group
Our
primary product group consists of our SoC solutions. To a lesser
extent, we derive net revenue from other products and services. The
following table sets forth net revenue in each of our product groups and the
percentage of net revenue represented by each product group (in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
%
of
|
|
|
November
3,
|
|
|
%
of
|
|
|
November
1,
|
|
|
%
of
|
|
|
November
3,
|
|
|
%
of
|
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
SoCs
|
|
$ |
46,035 |
|
|
|
98% |
|
|
$ |
65,035 |
|
|
|
98% |
|
|
$ |
160,981 |
|
|
|
99% |
|
|
$ |
140,780 |
|
|
|
97% |
|
Other
|
|
|
725 |
|
|
|
2% |
|
|
|
1,209 |
|
|
|
2% |
|
|
|
873 |
|
|
|
1% |
|
|
|
4,028 |
|
|
|
3% |
|
Net
revenue
|
|
$ |
46,760 |
|
|
|
100% |
|
|
$ |
66,244 |
|
|
|
100% |
|
|
$ |
161,854 |
|
|
|
100% |
|
|
$ |
144,808 |
|
|
|
100% |
|
SoCs: Our
SoCs are targeted toward manufacturers and large volume designer and
manufacturer customers building products for the IPTV, Blu-ray and other media
players, prosumer and industrial audio/video and HDTV markets. The
decrease of $19.0 million, or 29%, in net revenue from SoCs for the three months
ended November 1, 2008 compared to the corresponding period in the prior fiscal
year was due primarily to decreased demand in sales of IPTV products primarily
as a result of current macroeconomic conditions and loss of market share in the
Blu-ray market. The increase of $20.2 million, or 14%, in net revenue
from SoCs for the nine months ended November 1, 2008 compared to the
corresponding period in the prior fiscal year was due primarily to increased
demand in sales of IPTV products in the first half of 2009 compared to the first
half of 2008.
Other: We derive revenue
from other products and services, including engineering support services from
sales of hardware and software, engineering development for customization of
SoCs and other accessories and wireless devices. The decrease of $0.5
million, or 40%, for the three months ended November 1, 2008 compared to the
corresponding period in the prior fiscal year was due to lower sales of our
engineering development kits related to our SoCs and support
services. The decrease of $3.2 million, or 78%, for the nine months
ended November 1, 2008 compared to the corresponding period in the prior fiscal
year was due to lower sales of our engineering development kits related to our
SoCs and support services.
Net
revenue by geographic region
The
following table sets forth our net revenue by geographic region and the
percentage of net revenue represented by each geographic region based on the
invoicing location of each customer (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
%
of
|
|
|
November
3,
|
|
|
%
of
|
|
|
November
1,
|
|
|
%
of
|
|
|
November
3,
|
|
|
%
of
|
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
Asia
|
|
$ |
26,287 |
|
|
|
56% |
|
|
$ |
50,939 |
|
|
|
77% |
|
|
$ |
86,927 |
|
|
|
54% |
|
|
$ |
99,148 |
|
|
|
68% |
|
Europe
|
|
|
16,881 |
|
|
|
36% |
|
|
|
12,329 |
|
|
|
19% |
|
|
|
64,634 |
|
|
|
40% |
|
|
|
37,505 |
|
|
|
26% |
|
North
America
|
|
|
3,584 |
|
|
|
8% |
|
|
|
2,972 |
|
|
|
4% |
|
|
|
10,248 |
|
|
|
6% |
|
|
|
8,068 |
|
|
|
6% |
|
Other
regions
|
|
|
8 |
|
|
|
* |
|
|
|
4 |
|
|
|
* |
|
|
|
45 |
|
|
|
* |
|
|
|
87 |
|
|
|
* |
|
Net
revenue
|
|
$ |
46,760 |
|
|
|
100% |
|
|
$ |
66,244 |
|
|
|
100% |
|
|
$ |
161,854 |
|
|
|
100% |
|
|
$ |
144,808 |
|
|
|
100% |
|
|
*
|
These
regions provided less than 1% of our net revenue in these
periods
|
In
general, our products are components of a larger system and as such are
delivered to the point of manufacturing for these systems, which is primarily
Asia. However, as our customers periodically change their supplier
contracts, the geographic region of consumption may fluctuate.
Asia: Our net revenue
in absolute dollars from Asia decreased $24.7 million, or 48% in
the three months ended November 1, 2008 compared to the corresponding period in
the prior fiscal year. Our net revenue from Asia represented 56% and
77% of our net revenue for the three months ended November 1, 2008 and November
3, 2007, respectively. This 21% decrease as a percentage of revenue
was primarily due to the disproportionate increase in shipments to European
based manufacturing during the three months ended November 1, 2008.
Our net
revenue in absolute dollars from Asia decreased $12.2 million, or
12% in the nine months ended November 1, 2008 compared to the corresponding
period in the prior fiscal year. Our net revenue from Asia
represented 54% and 68% of our net revenue for the nine months ended November 1,
2008 and November 3, 2007, respectively. This 14% decrease as a
percentage of revenue was primarily due to the disproportionate increase in
shipments to European based manufacturing during the nine months ended November
1, 2008.
The
following table sets forth the percentage of net revenue from countries in the
Asia region that accounted for 10% or more of our net revenue:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
November
3,
|
|
|
November
1,
|
|
|
November
3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Singapore
|
|
|
17% |
|
|
|
29% |
|
|
|
21% |
|
|
|
20% |
|
Taiwan
|
|
|
16% |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
China
|
|
|
13% |
|
|
|
* |
|
|
|
10% |
|
|
|
* |
|
Korea
|
|
|
* |
|
|
|
22% |
|
|
|
* |
|
|
|
19% |
|
Japan
|
|
|
* |
|
|
|
14% |
|
|
|
* |
|
|
|
14% |
|
|
*
|
Net
revenue from this country was less than 10% of our net
revenue
|
Europe: Our
net revenue in absolute dollars from Europe increased $4.6 million, or 37%, for
the three months ended November 1, 2008 compared to the corresponding period in
the prior fiscal year. The increase in our net revenue from Europe
was primarily attributable to major deployments by our European customers using
our IPTV SoCs in their products, who also began manufacturing their systems in
Europe.
Our net
revenue in absolute dollars from Europe increased $27.1 million, or 72%, for the
nine months ended November 1, 2008 compared to the corresponding period in the
prior fiscal year. The increase in our net revenue from Europe was
primarily attributable to major deployments by our European customers using our
IPTV SoCs in their products, who also began manufacturing their systems in
Europe.
Our
revenue from Europe in any given period may also fluctuate depending on whether
our European customers place their orders locally or through their non-European
manufacturers who incorporate our SoCs into their products.
The
following table sets forth the percentage of net revenue from countries in
Europe that accounted for 10% or more of our net revenue:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
November
3,
|
|
|
November
1,
|
|
|
November
3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Netherlands
|
|
|
* |
|
|
|
* |
|
|
|
15% |
|
|
|
* |
|
France
|
|
|
16% |
|
|
|
12% |
|
|
|
13% |
|
|
|
17% |
|
|
*
|
Net
revenue from this country was less than 10% of our net
revenue
|
North
America: Our net revenue
in absolute dollars from North America increased $0.6 million, or 21%, for the
three months ended November 1, 2008 compared to the corresponding period in the
prior fiscal year. The increase in the comparative three month period
is very small in absolute value and can be attributed to revenue from sales of
our VXP products, which we commenced selling in February 2008 as well as shifts
in demand, product mix and other variables.
Our net
revenue from North America increased $2.2 million, or 27%, for the nine months
ended November 1, 2008 compared to the corresponding period in the prior fiscal
year. The increase in the comparative nine month period is very small
in absolute value and can be attributed to revenue from sales of our VXP
products, which we commenced selling in February 2008 as well as shifts in
demand, product mix and other variables..
Our
revenue from North America in any given period fluctuates depending on whether
our customers place their orders locally or through overseas manufacturers who
incorporate our SoCs into their products.
For the
three months and nine months ended November 1, 2008, our net revenue generated
outside North America was 92% and 94% of our net revenue, respectively, as
compared to 96% and 94%, respectively, in the corresponding periods in the prior
fiscal year.
Major
Customers
The
following table sets forth the major customers that accounted for 10% or more of
our net revenue:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
November
3,
|
|
|
November
1,
|
|
|
November
3,
|
|
Customer
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
MTC
Singapore
|
|
|
17% |
|
|
|
29% |
|
|
|
21% |
|
|
|
20% |
|
Cisco
Systems
|
|
|
12% |
** |
|
|
* |
|
|
|
20% |
|
|
|
* |
|
Netgem
|
|
|
11% |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Uniquest
Corp.
|
|
|
* |
|
|
|
22% |
|
|
|
* |
|
|
|
19% |
|
Macnica,
Inc.
|
|
|
* |
|
|
|
14% |
|
|
|
* |
|
|
|
13% |
|
Freebox
SA
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
11% |
|
|
*
|
These
customers provided less than 10% of our net revenue in these
periods
|
|
**
|
During
the three months ended November 1, 2008, Cisco Systems outsourced its
manufacturing to two subcontractors, which totaled 12% of our net
revenue
|
Gross
Profit and Gross Margin
The
following table sets forth gross profit and gross margin (in
thousands):
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
November
1,
|
|
%
|
|
|
November
3,
|
|
November
1,
|
|
|
%
|
|
|
November
3,
|
|
|
|
2008
|
|
|
change
|
|
|
2007
|
|
|
2008
|
|
|
change
|
|
|
2007
|
|
Gross
profit
|
|
$ |
21,659 |
|
|
|
-39% |
|
|
$ |
35,227 |
|
|
$ |
79,200 |
|
|
|
5% |
|
|
$ |
75,345 |
|
Gross
margin
|
|
|
46.3% |
|
|
|
|
|
|
|
53.2% |
|
|
|
48.9% |
|
|
|
|
|
|
|
52.0% |
|
The gross
margin percentage decreased 6.9% and 3.1% for the three and nine months ended
November 1, 2008 compared to the three and nine months ended November 3, 2007,
respectively. The decrease for the three and nine months ended
November 1, 2008 is attributable to decline in our average selling prices, an
increase in our assembly costs due to the cost of gold, overhead absorption
and the write down of older inventory.
