sigma_10q-050308.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 May 3, 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 May
30, 2008, we had 26,576,370 shares of Common Stock outstanding.
TABLE
OF CONTENTS
PART
I. FINANCIAL
INFORMATION
ITEM 1. UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIGMA
DESIGNS, INC.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands, except share amounts)
|
|
|
May
3,
|
|
|
February
2,
|
|
|
|
|
2008
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
92,635 |
|
|
$ |
174,089 |
|
|
Short-term
marketable securities
|
|
|
45,349 |
|
|
|
44,401 |
|
|
Accounts
receivable, net
|
|
|
33,741 |
|
|
|
40,205 |
|
|
Inventories
|
|
|
34,541 |
|
|
|
26,283 |
|
|
Deferred
tax assets
|
|
|
5,155 |
|
|
|
5,155 |
|
|
Prepaid
expenses and other current assets
|
|
|
5,591 |
|
|
|
5,547 |
|
|
Total
current assets
|
|
|
217,012 |
|
|
|
295,680 |
|
|
Long-term
marketable securities
|
|
|
52,123 |
|
|
|
57,242 |
|
|
Software,
equipment and leasehold improvements, net
|
|
|
11,836 |
|
|
|
8,783 |
|
|
Long-term
investments
|
|
|
263 |
|
|
|
263 |
|
|
Goodwill
|
|
|
7,255 |
|
|
|
5,020 |
|
|
Intangible
assets, net
|
|
|
13,527 |
|
|
|
4,303 |
|
|
Deferred
tax assets, net of current portion
|
|
|
6,926 |
|
|
|
7,513 |
|
|
Other
non-current assets
|
|
|
894 |
|
|
|
662 |
|
|
Total
assets
|
|
$ |
309,836 |
|
|
$ |
379,466 |
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
17,504 |
|
|
$ |
18,484 |
|
|
Accrued
liabilities
|
|
|
13,369 |
|
|
|
14,018 |
|
|
Total
current liabilities
|
|
|
30,873 |
|
|
|
32,502 |
|
|
Other
long-term liabilities
|
|
|
1,758 |
|
|
|
1,372 |
|
|
Total
liabilities
|
|
|
32,631 |
|
|
|
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; 30,399,577 issued and 26,563,552 outstanding at May 3,
2008 and 30,031,060 shares issued and outstanding at February 2,
2008
|
|
|
348,872 |
|
|
|
341,194 |
|
|
Treasury
stock, at cost, 3,836,025 shares at May 3, 2008 and no shares at February
2, 2008
|
|
|
(80,593 |
) |
|
|
— |
|
|
Accumulated
other comprehensive income
|
|
|
672 |
|
|
|
811 |
|
|
Retained
earnings
|
|
|
8,254 |
|
|
|
3,587 |
|
|
Total
shareholders' equity
|
|
|
277,205 |
|
|
|
345,592 |
|
|
Total
liabilities and shareholders' equity
|
|
$ |
309,836 |
|
|
$ |
379,466 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except per share data)
|
|
|
Three
Months Ended
|
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net
revenue
|
|
$ |
56,882 |
|
|
$ |
36,016 |
|
|
Cost
of revenue
|
|
|
31,249 |
|
|
|
18,206 |
|
|
Gross
profit
|
|
|
25,633 |
|
|
|
17,810 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
10,856 |
|
|
|
6,089 |
|
|
Sales
and marketing
|
|
|
2,641 |
|
|
|
2,187 |
|
|
General
and administrative
|
|
|
6,468 |
|
|
|
4,294 |
|
|
Acquired
in-process research and development
|
|
|
1,571 |
|
|
|
— |
|
|
Total
operating expenses
|
|
|
21,536 |
|
|
|
12,570 |
|
|
Income
from operations
|
|
|
4,097 |
|
|
|
5,240 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
2,168 |
|
|
|
320 |
|
|
Income
before income taxes
|
|
|
6,265 |
|
|
|
5,560 |
|
|
Provision
for income taxes
|
|
|
1,598 |
|
|
|
191 |
|
|
Net
income
|
|
$ |
4,667 |
|
|
$ |
5,369 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.16 |
|
|
$ |
0.23 |
|
|
Diluted
|
|
$ |
0.16 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,296 |
|
|
|
22,979 |
|
|
Diluted
|
|
|
29,483 |
|
|
|
26,825 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
Three
Months Ended
|
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,667 |
|
|
$ |
5,369 |
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,680 |
|
|
|
761 |
|
|
Acquired
in-process research and development
|
|
|
1,571 |
|
|
|
- |
|
|
Share-based
compensation expense
|
|
|
4,754 |
|
|
|
1,326 |
|
|
Provision
to record excess and obsolete inventory
|
|
|
781 |
|
|
|
183 |
|
|
Provision
(release) for sales returns, discounts and doubtful
accounts
|
|
|
(222 |
) |
|
|
236 |
|
|
Deferred
income taxes
|
|
|
587 |
|
|
|
— |
|
|
Loss
on disposal of software, equipment and leasehold
improvements
|
|
|
1 |
|
|
|
— |
|
|
Gains
on sale of long-term investments
|
|
|
— |
|
|
|
(31 |
) |
|
Accretion
of contributed leasehold improvements
|
|
|
(31 |
) |
|
|
(29 |
) |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
7,583 |
|
|
|
(1,758 |
) |
|
Inventories
|
|
|
(5,621 |
) |
|
|
260 |
|
|
Prepaid
expenses and other current assets
|
|
|
92 |
|
|
|
103 |
|
|
Other
non-current assets
|
|
|
(232 |
) |
|
|
(16 |
) |
|
Accounts
payable
|
|
|
(1,210 |
) |
|
|
(6,281 |
) |
|
Accrued
liabilities and others
|
|
|
(894 |
) |
|
|
(336 |
) |
|
Other
long-term liabilities
|
|
|
418 |
|
|
|
(108 |
) |
|
Net
cash provided by (used in) operating activities
|
|
|
13,924 |
|
|
|
(321 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of marketable securities
|
|
|
(24,205 |
) |
|
|
(10,558 |