Operating
Expenses
The
following table sets forth operating expenses and percent change in operating
expenses (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
%
|
|
|
November
3,
|
|
|
November
1,
|
|
|
%
|
|
|
November
3,
|
|
|
|
2008
|
|
|
change
|
|
|
2007
|
|
|
2008
|
|
|
change
|
|
|
2007
|
|
Research
and development expenses
|
|
$ |
11,131 |
|
|
|
49% |
|
|
|
$ |
7,488 |
|
|
$ |
32,364 |
|
|
|
48% |
|
|
|
$ |
21,941 |
|
Sales
and marketing expenses
|
|
|
3,102 |
|
|
|
11% |
|
|
|
|
2,785 |
|
|
|
8,526 |
|
|
|
11% |
|
|
|
|
7,709 |
|
General
and administrative expenses
|
|
|
3,837 |
|
|
|
51% |
|
|
|
|
2,541 |
|
|
|
13,939 |
|
|
|
51% |
|
|
|
|
9,246 |
|
Acquired
in-process R&D
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
1,571 |
|
|
|
100% |
|
|
|
|
— |
|
Total
operating expenses
|
|
$ |
18,070 |
|
|
|
41% |
|
|
|
$ |
12,814 |
|
|
$ |
56,400 |
|
|
|
45% |
|
|
|
$ |
38,896 |
|
Research and
development expenses: Research and
development expenses increased by $3.6 million, or 49%, for the three months
ended November 1, 2008 as compared with the corresponding period in the prior
fiscal year. This
increase is primarily attributable to an increase of $2.1 million in salaries,
wages and benefit expenses due to increased headcount and salary; an increase of
$0.5 million in share-based compensation expense; an increase of $0.8 million in
license fees, consulting services and supplies; an increase of $0.2 million in
rent and facilities related costs and an increase of $0.3 million in
depreciation and amortization and other expenses, offset by a decrease of $0.3
million in non-recurring engineering costs to develop our products.
Research
and development expenses increased by $10.4 million, or 48%, for the nine months
ended November 1, 2008 as compared with the corresponding period in the prior
fiscal year. This
increase is primarily attributable to an increase of $7.3 million in salaries,
wages and benefit expenses due to increased headcount and salary; an increase of
$0.1 million in share-based compensation expense; an increase of $2.0 million in
license fees, consulting services, supplies and non-recurring engineering costs
to develop our products; an increase of $0.4 million in rent and facilities
related costs; and an increase of $0.6 million in depreciation and amortization
and other expenses.
Sales and
marketing expenses: Sales and marketing expenses increased by
$0.3 million, or 11%, for the three months ended November 1, 2008 as compared
with the corresponding period in the prior fiscal year. This increase
is primarily attributable to an increase of $0.5 million in share-based
compensation expense and an increase of $0.1 million in depreciation and
amortization and other expenses, offset by a decrease of $0.3 million in
salaries, wages, commission and benefit expenses.
Sales and
marketing expenses increased by $0.8 million, or 11%, for the nine months ended
November 1, 2008 as compared with the corresponding period in the prior fiscal
year. This increase is primarily attributable to an increase of $0.3
million in salaries, wages, commission and benefit expenses; an increase of $0.3
million in share-based compensation expense; and an increase of $0.2 million in
depreciation and amortization and other expenses.
General and
administrative expenses: General and
administrative expenses increased by $1.3 million, or 51%, for the three months
ended November 1, 2008 as compared with the corresponding period in the prior
fiscal year. This increase is primarily attributable to an increase
of $0.3 million in salaries, wages and benefit expenses; an increase of $0.2
million in share-based compensation expense; an increase of $0.4 million in
professional fees related primarily to audit and tax services; an increase of
$0.3 million in other professional fees; an increase of $0.1 million in
insurance expense and an increase of $0.1 million in travel, entertainment and
other expenses, offset by a decrease of $0.1 million in legal fees.
General
and administrative expenses increased by $4.7 million, or 51%, for the nine
months ended November 1, 2008 as compared with the corresponding period in the
prior fiscal year. This increase is primarily attributable to an
increase of $1.0 million in salaries, wages and benefit expenses, an increase of
$2.6 million in share-based compensation expense; an increase of $1.2 million in
professional fees related primarily to audit and tax services; an increase of
$0.6 million in other professional fees; an increase of $0.4 million in
insurance expense; and an increase of $0.2 million in travel, entertainment and
other expenses; which was partially offset by a decrease of $1.3 million in
legal and other professional fees, which were higher in the prior fiscal year
mostly related to the review of our historical stock option granting practices
of previous fiscal years.
Acquired
in-process research and development: Acquired in-process
research and development, or IPR&D, totaled $1.6 million as a result of
the VXP acquisition completed on February 8, 2008. The amounts
allocated to IPR&D were determined through established valuation techniques
used in the high technology industry and were expensed upon acquisition as it
was determined that the underlying projects had not reached technological
feasibility and no alternative future uses existed. IPR&D is a
one-time expense related to the VXP acquisition recognized during the quarter in
which we closed the VXP acquisition.
Share-based
compensation expense: The following table sets forth the total
share-based compensation expense that is included in each functional line item
in the unaudited condensed consolidated statements of operations (in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
November
3,
|
|
|
November
1,
|
|
|
November
3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cost
of revenue
|
|
$ |
87 |
|
|
$ |
130 |
|
|
$ |
261 |
|
|
$ |
318 |
|
Research
and development expenses
|
|
|
1,239 |
|
|
|
762 |
|
|
|
3,892 |
|
|
|
2,315 |
|
Sales
and marketing expenses
|
|
|
796 |
|
|
|
338 |
|
|
|
1,536 |
|
|
|
827 |
|
General
and administrative expenses
|
|
|
655 |
|
|
|
468 |
|
|
|
4,246 |
|
|
|
1,278 |
|
Total
share-based compensation
|
|
$ |
2,777 |
|
|
$ |
1,698 |
|
|
$ |
9,935 |
|
|
$ |
4,738 |
|
Accounting
for employee stock options grants will continue to have an adverse impact on our
results of operations. Future share-based compensation expense and
unearned share-based compensation will increase to the extent that we grant
additional equity awards to employees or assume unvested equity awards in
connection with acquisitions.
Amortization of
intangible assets: Amortization
expense of $0.6 million and $1.7 million for acquired developed technology for
the three and nine months ended November 1, 2008, respectively, and $0.2 million
and $0.6 million, for the corresponding periods of the prior fiscal year, is
classified as cost of sales. Amortization expense of $0.1 million and
$0.4 million for other purchased intangible assets for the three months and nine
months ended November 1, 2008, respectively, and $0.1 million and $0.4 million,
for the corresponding periods of the prior fiscal year, is classified as
research and development expense. Amortization expense of $0.1 million and $0.2
million for other purchased intangible assets for the three months and nine
months ended November 1, 2008, respectively, and no amortization expense for the
corresponding periods of the prior fiscal year, is classified as sales and
marketing expense. At November 1, 2008, the unamortized balance from
purchased intangible assets was $12.0 million which will be amortized to future
periods based on their respective remaining estimated useful
lives. If we purchase additional intangible assets in the future, our
cost of revenue or other operating expenses will increase by the amortization of
those assets.
Interest
and other income, net
The
following table sets forth net interest and other income and the percent change
in interest and other income, net (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
%
|
|
|
November
3,
|
|
November
1,
|
|
|
%
|
|
|
November
3,
|
|
|
|
2008
|
|
|
change
|
|
|
2007
|
|
|
2008
|
|
|
change
|
|
|
2007
|
|
Interest
and other income, net
|
|
$ |
1,150 |
|
|
|
-20% |
|
|
$ |
1,446 |
|
|
$ |
4,382 |
|
|
|
102% |
|
|
$ |
2,166 |
|
The
decrease of $0.3 million, or 20% for the three months ended November 1, 2008
compared with the corresponding period in the prior fiscal year was due
primarily to a decrease in our total cash, cash equivalents and marketable
securities as a result of our share repurchases. The increase of $2.2
million, or 102% for the nine months ended November 1, 2008 compared with the
corresponding period in the prior fiscal year was due primarily to an increase
in our cash, cash equivalents and marketable securities, the balances of which
increased significantly during the last three months of fiscal 2008 as a result
of cash generated from operations and the follow-on public offering of our
common stock completed in October 2007, offset by a decrease in our cash as a
result of our share repurchases.
Provision
for income taxes
We
recorded a provision for income taxes of $1.1 million and $7.3 million for the
three months and nine months ended November 1, 2008, respectively, and $2.9
million and $3.7 million, respectively, for the corresponding periods of the
prior fiscal year. The effective tax rate for 2009 was approximately
23% and 27% for the three months and nine months ended November 1, 2008,
respectively. Our fiscal 2009 effective tax rate differs from the
combined federal and state statutory rate of 37% primarily due to our
international operations strategy, which resulted in a foreign tax differential
benefit.
Liquidity
and Capital Resources
The
following table sets forth the balances of cash and cash equivalents and
short-term marketable securities (in millions):
|
|
November
1,
|
|
|
February
2,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
90.8 |
|
|
$ |
174.1 |
|
Short-term
marketable securities
|
|
|
41.5 |
|
|
|
44.4 |
|
|
|
$ |
132.3 |
|
|
$ |
218.5 |
|
As of
November 1, 2008, our principal sources of liquidity consisted of cash and cash
equivalents and short-term marketable securities of $132.3 million, which
represents a decrease of $86.2 million from $218.5 million at February 2,
2008. The decrease in cash and cash equivalents and marketable
securities was primarily the result of our repurchase of 4.2 million shares of
our common stock for approximately $85.9 million during the nine months ended
November 1, 2008.
Cash
flows from operating activities
The
following table sets forth the net (decrease) or increase in cash and cash
equivalents summarized by operating, investing and financing activities (in
millions):
|
|
Nine
Months Ended
|
|
|
|
November
1,
|
|
|
November
3,
|
|
|
|
2008
|
|
|
2007
|
|
Net
cash (used in) provided by:
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
29.7 |
|
|
$ |
23.3 |
|
Investing
activities
|
|
|
(34.5 |
) |
|
|
(92.2 |
) |
Financing
activities
|
|
|
(78.2 |
) |
|
|
209.2 |
|
Effect
of foreign rate changes on cash and cash equivalents
|
|
|
(0.3 |
) |
|
|
0.2 |
|
Net
(decrease) increase in cash and cash equivalents
|
|
$ |
(83.3 |
) |
|
$ |
140.5 |
|
Net cash
provided by operating activities was $29.7 million for the nine months
ended November 1, 2008. The cash provided by our operating activities
for the nine months ended November 1, 2008 was primarily due to net income of
$19.8 million, non-cash expenses of $22.9 million, a $13.5 million decrease in
accounts receivable and a $2.3 million increase in other long-term liabilities.