) |
|
Sales
and maturities of marketable securities
|
|
|
28,116 |
|
|
|
10,725 |
|
|
Purchases
of software, equipment and leasehold improvement
|
|
|
(3,161 |
) |
|
|
(215 |
) |
|
Cash
paid in connection with acquisition
|
|
|
(18,576 |
) |
|
|
— |
|
|
Recovery
of long-term investment loss
|
|
|
— |
|
|
|
31 |
|
|
Net
cash used in investing activities
|
|
|
(17,826 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Treasury
stock purchases
|
|
|
(80,593 |
) |
|
|
— |
|
|
Repayment
of bank borrowings
|
|
|
— |
|
|
|
(53 |
) |
|
Collection
of shareholder notes receivable
|
|
|
— |
|
|
|
29 |
|
|
Net
proceeds from exercise of employee stock options
|
|
|
2,049 |
|
|
|
1,574 |
|
|
Excess
tax benefit on share-based compensation
|
|
|
875 |
|
|
|
— |
|
|
Net
cash (used in) provided by financing activities
|
|
|
(77,669 |
) |
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rates changes on cash and cash
equivalents
|
|
|
117 |
|
|
|
60 |
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(81,454 |
) |
|
|
1,272 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
174,089 |
|
|
|
24,413 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
92,635 |
|
|
$ |
25,685 |
|
SIGMA
DESIGNS, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In
thousands)
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
— |
|
|
$ |
5 |
|
|
Cash
paid for income taxes
|
|
|
— |
|
|
|
6 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
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, 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 2008 Annual Report.
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 May 3, 2008 and February 2, 2008, the
consolidated results of its operations for the three months ended May 3, 2008
and May 5, 2007, and the consolidated cash flows for the three months ended May
3, 2008 and May 5, 2007. The results of operations for the three
months ended May 3, 2008 and May 5, 2007 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 includes 13
weeks and ends on the last Saturday of the period. The first quarter
of fiscal 2009 ended on May 3, 2008. The first quarter of fiscal 2008
ended on May 5, 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 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. Auction rate securities 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 auction rate securities fail to clear at
the reset auction and the Company is unable to estimate the date the auction
rate securities will next clear, they are classified as long-term marketable
securities consistent with their stated contractual maturities. At
May 3, 2008 the Company held nine auction rate securities, with a cost of $43.0
million, all of which failed to clear at recent auctions. The Company
does not expect to incur other-than-temporary declines in value associated with
these auction rate securities and has classified all auction rate securities
held at May 3, 2008 as long-term marketable securities consistent with their
stated maturities which range from 30 to 40 years.
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 $0.8 million,
and $0.2 million to cost of revenue for the three months ended May 3, 2008 and
May 5, 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 is 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 of
goodwill 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 of
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 $32,000 and
$242,000 for the three months ended May 3, 2008 and May 5, 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 $28,000 and $600,000 for the
three months ended May 3, 2008 and May 5, 2007, respectively.
Foreign
currency: The Company determines the functional currency for
its parent company and each of its subsidiaries by reviewing the currencies in
which their respective operating activities occur. Transaction gains and losses
arising from activities in other than the applicable functional currency are
calculated using average exchange rates for the applicable period and reported
in net income as a non-operating item in each period. Non-monetary balance sheet
items denominated in a currency other than the applicable functional currency
are translated using the exchange rate in effect on the balance sheet date and
any gains and losses are included in cumulative translation
adjustment.
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 four 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 May 3, 2008 and
February 2, 2008, four and three customers accounted for approximately 67% 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 quarter ended May 3, 2008 and May 5, 2007 was $1.6 million
and $0.2 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. During the first quarter
of fiscal 2009, the Company recorded a net increase of $0.1 million in
unrecognized tax benefits.
Share-based
compensation: The Company applies SFAS No. 123(R) Share-Based Payment, (“SFAS
123(R)”) to measure and recognize of 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 quarter 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 ended May
3, 2008 and May 5, 2007 was as follows (in thousands, except per share
amounts):
|
|
|
Three
Months Ended
|
|
|
|
|
May
3, 2008
|
|
|
May
5, 2007
|
|
|
Share-based
compensation expense by type of award:
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
4,634 |
|
|
$ |
1,158 |
|
|
Employee
stock purchase plan
|
|
|
103 |
|
|
|
57 |
|
|
Total
share-based compensation expense
|
|
|
4,737 |
|
|
|
1,215 |
|
|
Tax
effect of share-based compensation expense
|
|
|
(1,800 |
) |
|
|
(42 |
) |
|
Net
effect on net income
|
|
$ |
2,937 |
|
|
$ |
1,173 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect
on net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.10 |
|
|
$ |
0.05 |
|
|
Diluted
|
|
$ |
0.10 |
|
|
$ |
0.04 |
|
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 2007, the FASB issued SFAS
No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities (“SFAS
159”). SFAS 159 provides companies with an option to report selected
financial assets and liabilities at fair value. The standard’s
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. The standard requires companies to provide
additional information that will help investors and other users of financial
statements to more easily understand the effect of the company’s choice to use
fair value on its earnings. It also requires companies to display the
fair value of those assets and liabilities for which the company has chosen to
use fair value on the face of the balance sheet. The new standard
does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, Disclosures about Fair Value of
Financial Instruments. SFAS 159 is effective for fiscal years
beginning after November 15, 2007, and the Company did not elect to adopt
the fair value option under SFAS 159.
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. SFAS 141R is effective
for fiscal years beginning after December 15, 2008. The Company
has adopted SFAS 141R beginning February 3, 2008 and there is no material impact
on its condensed consolidated financial statements.
|
2.
|
Cash, cash equivalents and marketable
securities
|
Cash,
cash equivalents and marketable securities consist of the following (in
thousands):
|
|
|
May
3, 2008
|
|
|
February
2, 2008
|
|
|
|
|
Book
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Book
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Value
|
|
|
Gain/(Loss)
|
|
|
Value
|
|
|
Value
|
|
|
Gain/(Loss)
|
|
|
Value
|
|
|
Money
market funds
|
|
$ |
74,128 |
|
|
$ |
— |
|
|
$ |
74,128 |
|
|
$ |
165,719 |
|
|
$ |
— |
|
|
$ |
165,719 |
|
|
Corporate
commercial paper
|
|
|
32,042 |
|
|
|
(23 |
) |
|
|
32,019 |
|
|
|
33,354 |
|
|
|
35 |
|
|
|
33,389 |
|
|
Corporate
bonds
|
|
|
12,568 |
|
|
|
28 |
|
|
|
12,596 |
|
|
|
17,177 |
|
|
|
180 |
|
|
|
17,357 |
|
|
US
agency discount notes
|
|
|
17,982 |
|
|
|
5 |
|
|
|
17,987 |
|
|
|
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
|
|
$ |
179,720 |
|
|
$ |
10 |
|
|
$ |
179,730 |
|
|
$ |
272,076 |
|
|
$ |
270 |
|
|
$ |
272,346 |
|
|
Cash
on hand held in the United States
|
|
|
|
|
|
|
|
|
|
|
8,665 |
|
|
|
|
|
|
|
|
|
|
|
2,257 |
|
|
Cash
on hand held overseas
|
|
|
|
|
|
|
|
|
|
|
1,712 |
|
|
|
|
|
|
|
|
|
|
|
1,129 |
|
|
Total
cash on hand
|
|
|
|
|
|
|
|
|
|
|
10,377 |
|
|
|
|
|
|
|
|
|
|
|
3,386 |
|
|
Total
cash, cash equivalents and marketable securities
|
|
|
|
|
|
|
|
|
|
$ |
190,107 |
|
|
|
|
|
|
|
|
|
|
$ |
275,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
$ |
92,635 |
|
|
|
|
|
|
|
|
|
|
$ |
174,089 |
|
|
Short-term
marketable securities
|
|
|
|
|
|
|
|
|
|
|
45,349 |
|
|
|
|
|
|
|
|
|
|
|
44,401 |
|
|
Long-term
marketable securities
|
|
|
|
|
|
|
|
|
|
|
52,123 |
|
|
|
|
|
|
|
|
|
|
|
57,242 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
190,107 |
|
|
|
|
|
|
|
|
|
|
$ |
275,732 |
|
The
amortized cost and estimated fair value of cash equivalents and marketable
securities, by contractual maturity, are shown below (in
thousands). Actual maturities may differ from contractual
maturities.
|
|
|
May
3, 2008
|
|
|
February
2, 2008
|
|
|
|
|
Book
|
|
|
Fair
|
|
|
Book
|
|
|
Fair
|
|
|
(In
thousands)
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Due
in 1 year or less
|
|
$ |
127,583 |
|
|
$ |
127,607 |
|
|
$ |
214,959 |
|
|
$ |
215,104 |
|
|
Due
in greater than 1 year
|
|
|
52,137 |
|
|
|
52,123 |
|
|
|
57,117 |
|
|
|
57,242 |
|
|
Total
|
|
$ |
179,720 |
|
|
$ |
179,730 |
|
|
$ |
272,076 |
|
|
$ |
272,346 |
|
Historically,
the Company classified its auction rate securities as short-term marketable
securities because the Company was able to liquidate them at its discretion at
the reset period. As of May 3, 2008, the carrying value of the
Company’s nine auction rate securities totaled
$43.0 million. During February, March and April of 2008, all of
the auctions associated with these securities failed. These failures
are not believed to be a credit issue, but rather caused by a lack of
liquidity. The auction rate securities 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 auction rate securities 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. The Company does not expect to incur
other-than-temporary declines in value associated with these auction rate
securities and has classified all auction rate securities held at May 3, 2008 as
long-term marketable securities consistent with their stated maturities which
range from 30 to 40 years.