These amounts were partially offset by a $17.6 million increase in inventories,
a $10.2 million decrease in accounts payable and other accrued liabilities, a
$0.9 million increase in prepaid expenses and other assets and a $0.1 million
increase in other non-current assets. The increase in inventory for
the nine months ended November 1, 2008 was due primarily to strategic purchases
of raw materials. The decrease in accounts payable and accrued liabilities was
due primarily to the timing of payments for inventories, tax liabilities and
software licenses. The increase in prepaid expenses and other assets was
primarily due to purchases of production mask sets to be used in manufacturing
our products. The decrease in accounts receivable for the nine months ended
November 1, 2008 was primarily the result of decreased billings due to decreased
product shipments during the third quarter, which was substantially offset by
increased sales to customers with payment terms greater than net 30
days. Non-cash charges included share-based compensation of $9.9
million in the nine months ended November 1, 2008.
Net cash
provided by operating activities was $23.3 million for the nine months
ended November 3, 2007. The cash provided by our operating activities
in the nine months ended November 3, 2007 was primarily due to net income of
$34.9 million, non-cash expenses of $8.8 million, a $4.2 million increase in
accounts payable and accrued liabilities and a $0.3 million increase in other
long-term liabilities. These amounts were partially offset by
increases in accounts receivable of $20.6 million, a $3.2 million increase in
inventory and a $1.2 million increase in prepaid expenses and other
assets. The increases in inventory and accounts receivable in the
nine months ended November 3, 2007 were associated with the increase in our net
revenues during the period primarily as a result of increased sales into the
IPTV market.
Cash
flows from our operating activities will continue to fluctuate based upon our
ability to achieve revenue growth while managing the timing of payments to us
from customers and to vendors from us, the timing of inventory purchases and
subsequent manufacture and sale of our products.
Cash
flows from investing activities
Net cash
used in our investing activities was $34.5 million for the nine months ended
November 1, 2008 which was primarily due to cash paid in connection with
acquisition of VXP Group of $18.6 million, purchases of software, equipment and
leasehold improvements of $10.5 million and net purchases of marketable
securities of $5.4 million.
Net cash
used in our investing activities was $92.2 million for the nine months ended
November 3, 2007, primarily due to net purchases of marketable securities of
$89.4 million and purchases of software, equipment and leasehold
improvements of $2.8 million.
Cash
flows from financing activities
Net cash
used in financing activities was $78.2 million in the nine months ended
November 1, 2008, which was the result of $85.9 million for the purchase of 4.2
million shares of our common stock, partially offset by $4.5 million of excess
tax benefit from share-based compensation and $3.3 million of proceeds from the
exercise of employee stock options.
Net cash
provided by financing activities was $209.2 million in the nine months
ended November 3, 2007, which primarily consisted of $198.9 million of proceeds
from our follow-on offering, $7.2 million of proceeds from the exercise of
employee stock options and $3.4 million excess tax benefit from share-based
compensation, partially offset by our repayment of our outstanding term loan of
$0.2 million.
Liquidity
To date,
our primary sources of funds have been proceeds from common stock
issuances. In certain periods, including fiscal 2008 and the first
nine months of fiscal 2009, cash generated from operations has also been a
source of funds. While we generated cash from operations in the nine
months ended November 1, 2008 and November 3, 2007, it is possible that our
operations will consume cash in future periods. Based on our
currently anticipated cash needs, we believe that our current reserve of cash
and cash equivalents will be sufficient to meet our primary uses of cash, which
include our anticipated working capital requirements, obligations, capital
expenditures, strategic investments and other cash needs for at least the next
twelve months. Cash will continue to fluctuate based upon our ability
to grow revenue and the timing of payments to us from customers and from us to
vendors, the timing of inventory purchases and subsequent manufacture and sale
of our products.
At
November 1, 2008, we held approximately $43.0 million of investments,
currently classified in our long-term marketable securities, with an interest
rate reset by an auction feature, which are referred to as "ARS.” In
recent months, the auctions failed for all of our ARS. There is no
assurance that future auctions will succeed and, as a result, our ability to
liquidate our investments and fully recover the carrying value of our ARS in the
near term may be limited or not exist. An auction failure means that
the parties wishing to sell securities could not. All of our ARS were
rated AAA or Aaa at the time of purchase, the highest rating, by a rating
agency. As of November 1, 2008, all of our ARS remained rated AAA or
Aaa. If the issuers of these ARS are unable to successfully close
future auctions and their credit ratings deteriorate, we may in the future be
required to record an impairment charge on these investments. We
believe that the underlying credit quality of the assets backing our ARS has not
been impacted by the reduced liquidity of these investments. In
October 2008, our cash investment advisor, UBS, acknowledged our acceptance of
its proposal of a comprehensive settlement agreement in principle for its
clients holding ARS, in which all the ARS currently in our portfolio could be
redeemed at par value. The offer to redeem will be at our option
during a two year period beginning in June 2010. The offer also gives
UBS the discretion to buy any or all of these securities from us at par value at
any time. We do not expect to incur any decline in
carrying value associated with these ARS and have classified all ARS held at
November 1, 2008 as long-term marketable securities consistent with their stated
maturities which range from 30 to 40 years. Additionally, the
proposed solution by UBS to the lack of liquidity of our ARS included a
commitment effective October 2008 through June 2010 to loan an amount up to the
full face value of the ARS. The interest charged on such loan would
be equal to the amount of interest being paid by the issuers of the securities
borrowed against.
Based on
our expected operating cash flows and our other sources of cash, we do not
anticipate the potential lack of liquidity on these ARS will affect our ability
to execute our current business plan.
Contractual
obligations and commitments
We do not
have guaranteed price or quantity commitments from any of our
suppliers. We generally maintain products for sale through
distributors based on forecasts rather than firm purchase
orders. Additionally, we generally manufacture products for sale to
our customers and acquire the necessary materials to manufacture those products,
in advance of receiving purchase orders from such customers. Purchase
orders with delivery dates longer than 12 weeks from the date of the order are
typically cancelable until four weeks prior to the scheduled delivery date
without substantial penalty to our customers. For our larger volume
designer and manufacturer customers, purchase orders for our products are
generally non-cancelable between four and 12 weeks in advance of scheduled
delivery dates, and within four weeks of scheduled delivery dates are also
generally non-reschedulable.
The
following table sets forth the amounts of payments due under specified
contractual obligations as of November 1, 2008 (in thousands):
|
|
Payments
Due by Period
|
|
|
|
1
year
|
|
|
1
- 3 |
|
|
3
- 5 |
|
|
|
|
|
|
|
Contractual
Obligations
|
|
or
less
|
|
|
years
|
|
|
years
|
|
|
thereafter
|
|
|
Total
|
|
Operating
leases
|
|
$ |
386 |
|
|
$ |
2,977 |
|
|
$ |
2,785 |
|
|
$ |
3,142 |
|
|
|
9,290 |
|
Non-cancelable
purchase orders
|
|
|
4,045 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,045 |
|
|
|
$ |
4,431 |
|
|
$ |
2,977 |
|
|
$ |
2,785 |
|
|
$ |
3,142 |
|
|
$ |
13,335 |
|
Off-balance
sheet transactions
As of
November 1, 2008, we did not have any off-balance sheet
arrangements.
Recent
accounting pronouncements
In
February 2008, the Financial Accounting Standards Board (“FASB”) issued
FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement
No.157 (“FSP 157-2), which delays the effective date of SFAS
No. 157, Fair Value
Measurements (“SFAS 157”), for all non-recurring fair value measurements
of non-financial assets and non-financial liabilities until fiscal years
beginning after November 15, 2008. We are currently evaluating the
financial impact of FSP 157-2 on its financial position and results of
operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill
acquired. SFAS 141R also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination and requires related acquisition costs to be expensed in the period
incurred. SFAS 141R is effective for fiscal years beginning after
December 15, 2008. We are currently evaluating the potential
impact, if any, of the adoption of SFAS 141R on its condensed consolidated
results of operations and financial condition.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
following discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those
projected in the forward-looking statements. We face exposure to
market risk from adverse movements in interest rates and foreign currency
exchange rates, which could impact our operations and financial
condition. We do not use derivative financial instruments for
speculative purposes.
Interest Rate
Sensitivity: As of November 1, 2008 and February 2, 2008, we
held approximately $197.3 million and $275.7 million, respectively, of cash,
cash equivalents, short-term marketable securities and long-term marketable
securities. If short-term interest rates were to decrease 10%, the
decreased interest income associated with these money market funds and
marketable securities would not have a significant impact on our net income and
cash flows.
As of
November 1, 2008, we held approximately $43.0 million of investments,
currently classified in our long-term marketable securities, with an interest
rate reset by an auction feature, which are referred to as "ARS.” In
late February and March 2008, auctions failed for all of our ARS and there is no
assurance that future auctions will succeed and as a result our ability to
liquidate our investments and fully recover the carrying value of our marketable
securities in the near term may be limited or not exist. An auction
failure means that the parties wishing to sell securities could
not. All of our ARS, including those subject to the failure, were
rated AAA or Aaa at the time of purchase, the highest rating, by a rating
agency. If the issuers of these ARS are unable to successfully close
future auctions and their credit ratings deteriorate, we may in the future be
required to record an impairment charge on these marketable
securities. We believe that the underlying credit quality of the
assets backing our ARS have not been impacted by the reduced liquidity of these
investments. We are continuing to evaluate the credit quality,
classification and valuation of our ARS; however, we are not yet able to
quantify the amount of impairment, if any, or change in classification in these
investments at this time. If these auctions continue to fail and the
credit ratings of these investments deteriorate, the fair value of these ARS may
decline and we may incur impairment charges in connection with these securities,
which would negatively affect our reported earnings, cash flow and financial
condition. In October 2008, our cash investment advisor, UBS,
acknowledged our acceptance of its proposal of a comprehensive settlement
agreement in principle for its clients holding ARS, in which all the ARS
currently in our portfolio could be redeemed at par value. The offer
to redeem will be at our option during a two year period beginning in June
2010. The offer also gives UBS the discretion to buy any or all of
these securities from us at par value at any time. We do not expect
to incur any decline in carrying value associated with these ARS and have
classified all ARS held at November 1, 2008 as long-term marketable securities
consistent with their stated maturities which range from 30 to 40
years. Additionally, the proposed solution by UBS to the lack of
liquidity of our ARS included a commitment effective October 2008 through June
2010 to loan an amount up to the full par value of the ARS. The
interest charged on such loan would be equal to the amount of interest being
paid by the issuers of the securities borrowed against. Based on our
expected operating cash flows, and our other sources of cash, we do not
anticipate the potential lack of liquidity of these investments will affect our
ability to execute our current business plan.