The
brokerage statements received from the Company’s investment firm that hold its
auction rate securities included an estimated value as of May 3, 2008 at
approximately $40.5 million with an unrealized loss of $2.5
million. The Company has reviewed the assumptions underlying this
valuation change and has not recorded this unrealized loss of $2.5
million.
Although
there is uncertainty with regard to the short-term liquidity of these
securities, 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, the Company has the intent and ability to
hold these securities until the earlier of: the market for auction rate
securities stabilizes, the issuer refinances the underlying security or the
maturity of the underlying securities. The Company received the
valuation calculated by the investment firm, however, does not believe it
represents fair value and accordingly the Company has not recorded an unrealized
loss for these adjustments. Based on the cash and short-term
marketable securities balance of $138.0 million and expected positive operating
cash flows, the Company does not anticipate a lack of liquidity associated with
the auction rate securities will adversely affect the Company’s ability to
conduct business, and the Company has the ability to hold the securities
throughout the currently estimated recovery period. The Company will
continue to evaluate any changes in the market value of the failed auction rate
securities that have not been liquidated subsequent to
quarter-end. Depending upon future market conditions, the Company may
be required to record an other-than-temporary decline in market value at that
time.
|
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 our own 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
auction-rate securities, 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.
Auction-rate securities are classified within Level 3 as significant assumptions
are not observable in the market. During the three months ended May
3, 2008, the Company recorded no impairment loss relating to the value of
auction-rate securities. There were no realized gain or losses
recorded for these auction-rate securities in the three months ended May 3,
2008.
The table
below presents the balances of the Company’s assets measured at fair value on a
recurring basis (in thousands):
|
|
|
Three
Months Ended
|
|
|
|
|
May
3, 2008
|
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Money
market funds
|
|
$ |
74,128 |
|
|
$ |
74,128 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Corporate
commercial paper
|
|
|
32,019 |
|
|
|
32,019 |
|
|
|
— |
|
|
|
— |
|
|
Corporate
bonds
|
|
|
12,596 |
|
|
|
12,596 |
|
|
|
— |
|
|
|
— |
|
|
US
agency discount notes
|
|
|
17,987 |
|
|
|
17,987 |
|
|
|
— |
|
|
|
— |
|
|
Auction
rate securities
|
|
|
43,000 |
|
|
|
— |
|
|
|
— |
|
|
|
43,000 |
|
|
Total
cash equivalents and marketable securities
|
|
$ |
179,730 |
|
|
$ |
136,730 |
|
|
$ |
— |
|
|
$ |
43,000 |
|
The table
below provides a reconciliation of the Company’s financial assets measured at
fair value on a reoccurring basis, consisting of auction rate securities, using
significant unobservable inputs (Level 3) for the three months ended May 3, 2008
(in thousands):
|
|
Fair
Value Measurements
|
|
|
|
Using
Significant
|
|
|
|
Unobservable
Inputs (Level 3)
|
|
|
|
Available-for-sale
|
|
|
Beginning
Balance
|
|
$ |
— |
|
|
Total
realized gains or (losses) included in net income
|
|
|
— |
|
|
Total
unrealized losses included in other comprehensive income
|
|
|
— |
|
|
Purchases,
sales and settlements, net
|
|
|
(900 |
) |
|
Transfers
in Level 3
|
|
|
43,900 |
|
|
Ending
balance
|
|
|
43,000 |
|
|
|
|
|
|
|
|
The
total amount of total gains or losses for the period included in earnings
attributable to the change in unrealized gains or losses relating to
assets still held at the reporting date
|
|
$ |
— |
|
Inventories
consist of the following (in thousands):
|
|
|
May
5,
|
|
|
February
2,
|
|
|
|
|
2008
|
|
|
2008
|
|
|
Raw
materials
|
|
$ |
20,865 |
|
|
$ |
12,838 |
|
|
Work-in-process
|
|
|
5,655 |
|
|
|
2,735 |
|
|
Finished
goods
|
|
|
8,021 |
|
|
|
10,710 |
|
|
Total
|
|
$ |
34,541 |
|
|
$ |
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 we intend to use to bring studio
quality video to consumer television, from Genuum 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
|
|
$ |
4,554 |
|
|
|
|
|
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
|
|
|
2,235 |
|
|
|
|
|
|
Total
consideration
|
|
$ |
18,576 |
|
|
|
|
|
|
6.
|
Goodwill
and Intangible assets
|
Goodwill
Total
goodwill as of May 3, 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
Blue 7 acquisition.