Our
short-term marketable securities generally consist of U.S. government agency and
high grade corporate debt securities with an average original maturity of less
than one year. Our long-term marketable securities generally consist
of state and U.S. government agency and high grade corporate debt securities
with an original maturity of more than one year, but no more than two
years. If short-term interest rates were to decrease 10%, the
decreased interest income associated with these short-term investments would not
have a significant impact on our net income and cash flows.
Foreign Currency
Exchange Rate Sensitivity: The Hong Kong dollar, Canadian
dollar and Euro are the primary financial currencies of our subsidiaries in Hong
Kong, Canada and France, respectively. We do not currently enter into
foreign exchange forward contracts to hedge certain balance sheet exposures and
inter-company balances against future movements in foreign exchange
rates. However, we do maintain cash balances denominated in the Hong
Kong dollar, Canadian dollar, Euro and Singapore dollar. If foreign
exchange rates were to weaken against the U.S. dollar immediately and uniformly
by 10% from the exchange rate at November 1, 2008 or February 2, 2008, the fair
value of these foreign currency amounts would decline by an insignificant
amount.
ITEM 4. CONTROLS
AND PROCEDURES
We are
committed to maintaining disclosure controls and procedures designed to ensure
that information required to be disclosed in our periodic reports filed under
the Exchange Act, is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures and implementing controls and
procedures.
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act.
Based on this evaluation, our principal executive officer and our principal
financial officer concluded that our disclosure controls and procedures were
effective at a reasonable assurance level as of November 1, 2008, the end of the
period covered by this Report.
There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the nine months
ended November 1, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting, except (i) in
second quarter of fiscal 2009, we upgraded our enterprise resource planning
(ERP) system and (ii) as part of our ongoing internal control review procedures
we have identified certain deficiencies in our internal control. While we
have not identified any material weaknesses to date, we are continuing to test
our internal controls. We expect to successfully remediate the deficiences
identified to date.
Inherent Limitations on Internal
Control
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met. Further, the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of management override or improper acts, if any, have been
detected. These inherent limitations include the realities that
judgments in decision making can be faulty, and that breakdowns can occur
because of simple errors or mistakes. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any system of controls is
also based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Because of
the inherent limitations in a cost-effective control system, misstatements due
to management override, error or improper acts may occur and not be
detected. Any resulting misstatement or loss may have an adverse and
material effect on our business, financial condition and results of
operations.
PART
II. OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
From time
to time, we are involved in claims and legal proceedings that arise in the
ordinary course of business. We expect that the number and
significance of these matters will increase as our business
expands. In particular, we could face an increasing number of patent
and other intellectual property claims as the number of products and competitors
in our industry grows. Any claims or proceedings against us, whether
meritorious or not, could be time consuming, result in costly litigation,
require significant amounts of management time, result in the diversion of
significant operational resources, or require us to enter into royalty or
licensing agreements which, if required, may not be available on terms favorable
to us or at all. Were an unfavorable outcome to occur against us,
there exists the possibility of a material adverse impact on our financial
position and results of operations for the period in which the unfavorable
outcome occurs, and potentially in future periods.
Lawsuits
related to our historical stock option granting practices
Certain
current and former directors and officers of the Company were named as
defendants in several shareholder derivative actions filed in the United States
District Court for the Northern District of California, which were consolidated
under the caption In re Sigma
Designs, Inc. Derivative Litigation (the “Federal Action”) and in a
substantially similar shareholder derivative action filed in the Superior Court
for Santa Clara County, California captioned Korsinsky v. Tran, et al.
(the “State Action”).
Plaintiffs
in the Federal and State Actions alleged that the individual defendants breached
their fiduciary duties to the Company in connection with the alleged backdating
of stock option grants during the period from 1994 through 2005 and that certain
defendants were unjustly enriched. Plaintiffs in the Federal Action
asserted derivative claims against the individual defendants based on alleged
violations of Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of
1934, and Rules 10b-5 and 14a-9 promulgated thereunder. They also
alleged that the individual defendants aided and abetted one another’s alleged
breaches of fiduciary duty and violated California Corporations Code section
25402 and brought claims for an accounting and rescission. In the
State Action, plaintiffs also alleged that the individual defendants wasted
corporate assets. Both Actions sought to recover unspecified money
damages, disgorgement of profits and benefits and equitable
relief. The Federal Action also sought treble damages, rescission of
certain defendants’ option contracts, imposition of a constructive trust over
executory option contracts and attorney’s fees. The Company was named
as a nominal defendant in both the Federal and State Actions; thus, no recovery
against the Company was sought.
In
January 2007, the Company filed a motion to dismiss the Federal Action on the
ground that the plaintiffs had not made a pre-litigation demand on its Board of
Directors and had not demonstrated that such a demand would have been
futile. The defendant directors and officers joined in that motion,
and filed a motion to dismiss the Federal Action for failure to state a claim
against each of them. Pursuant to a joint stipulation, plaintiffs
filed an Amended Consolidated Shareholder Derivative Complaint (“Amended
Complaint”) on August 13, 2007. On September 19, 2007, the Company
and the individual defendants each filed a motion to dismiss the Amended
Complaint on the same grounds as their previous motions to
dismiss. Plaintiffs filed oppositions to the motions to dismiss on
October 19, 2007. Defendants filed replies in support of their
motions to dismiss on November 5, 2007. Thereafter, the parties
reached an agreement to settle the action. On May 28, 2008, the
parties to both the Federal Action and the State Action executed a definitive
settlement agreement which, if approved, would result in the dismissal of both
the Federal Action and the State Action. On September 15, 2008, the
Court entered an Order and Final Judgment approving the settlement and
dismissing the Federal Action with prejudice.
In
January 2007, the Company also filed a motion to dismiss or stay the State
Action in favor of the earlier filed Federal Action. The defendant
directors and officers joined in that motion. Pursuant to a joint
stipulation, the Court ordered that the State Action be stayed in favor of the
earlier-filed Federal Action. Thereafter, as stated above, the
parties to the Federal Action reached an agreement to settle that
action. On May 28, 2008, the parties to both the Federal Action and
the State Action executed a definitive settlement agreement. Pursuant
to the settlement agreement, after the Order and Final Judgment approving the
settlement was entered in the Federal Action, Plaintiff requested that the State
Action be dismissed with prejudice. The Court granted this request on
September 22, 2008. All amounts due under the settlement were accrued
as of February 2, 2008 and paid during the third quarter.
The
Company has previously disclosed in press releases that the Securities and
Exchange Commission (“SEC”) has initiated an informal inquiry into the Company’s
stock option granting practices. The SEC requested that the Company
voluntarily produce documents relating to, among other things, its stock option
practices. The Company responded to the SEC's requests in July and
August of 2006 and has received no further requests since that
time. While the Company has no reason to believe that the SEC inquiry
is still active, the Company intends to continue cooperating with the SEC should
the Company receive any additional requests.
In May
2007, the IRS began an employment tax audit for our fiscal 2004 and
2005. We have also requested that fiscal 2006 be included in this
audit cycle and the IRS agreed. The focus of the IRS employment tax
audit related to tax issues connected to our granting stock options with
exercise prices per share that were less than the fair market value per share of
the common stock underlying the option on the option's measurement date for
financial reporting purposes. We recently settled this IRS audit
(including the year 2006), although we are still waiting to receive the notice
of assessment resulting from such settlement for interest on the agreed tax and
penalty amounts. The settlement amounts were in alignment with the
amounts previously provided for. We have reported these IRS
adjustments to the California Employment Development Department (“EDD”) and are
communicating with the EDD in order to resolve the corresponding state tax,
penalty and/or interest adjustments.
In August
2007, the IRS began an income tax audit for our fiscal 2005 federal income tax
return. The IRS has proposed several adjustments. We have
accepted most of the adjustments, which will not have a material financial
impact to our operations and financial condition. We are in
discussions with the IRS concerning an additional proposed adjustment, which
concerns an area that is not complete. We intend to perform
additional development work to resolve this proposed adjustment.
If any of
the following risks actually occurs, our business, financial condition and
results of operations could be harmed. In that case, the trading
price of our common stock could decline and you might lose all or part of your
investment in our common stock. The risks and uncertainties described
below are not the only ones we face. You should also refer to the
other information set forth in this 10-Q, including our unaudited condensed
consolidated financial statements and the related notes. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations.
Risks
Related to Our Business and Our Industry
Our
dependence on a limited number of customers means that the loss of a major
customer or any reduction in orders by a major customer could materially reduce
our net revenue and adversely affect our results of operations. We
expect that sales to relatively few customers will continue to account for a
significant percentage of our net revenue for the foreseeable
future. We have no firm, long-term volume commitments from any of our
major customers and we generally accept purchase commitments from our customers
based upon their purchase orders. Customer purchase orders may be
cancelled and order volume levels can be changed, cancelled or delayed with
limited or no penalties. We have experienced fluctuations in order
levels from period to period and expect that we will continue to experience such
fluctuations and may experience cancellations in the future. We may
not be able to replace the cancelled, delayed or reduced purchase orders with
new orders. Any difficulty in the collection of receivables from key
customers could also harm our business.
For the
three months ended November 1, 2008, MTC Singapore, Cisco Systems and Netgem
accounted for 17%, 12% and 11%, respectively, of our net revenue. For
the three months ended November 3, 2007, MTC Singapore, Uniquest and Macnica
accounted for 29%, 22% and 14%, respectively, of our net revenue.
If
we fail to achieve initial design wins for our products, we may be unable to
recoup our investments in our products and revenue could decline.
We expend
considerable resources in order to achieve design wins for our products,
especially our new products and product enhancements, without any assurance that
a customer will select our product. Once a customer designs a
semiconductor into a product, it is likely to continue to use the same
semiconductor or enhanced versions of that semiconductor from the same supplier
across a number of similar and successor products for a lengthy period of time,
due to the significant costs and risks associated with qualifying a new supplier
and potentially redesigning the product to incorporate a different
semiconductor. As a result, if we fail to achieve an initial design
win in a customer's qualification process, we may lose the opportunity for
significant sales to that customer for a number of its products and for a
lengthy period of time, or we would only be able to sell our products to these
customers as a second source, which usually means we would only be able to sell
a limited amount of product to them. Also, even if we achieve new
design wins with customers, these manufacturers may not purchase our products in
sufficient volumes to recoup our development costs, and they can choose at any
time to stop using our products, for example, if their own products are not
commercially successful. This may cause us to be unable to recoup our
investments in the development of our products and cause our revenue to
decline.
If
we do not successfully anticipate market needs and develop products and product
enhancements that meet those needs, or if those products do not gain market
acceptance, we may not be able to compete effectively and our ability to
generate revenue will suffer.
We may
not be able to accurately anticipate future market needs or be able to develop
new products or product enhancements to meet such needs or to meet them in a
timely manner.
Our
ability to develop and deliver new products successfully will depend on various
factors, including our ability to:
|
•
|
accurately
predict market requirements and evolving industry
standards;
|
|
•
|
accurately
design new SoC products;
|
|
•
|
timely
complete and introduce new product
designs;
|
|
•
|
timely
qualify and obtain industry interoperability certification of our products
and the equipment into which our products will be
incorporated;
|
|
•
|
ensure
that our subcontractors have sufficient foundry, assembly and test
capacity and packaging materials and achieve acceptable manufacturing
yields;
|
|
•
|
shift
our products to smaller geometry process technologies to achieve lower
cost and higher levels of design integration;
and
|
|
•
|
gain
market acceptance of our products and our customers'
products.
|
If we
fail to anticipate market requirements or to develop new products or product
enhancements to meet those needs in a cost-effective and timely manner, it could
substantially decrease market acceptance and sales of our present and future
products and we may be unable to attract new customers or retain our existing
customers, which would significantly harm our business and financial
results.
Even if
we are able to anticipate, develop and commercially introduce new products and
enhancements, our new products or enhancements may not achieve widespread market
acceptance. Any failure of our products to achieve market acceptance
could adversely affect our business and financial results.
Our
ability to develop, market and sell products could be harmed if we are unable to
retain or hire key personnel.
Our
future success depends upon our ability to recruit and retain the services of
key executive, engineering, finance and accounting, sales, marketing and support
personnel. The supply of highly qualified individuals, in particular
engineers in very specialized technical areas, or sales people specializing in
the semiconductor industry, is limited and competition for such individuals is
intense. None of our officers or key employees is bound by an
employment agreement for any specific term. The loss of the services
of any of our key employees, the inability to attract or retain key personnel in
the future or delays in hiring required personnel, particularly engineers and
sales people, and the complexity and time involved in replacing or training new
employees, could delay the development and introduction of new products, and
negatively impact our ability to market, sell or support our
products.
Our
industry is highly competitive and we may not be able to compete effectively,
which would harm our market share and cause our revenue to decline.
The
markets in which we operate are extremely competitive and are characterized by
rapid technological change, continuously evolving customer requirements and
declining average selling prices. We may not be able to compete
successfully against current or potential competitors. We compete
with large semiconductor providers that have substantial experience and
expertise in video, audio and multimedia technology and in selling to consumer
equipment providers. Many of these companies have substantially
greater engineering, marketing and financial resources than we
have. As a result, our competitors may be able to respond better to
new or emerging technologies or standards and to changes in customer
requirements. Further, some of our competitors are in a better
financial and marketing position from which to influence industry acceptance of
a particular industry standard or competing technology than we
are. Our competitors may also be able to devote greater resources to
the development, promotion and sale of products, and may be able to deliver
competitive products at a lower price. We also may face competition
from newly established competitors, suppliers of products based on new or
emerging technologies and customers who choose to develop their own
SoCs. Additionally, some of our competitors operate their own
fabrication facilities or may have stronger manufacturing partner relationships
than we have. We expect our current customers, particularly in the
IPTV and Blu-ray player markets, to seek additional suppliers of SoCs for
inclusion in their products, which will increase competition and could reduce
our market share. If we do not compete successfully, our market share
and net revenue could decline.
The
timing of our customer orders and product shipments can adversely affect our
operating results and stock price.
Our
quarterly revenue and operating results depend upon the volume and timing of
customer orders received during a given quarter and the percentage of each order
that we are able to ship and recognize as net revenue during each
quarter. Customers may change their cycle of product orders from us,
which would affect the timing of our product shipments. For example,
we experienced a decline in orders from significant customers in the first
quarter of fiscal 2009 compared to other recently completed
quarters. Any failure or delay in the closing of orders expected to
occur within a quarterly period, particularly from significant customers, would
adversely affect our operating results. Further, to the extent we
receive orders late in any given quarter, we may be unable to ship products to
fill those orders during the same quarter in which we received the corresponding
order, which could have an adverse impact on our operating results for that
quarter.
We
base orders for inventory on our forecasts of our customers' demand and if our
forecasts are inaccurate, our financial condition and liquidity would
suffer.
We place
orders with our suppliers based on our forecasts of our customers'
demand. Our forecasts are based on multiple assumptions, each of
which may introduce errors into our estimates. When the demand for
our customers' products increases significantly, we may not be able to meet
demand on a timely basis, and we may need to expend a significant amount of time
working with our customers to allocate limited supply and maintain positive
customer relations. If we underestimate customer demand, we may
forego revenue opportunities, lose market share and damage our customer
relationships. Conversely, if we overestimate customer demand, we may
allocate resources to manufacturing products that we may not be able to sell
when we expect to or at all. As a result, we would have excess or
obsolete inventory, resulting in a decline in the value of our inventory, which
would increase our cost of revenue and create a drain on our
liquidity. We have recorded $1.8 million of inventory write-offs in
the first three quarters of fiscal 2009. Based on current demand
forecast, we have in excess of five quarters of die bank of our part that is
used to build our highest volume products, primarily our IPTV market and we
believe we have sufficient forecasted demand. Our failure to
accurately manage inventory against demand would adversely affect our financial
results.
If
demand for our SoCs declines or does not grow, we will be unable to increase or
sustain our net revenue.
We expect
our SoCs to account for the substantial majority of our net revenue for the
foreseeable future. For the three months and nine months ended
November 1, 2008, sales of our SoCs represented 98% and 99%, respectively, of
our net revenue. Even if the consumer electronic markets that we
target continue to expand, manufacturers of consumer products in these markets
may not choose to utilize our SoCs in their products. The markets for
our products are characterized by frequent introduction of new technologies,
short product life cycles and significant price competition. If we or
our customers are unable to manage product transitions in a timely and cost
effective manner, our net revenue would suffer. In addition, frequent
technological changes and introduction of next generation products may result in
inventory obsolescence which would increase our cost of revenue and adversely
affect our operating performance. If demand for our SoCs declines or
fails to grow or we are unable to develop new products to meet our customers'
demand, our net revenue could be harmed
We
may not be able to effectively manage our growth or develop our financial and
managerial control and reporting systems, and we may need to incur significant
expenditures to address the additional operational and control requirements of
our growth, either of which could harm our business and operating
results.
To
continue to grow, we must continue to expand and improve our operational,
engineering, accounting and financial systems, procedures, controls and other
internal management systems. This may require substantial managerial and
financial resources, and our efforts in this regard may not be successful.
Our current systems, procedures and controls may not be adequate to support our
future operations. For example, we recently implemented a new enterprise
resource management system. If we fail to adequately manage our growth, or to
improve and develop our operational, financial and management information
systems, or fail to effectively motivate or manage our current and future
employees, the quality of our products and the management of our operations
could suffer, which could adversely affect our operating results.
If
the growth of demand in the consumer electronics market does not continue, our
ability to increase our revenue could suffer.
Our
business is highly dependent on developing sectors of the consumer electronics
market, including IPTV, Blu-ray and other media players, prosumer and industrial
audio/video and HDTVs. The consumer electronics market is highly
competitive and is characterized by, among other things, frequent introductions
of new products and short product life cycles. The consumer
electronics market may also be negatively impacted by a slowdown in overall
consumer spending. The worldwide economy, generally, and consumer
spending, specifically, have significantly declined in recent months, which has
negatively impacted our target markets. If our target markets do not
grow as rapidly or to the extent we anticipate, our business could
suffer. We expect the majority of our revenue for the foreseeable
future to come from the sale of our SoC solutions for use in emerging consumer
applications. Our ability to sustain and increase revenue is in large
part dependent on the continued growth of these rapidly evolving market sectors,
whose future is largely uncertain. Many factors could impede or
interfere with the expansion of these consumer market sectors, including
consumer demand in these sectors, general economic conditions, other competing
consumer electronic products, delays in the deployment of telecommunications
video services and insufficient interest in new technology
innovations. In addition, if market acceptance of the consumer
products that utilize our products does not occur as expected, our business
could be harmed.
The
review of our historical stock option granting practices and the restatement of
our prior financial statements may result in additional litigation, regulatory
proceedings and government enforcement actions, which could harm our business,
financial condition, results of operations and cash flows.
Our
historical stock option granting practices and the related restatement of our
historical financial statements, which we completed in connection with the audit
of our financial statements for fiscal 2007, have exposed us to greater risks
associated with litigation, regulatory proceedings and government enforcement
actions. For more information regarding our recent litigation and
related inquiries, please see the section entitled "Legal Proceedings" under
Part II, Item 1. We have provided the results of our internal review
and investigation of our stock option practices to the SEC, and in that regard
we have responded to informal requests for documents and additional
information. While we have no reason to believe that the SEC inquiry
is still active, we intend to continue to cooperate with the SEC and any other
governmental agency which may become involved in this matter. We
cannot give any assurance regarding the outcomes from regulatory proceedings or
government enforcement actions relating to our past stock option
practices. The resolution of these matters could be time consuming,
expensive and may distract management from the conduct of our
business. Furthermore, if we are subject to adverse findings in
regulatory proceedings or government enforcement actions, we could be required
to pay damages or penalties or have other remedies imposed, which could harm our
business, financial condition, results of operations and cash
flows.