Intangible
assets
Acquired
intangible assets, subject to amortization, were as follows as of May 3, 2008
(in thousands, except for years):
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
Useful
Life
|
|
Developed
technology
|
|
$ |
13,803 |
|
|
$ |
(2,018 |
) |
|
$ |
11,785 |
|
2
to 7 years
|
|
Noncompete
agreements
|
|
|
1,400 |
|
|
|
(1,030 |
) |
|
|
370 |
|
3
years
|
|
Customer
relationships
|
|
|
1,123 |
|
|
|
(36 |
) |
|
|
1,087 |
|
7
years
|
|
Trademarks
|
|
|
298 |
|
|
|
(13 |
) |
|
|
285 |
|
5
years
|
|
|
|
$ |
16,624 |
|
|
$ |
(3,097 |
) |
|
$ |
13,527 |
|
|
Amortization
expense related to acquired intangible assets was $0.7 million and $0.3 million
for the three months ended May 3, 2008 and May 5, 2007,
respectively. As of May 3, 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
|
|
|
2009
|
|
$ |
1,711 |
|
|
$ |
351 |
|
|
$ |
120 |
|
|
$ |
45 |
|
|
$ |
2,227 |
|
|
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
|
|
|
1,427 |
|
|
|
— |
|
|
|
327 |
|
|
|
— |
|
|
|
1,754 |
|
|
|
|
$ |
11,785 |
|
|
$ |
370 |
|
|
$ |
1,087 |
|
|
$ |
285 |
|
|
$ |
13,527 |
|
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 May 3, 3008 and May 5, 2007 are as
follows (in thousands):
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
End
of
|
|
|
Three
Months Ended
|
|
of
Period
|
|
|
Additions
|
|
|
Deductions
|
|
|
Period
|
|
|
May
3, 2008
|
|
$ |
1,564 |
|
|
$ |
212 |
|
|
$ |
(71 |
) |
|
$ |
1,705 |
|
|
May
5, 2007
|
|
|
556 |
|
|
|
79 |
|
|
|
(116 |
) |
|
|
519 |
|
|
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
|
|
$ |
1,176 |
|
|
2010
|
|
|
1,641 |
|
|
2011
|
|
|
1,638 |
|
|
2012
|
|
|
1,686 |
|
|
2013
|
|
|
1,399 |
|
|
Thereafter
|
|
|
3,867 |
|
|
Total
minimum lease payments
|
|
$ |
11,407 |
|
Purchase
commitments
The
Company places non-cancelable orders to purchase semiconductor products from our
suppliers on an eight to twelve week lead-time basis. The total
amount of outstanding non-cancelable purchase orders was approximately $31.1
million and $19.6 million as of May 3, 2008 and February 2, 2008,
respectively.
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
$16,000 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
$0.2 million for the three months ended May 3, 2008.
Group
Registered Retirement Savings Plan
The
Company maintains a Group Registered Retirement Savings Plan 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
in calendar year 2008. In April 2008, the Company implemented a matching
contribution program whereby it matches employee contributions made by each
employee up to 2.5% of their annual salary. The matching contributions to
the Group Registered Retirement Saving Plan totaled $11,000 for the three months
ended May 3,
2008.
Contingencies
Litigation
Certain
current and former directors and officers of the Company have been named as
defendants in several shareholder derivative actions filed in the United States
District Court for the Northern District of California, which have been
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 allege 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
assert 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 there under. They also
allege that the individual defendants aided and abetted one another’s alleged
breaches of fiduciary duty and violated California Corporations Code section
25402 and bring claims for an accounting and rescission. In the State
Action, plaintiffs also allege that the individual defendants wasted corporate
assets. Both Actions seek to recover unspecified money damages,
disgorgement of profits and benefits and equitable relief. The
Federal Action also seeks treble damages, rescission of certain defendants’
option contracts, imposition of a constructive trust over executory option
contracts and attorney’s fees. The Company is named as a nominal
defendant in both the Federal and State Actions; thus, no recovery against the
Company is 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. The settlement, which is subject to the
approval of the United States District Court for the Northern District of
California, will result in dismissal of both the Federal Action and the State
Action. The parties filed a Joint Motion for Preliminary Approval of
Settlement on May 29, 2008. At a hearing on this motion held on June
6, 2008, the Court requested that the parties revise certain documents and
submit them for the Court’s review. The parties fulfilled this
request and expect an order on the joint motion to be entered by June 30,
2008.
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. The
settlement, which is subject to the approval of the United States District Court
for the Northern District of California, will result in dismissal of both the
Federal Action and the State Action. On June 9, 2008, pursuant to
joint stipulation, the Court ordered that the State Action continue to be stayed
pending entry of an Order and Final Judgment approving the settlement in the
Federal Action. 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 has requested that the
Company voluntarily produce documents relating to, among other things, its stock
option practices. The Company is cooperating with the
SEC.
In May
2007, the IRS began an employment tax audit for the Company’s fiscal 2004 and
2005. The Company has also requested that fiscal 2006 be included in
this audit cycle. The focus of the IRS employment tax audit relates
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 been meeting with the
IRS to determine if an informal settlement may be reached as to the tax, penalty
and interest due in respect of the employment taxes for the 2004 and 2005 audit
years as well as for 2006.