In
addition, the SEC may disagree with the manner in which we accounted for and
reported, or not reported, the financial impact of determining the correct
measurement dates for our stock option grants. Accordingly, there is
a risk that we may have to further restate our prior financial statements, amend
prior filings with the SEC or take other actions not currently
contemplated.
As a
result of our internal review of our historical stock option granting practices,
we were unable to timely file our periodic reports with the SEC during fiscal
2007. We were also subject to delisting proceedings in front of the
Nasdaq Listing Qualifications Staff. After we filed all of our
outstanding periodic reports with the SEC in April 2007, we received a Nasdaq
Listing Qualifications Staff letter stating that the Nasdaq Listing
Qualifications Staff determined that we had demonstrated compliance with all
Nasdaq Marketplace Rules. Accordingly, our securities continue to be
listed on the Nasdaq Global Market. However, if the SEC disagrees
with the manner in which we have accounted for and reported, or not reported,
the financial impact of past stock option grants, there could be further delays
in filing subsequent SEC reports or other actions that might result in the
delisting of our common stock from the Nasdaq Global Market.
We
have reported material weaknesses in our controls over financial reporting in
fiscal 2005 through 2007. If we are unable to maintain effective
internal control over financial reporting, our ability to report our financial
results on a timely and accurate basis may be adversely affected, which in turn
could cause the market price of our common stock to decline.
As of
February 2, 2008, our management, including our principal executive officer
and principal financial officer, assessed the effectiveness of our internal
control over financial reporting. Based on this assessment, our management
determined we had remediated the prior year’s material weaknesses and that our
internal control over financial reporting was effective as of February 2,
2008. However, prior to this we had ongoing material weaknesses in
our internal control over financial reporting since the fiscal year ended
January 31, 2005, the first year in which we were required to evaluate our
internal control over financial reporting under Section 404 of the
Sarbanes-Oxley Act of 2002. Further, in September 2006, we announced
that our historical financial statements should no longer be relied upon as a
result of our preliminary determination of an internal review relating to our
practices in administering stock option grants. We continued to have
material weaknesses in our internal control over financial reporting, which
resulted from ineffective internal controls over financial reporting for the
year ended February 2, 2007. In August 2007, we filed an amendment to
our annual report on Form 10-K for fiscal 2007, in order to correct certain
clerical errors in our financial statements and financial statement footnotes.
In connection with our ongoing internal control review procedures, we have
identified certain deficiencies in our internal control over financial
reporting.
Effective
controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports
or prevent fraud, our operating results could be harmed and the market price of
our common stock could decline. We cannot be certain that we will be able
to maintain adequate controls over our financial processes and reporting in the
future. If we identify additional material weaknesses in the future, our
ability to report our financial results on a timely and accurate basis may be
adversely affected. In addition, if we cannot maintain effective internal
control over financial reporting and disclosure controls and procedures,
investors may lose confidence in our reported financial information, which could
cause the market price of our common stock to decline.
We
are subject to risks arising from our international operations.
We derive
a substantial portion of our net revenue from our customers outside of North
America and we plan to continue expanding our business in international markets
in the future. For the three months and nine months ended November 1,
2008, we derived 92% and 94%, respectively, of our revenue from customers
outside of North America. We also have significant international
operations, including a significant newly established operation in Singapore,
research and development facilities in France and Canada and a sales office in
Hong Kong. As a result of our international business, we are affected
by economic, regulatory and political conditions in foreign countries, including
the imposition of government controls, changes or limitations in trade
protection laws, unfavorable changes in tax treaties or laws, difficulties in
collecting receivables and enforcing contracts, natural disasters, labor unrest,
earnings expatriation restrictions, misappropriation of intellectual property,
changes in import/export regulations, tariffs and freight rates, economic
instability, public health crises, acts of terrorism and continued unrest in
many regions and other factors, which could have a material impact on our
international revenue and operations. In particular, in some countries we may
experience reduced intellectual property protection. Our results of
operations could also be adversely affected by exchange rate fluctuations, which
could increase the sales price in local currencies of our products in
international markets. Overseas sales and purchases to date have been
denominated in U.S. dollars. We do not currently engage in any
hedging activities to reduce our exposure to exchange rate
risks. Moreover, local laws and customs in many countries differ
significantly from those in the United States. In many foreign
countries, particularly in those with developing economies, it is common for
others to engage in business practices that are prohibited by our internal
policies and procedures or United States laws or regulations applicable to
us. Violations of laws or key control policies by our employees,
contractors or agents could result in financial reporting problems, fines,
penalties, or prohibition on the importation or exportation of our products and
could have a material adverse effect on our business results.
The
average selling prices of semiconductor products have historically decreased
rapidly and will likely do so in the future, which could harm our revenue and
gross margins.
The
semiconductor industry, in general, and the consumer electronics markets that we
target, specifically, are characterized by intense price competition, frequent
introductions of new products and short product life cycles, which can result in
rapid price erosion in the average selling prices for semiconductor
products. A decline in the average selling prices of our products
could harm our revenue and gross margins. The willingness of
customers to design our SoCs into their products depends to a significant extent
upon our ability to sell our products at competitive prices. In the
past, we have reduced our prices to meet customer requirements or to maintain a
competitive advantage. Reductions in our average selling prices to
one customer could impact our average selling prices to all
customers. If we are unable to reduce our costs sufficiently to
offset declines in product prices or are unable to introduce more advanced
products with higher margins in a timely manner, we could experience declines in
our net revenue and gross margins.
We
have a history of fluctuating operating results, including a net loss in fiscal
2006, and we may not be able to sustain or increase profitability in the future,
which may cause the market price of our common stock to decline.
We have a
history of fluctuating operating results. We reported a net loss of
$1.6 million in fiscal 2006, net income of $6.2 million in fiscal 2007, net
income of $70.2 million in fiscal 2008, net income of $4.7 million in the first
fiscal quarter of 2009, net income of $9.6 million in the second fiscal quarter
of 2009 and net income of $3.7 million in the third fiscal quarter of
2009. To sustain or increase profitability, we will need to
successfully develop new products and product enhancements and sustain higher
revenue while controlling our cost and expense levels. In recent
years, we made significant investments in our product development efforts and
have expended substantial funds to enhance our sales and marketing efforts and
otherwise operate our business. However, we may not realize the
benefits of these investments. Although we were profitable in fiscal 2008, we may not continue to be
profitable. For example, our net income decreased from $35.3 million
in the fourth quarter of 2008 to $4.7 million in the first quarter of fiscal
2009. We may incur operating losses in future quarterly periods or
fiscal years, which in turn could cause the price of our common stock to
decline.
Litigation
due to stock price volatility or other factors could cause us to incur
substantial costs and divert our management's attention and
resources.
In the
past, securities class action litigation often has been brought against a
company following periods of volatility in the market price of its
securities. Companies such as ours in the semiconductor industry and other
technology industries are particularly vulnerable to this kind of litigation due
to the high volatility of their stock prices. While we are not aware of
any such contemplated class action litigation against us, we may in the future
be the target of securities litigation. Any future lawsuits to which we
may become a party will likely be expensive and time consuming to investigate,
defend and resolve. Such costs, which include investigation and defense,
the diversion of our management’s attention and resources, and any losses
resulting from these claims, could significantly increase our expenses and
adversely affect our profitability and cash flow.
Because
our products are based on constantly evolving technologies, we have experienced
a lengthy sales cycle for some of our SoCs, particularly those designed for
set-top box applications in the IPTV market. After we have delivered
a product to a customer, the customer will usually test and evaluate our product
with its service provider customer prior to the customer completing the design
of its own equipment that will incorporate our product. Our customers
and the telecommunications carriers our customers serve may need three to more
than six months to test, evaluate and adopt our product and an additional three
to more than nine months to begin volume production of equipment that
incorporates our product. Our complete sales cycle typically ranges
from nine to eighteen months, but could be longer. As a result, we
may experience a significant delay between the time we increase expenditures for
research and development, sales and marketing efforts and inventory and the time
we generate net revenue, if any, from these expenditures. In
addition, because we do not have long-term commitments from our customers, we
must repeat our sales process on a continual basis even for current customers
looking to purchase a new product. As a result, our business could be
harmed if a customer reduces or delays its orders, chooses not to release
products incorporating our SoCs or elects not to purchase a new product or
product enhancements from us.
We
rely on a limited number of independent third-party manufacturers for the
fabrication, assembly and testing of our SoCs, and the failure of any of these
third-party manufacturers to deliver products or otherwise perform as requested
could damage our relationships with our customers, decrease our sales and limit
our growth.
We are a
fabless semiconductor company, and thus we do not own or operate a fabrication
or manufacturing facility. We depend on independent manufacturers,
each of whom is a third-party manufacturer for numerous companies, to
manufacture, assemble and test our products. We currently rely on
Taiwan Semiconductor Manufacturing Corporation, or TSMC, to produce
substantially all of our SoCs. We rely on Advanced Semiconductor
Engineering, Inc., or ASE, to assemble, package and test substantially all of
our products. These third-party manufacturers may allocate capacity
to the production of other companies' products while reducing product deliveries
or the provision of services to us on short notice, or they may increase the
prices of the products and services they provide to us with little or no
notice. In particular, other clients that are larger and better
financed than we are or that have long-term agreements with TSMC or ASE may
cause either or both of them to reallocate capacity to those clients, decreasing
the capacity available to us.