In August
2007, the IRS began an income tax audit for the Company’s fiscal
2005. The IRS has not yet proposed any tax deficiency, interest or
penalty amounts in respect of this audit.
Basic net
income per share for the periods presented is computed by dividing net income by
the weighted average number of common shares outstanding (excluding shares
subject to repurchase). 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 ended May 3, 2008 and May 5, 2007 (in thousands, except per
share amounts):
|
|
|
Three
Months Ended
|
|
|
|
|
May
3, 2008
|
|
|
May
5, 2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$ |
4,667 |
|
|
$ |
5,369 |
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
28,296 |
|
|
|
23,010 |
|
|
Escrowed
shares related to Blue7 acquisition
|
|
|
— |
|
|
|
(31 |
) |
|
Shares
used in computation - basic
|
|
|
28,296 |
|
|
|
22,979 |
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Escrowed
shares related to Blue7 acquisition
|
|
|
— |
|
|
|
31 |
|
|
Stock
options
|
|
|
1,187 |
|
|
|
3,815 |
|
|
Shares
used in computation - diluted
|
|
|
29,483 |
|
|
|
26,825 |
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.16 |
|
|
$ |
0.23 |
|
|
Diluted
|
|
$ |
0.16 |
|
|
$ |
0.20 |
|
A summary
of the excluded potentially dilutive securities as of three months ended May 3,
2008 and May 5, 2007 as follows (in thousands):
|
|
|
Three
Months Ended
|
|
|
|
|
May
3, 2008
|
|
|
May
5, 2007
|
|
|
Stock
options excluded because exercise price in excess of average stock
price
|
|
|
1,309 |
|
|
|
245 |
|
The
reconciliation of net income to total comprehensive income is as follows (in
thousands):
|
|
|
Three
Months Ended
|
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net
income
|
|
$ |
4,667 |
|
|
$ |
5,369 |
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on available-for-sale securities
|
|
|
(261 |
) |
|
|
1 |
|
|
Foreign
currency translation adjustment
|
|
|
122 |
|
|
|
59 |
|
|
Total
comprehensive income
|
|
$ |
4,528 |
|
|
$ |
5,429 |
|
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 May 3, 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 82,500 have been granted as of May 3,
2008.
The total
stock option activity of the 2001 Option Plan 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 |
|
|
|
7.28 |
|
|
$ |
24,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Vested and Expected to Vest
|
|
|
3,673,461 |
|
|
$ |
18.47 |
|
|
|
7.23 |
|
|
$ |
24,138 |
|
|
Ending
Exercisable
|
|
|
1,421,822 |
|
|
$ |
9.42 |
|
|
|
5.52 |
|
|
$ |
15,293 |
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on the Company’s closing stock price of $18.43 as of May
3, 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 $10.7 million and $15.9 million for the three months ended May
3, 2008 and May 5, 2007, respectively, determined as of the date of option
exercise. The total fair value of options, which vested during the
three months ended May 3, 2008 and May 5, 2007 was $3.6 million and $1.2
million, respectively. At May 3, 2008, 747,449 shares were available
for future grants.
The
options outstanding and currently exercisable at May 3, 2008 were in the
following exercise price ranges:
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Range of Exercise Prices
|
|
|
Number of Shares Outstanding
at
May 3, 2008
|
|
|
Weighted Average Remaining Life
(Years)
|
|
|
Weighted Average
Exercise Price Per Share
|
|
|
Number of Shares Exercisable at May 3,
2008
|
|
|
Weighted Average Exercise Price Per
Share
|
|
| $ |
0.95 |
|
|
$ |
3.40 |
|
|
|
452,877 |
|
|
|
4.61 |
|
|
$ |
2.27 |
|
|
|
414,303 |
|
|
$ |
2.20 |
|
| $ |
3.50 |
|
|
$ |
7.32 |
|
|
|
391,799 |
|
|
|
4.30 |
|
|
$ |
5.22 |
|
|
|
279,038 |
|
|
$ |
5.03 |
|
| $ |
7.40 |
|
|
$ |
9.89 |
|
|
|
525,417 |
|
|
|
6.61 |
|
|
$ |
8.63 |
|
|
|
226,143 |
|
|
$ |
8.14 |
|
| $ |
11.06 |
|
|
$ |
11.06 |
|
|
|
560,099 |
|
|
|
8.31 |
|
|
$ |
11.06 |
|
|
|
159,410 |
|
|
$ |
11.06 |
|
| $ |
11.40 |
|
|
$ |
13.88 |
|
|
|
411,067 |
|
|
|
7.39 |
|
|
$ |
11.69 |
|
|
|
184,998 |
|
|
$ |
11.66 |
|
| $ |
15.91 |
|
|
$ |
27.83 |
|
|
|
399,802 |
|
|
|
9.07 |
|
|
$ |
21.73 |
|
|
|
54,930 |
|
|
$ |
19.47 |
|
| $ |
28.63 |
|
|
$ |
28.63 |
|
|
|
135,000 |
|
|
|
9.08 |
|
|
$ |
28.63 |
|
|
|
— |
|
|
$ |
— |
|
| $ |
31.57 |
|
|
$ |
31.57 |
|
|
|
216,500 |
|
|
|
6.96 |
|
|
$ |
31.57 |
|
|
|
3,000 |
|
|
$ |
31.57 |
|
| $ |
41.58 |
|
|
$ |
41.58 |
|
|
|
100,000 |
|
|
|
4.78 |
|
|
$ |
41.58 |
|
|
|
100,000 |
|
|
$ |
41.58 |
|
| $ |
45.83 |
|
|
$ |
45.83 |
|
|
|
660,400 |
|
|
|
9.51 |
|
|
$ |
45.83 |
|
|
|
— |
|
|
$ |
— |
|
| $ |
0.95 |
|
|
$ |
45.83 |
|
|
|
3,852,961 |
|
|
|
7.28 |
|
|
$ |
18.80 |
|
|
|
1,421,822 |
|
|
$ |
9.42 |
|
As of May
3, 2008, the unrecorded share-based compensation balance related to stock
options outstanding excluding estimated forfeitures was $42.1 million and
will be recognized over an estimated weighted average amortization period of
3.36 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. As of May 3, 2008, 254,428 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 May 3, 2008 and May 5, 2007 was $18.71 and $17.54 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 May 3, 2008 and May 5, 2007 was $17.45 and $8.44,
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
|
|
|
May
3, 2008
|
|
May
5, 2007
|
|
|
Stock
Options
|
|
Stock
Purchase Plan
|
|
Stock
Options
|
|
Stock
Purchase Plan
|
|
Expected
volatility
|
71.12%
|
|
60.21%
|
|
68.33%
|
|
62.91%
|
|
Risk-free
interest rate
|
3.33%
|
|
3.49%
|
|
4.57%
|
|
5.11%
|
|
Expected
term (in years)
|
5.66
|
|
0.50
|
|
6.10
|
|
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 71.12%, risk-free interest rates of 3.39%, expected term of
options of 6.72 years and dividend yields of zero percent for the three months
ended May 3, 2008. Total non-employee share-based compensation
recorded during the three months ended May 3, 2008 and May 5, 2007 was $17,000
and $107,000, respectively
|
12.
|
Significant
customers
|
For the
three month ended May 3, 2008, four customers accounted for 16%, 15%, 11% and
11%, respectively, of net revenue. For the three months ended May 5,
2007, three customers accounted for 22%, 15% and 12%, respectively, of net
revenue.
Four
customers accounted for 26%, 20%, 11% and 11%, respectively, of total accounts
receivable at May 3, 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% ownership interest. Three of the Company’s board members have
investments in this same firm, with an aggregate ownership fraction of less than
1% ownership interest. 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, 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.
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, our expectations for growth in our
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 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 a leading provider 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, and the 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 players, multi-function products, and portable media devices
that perform playback of digital media stored on optical or hard disk
formats. 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, prosumer audio/video applications, and media
communication devices. 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 three months ended May 3, 2008 and May 5,
2007, we derived 99% and 95%, 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
$21.7 million or 63%, respectively, for the three months ended May 3, 2008
as compared to the corresponding periods 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 80% and 70% of our net
revenue for the three months ended May 3, 2008 and May 5, 2007,
respectively. We believe our success with the SMP8630 series product
demonstrates our success in the recently emerging IPTV and Blu-ray player
markets.
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.
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. We also
experienced a negative impact to our gross margins for the three months ended
May 3, 2008 as a result of inventory aquired of $3.2 million from Gennum
Corporation in connection with our acquisition of certain assets of its VXP
business.
We expect
our revenue from the IPTV, the Blu-ray and other media players and the HDTV
markets to grow with increasing demand in these markets. Our revenue
derived from the IPTV market may fluctuate in future periods, as this revenue is
based on telecommunications service providers IPTV service deployments, the
timing of which are uncertain. We expect our operating expenses will
increase in absolute dollars as our revenue grows.