If we fail to effectively manage our relationships with
TSMC and ASE, if we are unable to secure sufficient capacity at our third-party
manufacturers' facilities or if any of them should experience delays,
disruptions or technical or quality control problems in our manufacturing
operations, or if we had to change or add additional third-party manufacturers
or contract manufacturing sites, our ability to ship products to our customers
could be delayed, our relationships with our customers would suffer and our
market share and operating results would suffer. If our third-party
manufacturers' pricing for the products and services they provide increases and
we are unable to pass along such increases to our customers, our operating
results would be adversely affected. Also, the addition of
manufacturing locations or additional third-party subcontractors would increase
the complexity of our supply chain management. Moreover, all of our
product manufacturing, assembly and packaging is performed in Asian countries
and is therefore subject to risks associated with doing business in these
countries, such as quarantines or closures of manufacturing facilities due to
the outbreak of viruses, such as SARS, avian flu or any similar
outbreaks. Each of these factors could harm our business and
financial results.
In
the event we seek or are required to use a new manufacturer to fabricate or to
assemble and test all or a portion of our SoC products, we may not be able to
bring new manufacturers on-line rapidly enough, which could damage our
relationships with our customers, decrease our sales and limit our
growth.
As
indicated above, we use a single wafer foundry to manufacture substantially all
of our products and a single source to assemble and test substantially all of
our products, which exposes us to a substantial risk of delay, increased costs
and customer dissatisfaction in the event our third-party manufacturers are
unable to provide us with our SoC requirements. Particularly during
times when semiconductor capacity is limited, we may seek to, and in the event
that our current foundry were to stop producing wafers for us altogether, we
would be required to, qualify one or more additional wafer foundries to meet our
requirements, which would be time consuming and costly. In order to
bring these new foundries on-line, we and our customers would need to qualify
their facilities, which process could take as long as several
months. Once qualified, these new foundries would then require an
additional number of months to actually begin producing SoCs to meet our needs,
by which time our perceived need for additional capacity may have passed, or the
opportunities we previously identified may have been lost to our
competitors. Similarly, qualifying a new provider of assembly,
packaging and testing services would be a lengthy and costly process and, in
both cases, they could prove to be less reliable than our existing
manufacturers, which could result in increased costs and expenses as well as
delays in deliveries of our products to our customers.
If
our third-party manufacturers do not achieve satisfactory yields or quality, our
relationships with our customers and our reputation will be harmed, which in
turn would harm our operating results and financial performance.
The
fabrication of semiconductors is a complex and technically demanding
process. Minor deviations in the manufacturing process can cause
substantial decreases in yields and, in some cases, cause production to be
stopped or suspended. Although we work closely with our third-party
manufacturers to minimize the likelihood of reduced manufacturing yields, their
facilities have from time to time experienced lower than anticipated
manufacturing yields that have resulted in our inability to meet our customer
demand. It is not uncommon for yields in semiconductor fabrication
facilities to decrease in times of high demand, in addition to reduced yields
that may result from normal wafer lot loss due to workmanship or operational
problems at these facilities. When these events occur, especially
simultaneously, as happens from time to time, we may be unable to supply our
customers' demand. Many of these problems are difficult to detect at
an early stage of the manufacturing process and may be time consuming and
expensive to correct. Poor yields from the wafer foundries or
defects, integration issues or other performance problems in our products could
cause us significant customer relations and business reputation problems, or
force us to sell our products at lower gross margins and therefore harm our
financial results.
To
remain competitive, we need to continue to transition our SoCs to increasingly
smaller sizes while maintaining or increasing functionality, and our failure to
do so may harm our business.
We
periodically evaluate the benefits, on a product-by-product basis, of migrating
to more advanced technology to reduce the size of our SoCs. The
smaller SoC size reduces our production and packaging costs, which enables us to
be competitive in our pricing. We also continually strive to increase
the functionality of our SoCs, which is essential to competing effectively in
our target markets. The transition to smaller geometries while
maintaining or increasing functionality requires us to work with our contractors
to modify the manufacturing processes for our products and to redesign some
products. This effort requires considerable development investment
and a risk of reduced yields as a new process is brought to acceptable levels of
operating and quality efficiency. In the past, we have experienced
some difficulties in shifting to smaller geometry process technologies or new
manufacturing processes, which resulted in reduced manufacturing yields, delays
in product deliveries and increased expenses. We may face similar
difficulties, delays and expenses as we continue to transition our products to
smaller geometry processes, all of which could harm our relationships with our
customers, and our failure to do so would impact our ability to provide
competitive prices to our customers, which would have a negative impact on our
sales.
The
complexity of our products could result in unforeseen delays or expenses and in
undetected defects, which could damage our reputation with current or
prospective customers, adversely affect the market acceptance of new products
and result in warranty claims.
Highly
complex products, such as those that we offer, frequently contain defects,
particularly when they are first introduced or as new versions are
released. Our SoCs contain highly sophisticated silicon technology
and complex software. In the past we have experienced, and may in the
future experience, defects in our products, both with our SoCs and the related
software products we offer. If any of our products contain defects or
have reliability, quality or compatibility problems, our reputation may be
damaged and our customers may be reluctant to buy our products, which could harm
our ability to retain existing customers and attract new
customers. In addition, these defects could interrupt or delay sales
or shipment of our products to our customers. Manufacturing defects
may not be detected by the testing process performed by our
subcontractors. If defects are discovered after we have shipped our
products, it could result in unanticipated costs, order cancellations or
deferrals and product recalls, harm to our reputation and a decline in our net
revenue, income from operations and gross margins.
We
may engage in investments in and acquisitions of other businesses and
technologies, which could divert management's attention and prove difficult to
integrate with our existing business and technology.
We
continue to consider investments in and acquisitions of other businesses,
technologies or products, to improve our market position, broaden our
technological capabilities and expand our product offerings. For
example, we completed the acquisition of certain assets and 44 new employees
from the VXP Group of Gennum Corporation in February 2008 and the acquisition of
Blue7 Communications, or Blue7, in February 2006. However, we may not
be able to acquire, or successfully identify, companies, products or
technologies that would enhance our business. Once we identify a
strategic opportunity, the process to consummate a transaction could divert
management's attention from the operation of our business causing our financial
results to decline.
If we are
able to acquire companies, products or technologies, we could experience
difficulties in integrating them. Integrating acquired businesses
involves a number of risks, including:
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• potential
disruption of our ongoing business and the diversion of management
resources from other business
concerns;
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• unexpected
costs or incurring unknown
liabilities;
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• difficulties
relating to integrating the operations and personnel of the acquired
businesses;
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• adverse
effects on the existing customer relationships of acquired companies;
and
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•
adverse effects associated with entering into markets and acquiring
technologies in areas in which we have little
experience.
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If
we are unable to successfully integrate the businesses we acquire, our
operating results could be harmed.
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Changes
in our effective tax rate or tax liability may have an adverse effect on our
results of operations.
As a
global company, we are subject to taxation in Singapore, the United States and
various other countries. Significant judgment is required to
determine and estimate worldwide tax liabilities. Any significant
change in our future effective tax rates could adversely impact our consolidated
financial position, results of operations, and cash flows. Our future
effective tax rates may be adversely affected by a number of factors
including:
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•
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changes
in tax laws in the countries in which we operate or the interpretation of
such tax laws;
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•
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changes
in the valuation of our deferred tax
assets;
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•
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increases
in expenses not deductible for tax purposes, including write-offs of
acquired in-process research and development and impairment of goodwill in
connection with acquisitions;
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•
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changes
in share-based compensation
expense;
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•
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changes
in generally accepted accounting principles;
and
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•
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our
ability to use our tax attributes such as research and development tax
credits and net operating losses of acquired companies to the fullest
extent.
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We have
recently established a foreign operating subsidiary in Singapore. We
anticipate that our consolidated pre-tax income will be subject to foreign tax
at relatively lower tax rates when compared to the United States federal
statutory tax rate and, as a consequence, our effective income tax rate is
expected to be lower than the United States federal statutory
rate. Our future effective income tax rates could be adversely
affected if tax authorities challenge our international tax structure or if the
relative mix of United States and international income changes for any
reason. Accordingly, there can be no assurance that our income tax
rate will be less than the United States federal statutory rate
If
the recent worsening of credit market conditions continues or increases, it
could have a material adverse impact on our investment portfolio.
Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity
issues. The short-term funding markets experienced credit issues
during the second half of fiscal 2007 and continuing into the first three
quarters of fiscal 2009, leading to liquidity issues and failed auctions in the
ARS market. If the global credit market continues to deteriorate, the
liquidity of our investment portfolio may be impacted and we could determine
that some of our investments are impaired. This could materially
adversely impact our results of operations and financial condition.
Included
in our marketable securities portfolio at November 1, 2008 were ARS that we
purchased for $43.0 million. These securities have failed to
trade at recent auctions due to insufficient bids from buyers. If
these auctions continue to fail and the credit ratings of these investments
deteriorate, the fair value of these ARS may decline and we may incur impairment
charges in connection with these securities, which would negatively affect our
reported earnings, cash flow and financial condition. Although our
cash management advisor, UBS, has indicated that absent other solution to the
limited market for our ARS, it will redeem all these securities at par value
upon request after June 2010, there is a risk that their intention may not be
achieved for reasons outside our control.
The
recent global economic downturn could negatively affect our business, results of
operations and financial condition.
Current
uncertainty in global economic conditions pose a risk to the overall economy as
consumers and businesses may defer purchases in response to tighter credit and
negative financial news, which could negatively affect demand for our products
and other related matters. Consequently, demand for our products could be
different from our expectations due to factors including:
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•
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changes
in business and economic conditions, including conditions in the credit
market that could affect consumer
confidence;
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•
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customer
acceptance of our products and those of our
competitors;
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•
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changes
in customer order patterns including order cancellations;
and
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•
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changes
in the level of inventory our customers are willing to
hold.
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There
could also be a number of secondary effects from the current uncertainty in
global economic conditions, such as insolvency of suppliers resulting in product
delays, an inability of our customers to obtain credit to finance purchasers of
our products or a desire of our customers to delay payment to us for the
purchase of our products. The effects, including those mentioned
above, of the current global economic environment could negatively impact our
business, results of operations and financial condition.
Our
ability to raise capital in the future may be limited and our failure to raise
capital when needed could prevent us from executing our growth
strategy.
We
believe that our existing cash and cash equivalents, short-term and long-term
marketable securities will be sufficient to meet our anticipated cash needs for
at least the next 12 months. The timing and amount of our working
capital and capital expenditure requirements may vary significantly depending on
numerous factors, including:
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• market
acceptance of our products;
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• the
need to adapt to changing technologies and technical
requirements;
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• the
existence of opportunities for
expansion;
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• access
to and availability of sufficient management, technical, marketing and
financial personnel; and
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• the
number of shares we repurchase under our share repurchase
program.
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If our
capital resources are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity securities or debt securities or obtain debt
financing. We recently announced a share repurchase program under
which our Board of Directors authorized us to repurchase up to 5.0 million
shares of our common stock. In the nine months ended November 1,
2008, we used an aggregate of $85.9 million to purchase 4.2 million shares of
our common stock. Although we are not obligated to repurchase any
additional shares under this share repurchase program, to the extent we elect to
repurchase shares or to the extent we have already spent our cash resources, the
amount of cash we used or may use could limit our ability to execute our
business plans and require us to raise additional capital in the future in order
to fund any repurchases or for other purposes. The sale of additional
equity securities or convertible debt securities would result in additional
dilution to our shareholders. Additional debt would result in
increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to
obtain additional financing and there is no assurance that financing, if
required, will be available in amounts or on terms acceptable to us, if at
all.
We
may face intellectual property claims that could be costly to defend and result
in our loss of significant rights.
The
semiconductor industry is characterized by frequent litigation regarding patent
and intellectual property rights. We believe that it may be
necessary, from time to time, to initiate litigation against one or more third
parties to preserve our intellectual property rights. From time to
time, we have received, and may receive in the future, notices that claim we
have infringed upon, misappropriated or misused other parties' proprietary
rights. Any of the foregoing events or claims could result in
litigation. Any such litigation could result in significant expense
to us and divert the efforts of our technical and management
personnel. In the event of an adverse result in any such litigation,
we could be required to pay substantial damages, cease the manufacture, use and
sale of certain products or expend significant resources to develop
non-infringing technology or to obtain licenses to the technology that is the
subject of the litigation, and we may not be successful in such development or
in obtaining such licenses on acceptable terms, if at all. In
addition, patent disputes in the electronics industry have often been settled
through cross-licensing arrangements. Because we do not yet have a
large portfolio of issued patents, we may not be able to settle an alleged
patent infringement claim through a cross-licensing arrangement.
We
rely upon patents, trademarks, copyrights and trade secrets to protect our
proprietary rights and if these rights are not sufficiently protected, it could
harm our ability to compete and to generate revenue.
Our
ability to compete may be affected by our ability to protect our proprietary
information. As of February 2, 2008, we held 30 patents and these
patents will expire within the next five to sixteen years. These
patents cover the technology underlying our products. We have filed
certain patent applications and are in the process of preparing
others. We cannot assure you that any additional patents for which we
have applied will be issued or that any issued patents will provide meaningful
protection of our product innovations. Like other semiconductor
companies, we rely primarily on trade secrets and technological know-how in the
conduct of our business. We use measures such as confidentiality
agreements to protect our intellectual property. However, these
methods of protecting our intellectual property may not be
sufficient.
Our
business may become subject to seasonality, which may cause our revenue to
fluctuate.
Our
business may become subject to seasonality as a result of our target
markets. We sell a significant number of our SoCs into the consumer
electronics market. Our customers who manufacture products for the
consumer market typically experience seasonality in the sales of their products,
which in turn may affect the timing and volume of orders for our
SoCs. Although we have not experienced seasonality to date in sales
of our products, due to the overall growth in demand for our SoCs, we may, in
the future, experience lower sales in our second fiscal quarter and higher sales
in our third fiscal quarter as a result of the seasonality of demand associated
with the consumer electronics markets into which we sell our
products. As a result, our operating results may vary significantly
from quarter to quarter.
Due
to the cyclical nature of the semiconductor industry, our operating results may
fluctuate significantly, which could adversely affect the market price of our
common stock.
Risks
Related to Our Common Stock
Our
operating results are subject to significant fluctuations due to many factors
and any of these factors could adversely affect our stock price.
Our
operating results have fluctuated in the past and may continue to fluctuate in
the future due to a number of factors, including:
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•
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new
product introductions by us and our
competitors;
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changes
in our pricing models and product sales
mix;
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unexpected
reductions in unit sales and average selling prices, particularly if they
occur precipitously;
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•
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expenses
related to our compliance efforts with Section 404 of the Sarbanes-Oxley
Act of 2002;
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•
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expenses
related to implementing and maintaining a new enterprise resource
management system and other information
technologies;
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•
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the
level of acceptance of our products by our customers and acceptance of our
customers' products by their end user
customers;
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shifts
in demand for the technology embodied in our products and those of our
competitors;
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•
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the
loss of one or more significant
customers;
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•
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the
timing of, and potential unexpected delays in, our customer orders and
product shipments;
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inventory
obsolescence;
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•
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write-downs
of accounts receivable;
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•
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a
significant increase in our effective tax rate in any particular period as
a result of the exhaustion, disallowance or accelerated recognition of our
net operating loss carryforwards or
otherwise;
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an
interrupted or inadequate supply of semiconductor chips or other materials
included in our products;
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technical
problems in the development, ramp up, and manufacturing of products, which
could cause shipping delays;
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availability
of third-party manufacturing capacity for production of certain
products;
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the
impact of potential economic instability in the United States and
Asia-Pacific region, including the continued effects of the recent
worldwide economic slowdown; and
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continuing
impact and expenses related to our stock option review and its
resolution.
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In
addition, the market prices of securities of semiconductor and other technology
companies have been volatile. This volatility has significantly
affected the market prices of securities of many technology companies for
reasons frequently unrelated to the operating performance of the specific
companies.
Accordingly,
you may not be able to resell your shares of common stock at or above the price
you paid. In the past, we and other companies that have experienced
volatility in the market price of their securities have been, and in the future
we may be, the subject of securities class action litigation.
Our
stock price has demonstrated volatility, and continued volatility in the stock
market may cause further fluctuations or decline in our stock
price.
The
market for our common stock has been subject to significant volatility, which is
expected to continue. For example, the high and low selling prices
per share of our common stock on the Nasdaq Global Market ranged from a high of
$73.00 on December 10, 2007 to a low of $6.93 on November 21,
2008. This volatility is often unrelated or disproportionate to our
operating performance. These fluctuations, as well as general
economic and market conditions, could cause the market price of our common stock
to decline.
If
securities or industry analysts do not publish research or reports about our
business, or if they issue an adverse opinion regarding our stock, our stock
price and trading volume could decline.
The
trading market for our common stock is influenced by the research and reports
that industry or securities analysts publish about us or our
business. If one or more of the analysts who cover us issue an
adverse opinion regarding our stock, our stock price would likely
decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could lose visibility in
the financial markets, which in turn could cause our stock price or trading
volume to decline.
Provisions
in our organizational documents, our shareholders rights agreement and
California law could delay or prevent a change in control of our company that
our shareholders may consider favorable.
Our
articles of incorporation and bylaws contain provisions that could limit the
price that investors might be willing to pay in the future for shares of our
common stock. Our Board of Directors can authorize the issuance of preferred stock that can be
created and issued by our Board of Directors without prior shareholder approval,
commonly referred to as "blank check" preferred stock, with rights senior to
those of our common stock. The rights of the holders of our common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that we may issue in the future. The
issuance of preferred stock could have the effect of delaying, deterring or
preventing a change in control and could adversely affect the voting power of
your shares. In addition, our Board of Directors has adopted a rights
plan that provides each share of our common stock with an associated right to
purchase from us one one-thousandth share of Series D participating preferred
stock at a purchase price of $58.00 in cash, subject to adjustment in the manner
set forth in the rights agreement. The rights have anti-takeover
effects, in that they would cause substantial dilution to a person or group that
attempts to acquire a significant interest in our company on terms not approved
by our Board of Directors. In addition, provisions of California law
could make it more difficult for a third party to acquire a majority of our
outstanding voting stock by discouraging a hostile bid, or delaying or deterring
a merger, acquisition or tender offer in which our shareholders could receive a
premium for their shares or a proxy contest for control of our company or other
changes in our management.
ITEM
2. UNREGISTERED SALES OF EQUITY SERCURITIES AND USE OF
PROCEEDS
On
February 26, 2008, our Board of Directors approved a share repurchase program
that authorized the repurchase of up to 2.0 million shares of our common
stock. On March 18, 2008, our Board of Directors amended the current
program and increased the aggregate number of authorized shares by 3.0
million. This share repurchase program shall expire in a year from
the date of adoption. As of November 1, 2008, 0.8 million authorized
shares remained available for repurchase. We did not repurchase any
shares under this repurchase program for the three months ended November 1,
2008.
None.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER
INFORMATION
None.
ITEM 6. EXHIBITS
The
following exhibits are filed herewith:
31.1
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Certification
of the President and Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
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31.2
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Certification
of the Chief Financial Officer and Secretary pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
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32.1
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Certificate
of President and Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (1)
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32.2
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Certificate
of Chief Financial Officer and Secretary pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (1)
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(1) The
certificates contained in Exhibits 32.1 and 32.2 are not deemed “filed” for
purposes of Section 18 of the Securities and Exchange Act of 1934 and are
not to be incorporated by reference into any filing of the registrant under the
Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof irrespective of any general incorporation by
reference language contained in any such filing, except to the extent that the
registration specifically incorporates it by reference.
SIGNATURES
Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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SIGMA
DESIGNS, INC.
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Date:
December 11, 2008
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By:
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/s/ Thinh
Q. Tran
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Thinh
Q. Tran
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Chairman
of the Board, President and Chief Executive Officer
(Principal
Executive Officer)
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By:
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/s/ Thomas
E. Gay III
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Thomas
E. Gay III
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Chief
Financial Officer and Secretary
(Principal
Financial and Accounting Officer)
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EXHIBIT
INDEX
31.1
|
Certification
of the President and Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
|
|
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31.2
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Certification
of the Chief Financial Officer and Secretary pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
|
|
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32.1
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Certificate
of President and Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (1)
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|
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32.2
|
Certificate
of Chief Financial Officer and Secretary pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (1)
|
(1) The
certificates contained in Exhibits 32.1 and 32.2 are not deemed “filed” for
purposes of Section 18 of the Securities and Exchange Act of 1934 and are
not to be incorporated by reference into any filing of the registrant under the
Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof irrespective of any general incorporation by
reference language contained in any such filing, except to the extent that the
registration specifically incorporates it by reference.
49