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 May 3, 2008, we had purchased a cumulative total
of approximately 3.8 million shares of our common stock pursuant to the
repurchase program for an aggregate purchase price of $80.6 million at an
average price of $21.01 per share.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of financial condition and results of operations are
based on our 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 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. Management believes there
have been no material changes to our critical accounting policies and estimates
during the three months ended May 3, 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 selected consolidated financial data and
sets forth our historical operating results as a percentage of net revenue for
each of periods indicated (in thousands):
|
|
|
Three
Months Ended
|
|
|
|
|
May
3,
|
|
|
% of
|
|
|
May
5,
|
|
|
% of
|
|
|
|
|
2008
|
|
|
Net
Revenue
|
|
|
2007
|
|
|
Net
Revenue
|
|
|
Net
revenue
|
|
$ |
56,882 |
|
|
|
100 |
% |
|
$ |
36,016 |
|
|
|
100 |
% |
|
Cost
of revenue
|
|
|
31,249 |
|
|
|
(55 |
)% |
|
|
18,206 |
|
|
|
(51 |
)% |
|
Gross
profit
|
|
|
25,633 |
|
|
|
45 |
% |
|
|
17,810 |
|
|
|
49 |
% |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
10,856 |
|
|
|
(19 |
)% |
|
|
6,089 |
|
|
|
(17 |
)% |
|
Sales
and marketing
|
|
|
2,641 |
|
|
|
(5 |
)% |
|
|
2,187 |
|
|
|
(6 |
)% |
|
General
and administrative
|
|
|
6,468 |
|
|
|
(11 |
)% |
|
|
4,294 |
|
|
|
(12 |
)% |
|
Acquired
in-process research and development
|
|
|
1,571 |
|
|
|
(3 |
)% |
|
|
— |
|
|
|
— |
|
|
Total
operating expenses
|
|
|
21,536 |
|
|
|
(38 |
)% |
|
|
12,570 |
|
|
|
(35 |
)% |
|
Income
from operations
|
|
|
4,097 |
|
|
|
7 |
% |
|
|
5,240 |
|
|
|
15 |
% |
|
Interest
income and other income, net
|
|
|
2,168 |
|
|
|
4 |
% |
|
|
320 |
|
|
|
1 |
% |
|
Income
before income taxes
|
|
|
6,265 |
|
|
|
11 |
% |
|
|
5,560 |
|
|
|
15 |
% |
|
Provision
for income taxes
|
|
|
1,598 |
|
|
|
(3 |
)% |
|
|
191 |
|
|
|
(1 |
)% |
|
Net
income
|
|
$ |
4,667 |
|
|
|
8 |
% |
|
$ |
5,369 |
|
|
|
15 |
% |
Net
revenue
The
following table sets forth net revenue and percent change in net revenue (in
thousands):
| |
|
Three
Months Ended
|
|
|
|
|
May
3,
|
|
|
%
|
|
|
May
5,
|
|
|
|
|
2008
|
|
|
change
|
|
|
2007
|
|
Net
revenue
|
$
|
56,882
|
|
|
58%
|
|
$
|
36,016
|
Our net
revenue for the three months ended May 3, 2008 increased approximately $20.9
million, as compared to the corresponding period in the prior fiscal
year. The increase in net revenue for the three months ended May 3,
2008 was primarily due to an 86% increase over the prior period in unit
shipments of our SoC’s into the IPTV, Blu-ray and other media players markets,
which was partially offset by a 12% decline over the prior period in average
selling prices of our products. The increase in unit shipments was
driven primarily by our participation in the increased market adoption of
IPTV. The decrease in average selling prices was driven primarily by
the achievement of volume pricing targets by our customers.
Net
revenue by target market
We sell
our products into three primary markets, which are the IPTV market, the Blu-ray
and other media players 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 and prosumer audio/video 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 |
|
|
|
|
May
3, |
|
%
of
|
|
May
5, |
|
%
of
|
|
|
|
|
2008 |
|
Net
Revenue
|
|
2007 |
|
Net
Revenue
|
|
IPTV
|
|
|
$
|
42,997
|
|
76%
|
|
$
|
27,918
|
|
78%
|
|
Blu-ray
and other media players
|
|
|
|
11,450
|
|
20%
|
|
|
7,053
|
|
20%
|
|
HDTV
|
|
|
|
436
|
|
1%
|
|
|
511
|
|
1%
|
|
Other
|
|
|
|
1,999
|
|
3%
|
|
|
534
|
|
1%
|
|
Net
revenue
|
|
|
$
|
56,882
|
|
100%
|
|
$
|
36,016
|
|
100%
|
IPTV: The increase of
$15.1 million, or 54%, in net revenue from sales into the IPTV market for the
three months ended May 3, 2008 as compared to the corresponding period in the
prior fiscal year was primarily attributable to our customers in the IPTV market
incorporating our SoCs into their products, primarily our SMP8630 SoC
series.
Blu-ray and other
media players: The increase of
$4.4 million, or 62%, in net revenue from the Blu-ray and other media players
market for the three months ended May 3, 2008 as compared to the corresponding
period in the prior fiscal year was primarily attributable to increased sales
volume of our customers’ products incorporating our SoCs, including an increase
in Blu-ray and digital media adapter applications.
HDTV: We reported a
decrease in net revenue from sales into the HDTV market of $0.1 million or 15%
for the three months ended May 3, 2008 compared to the corresponding period in
the prior fiscal year.
Other: Our other markets
consists of PC add-ins and other ancillary markets, including products acquired
in connection with an acquisition of certain assets of the VXP Group from Gennum
Corporation. Sales to our other markets for the three months ended
May 3, 2008 increased $1.5 million or 274% compared to the corresponding period
in the prior year was primarily attributable to $1.1 million of revenue from
sales of our VXP product, which we commenced selling in February 2008 following
the asset acquisition from Gennum Corporation.
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
|
|
|
|
|
May
3,
|
|
%
of
|
|
May
5, |
|
%
of
|
|
|
|
|
2008 |
|
Net
Revenue
|
|
2007 |
|
Net
Revenue
|
|
SoCs
|
|
|
$ |
56,141
|
|
99%
|
|
$ |
34,392
|
|
95%
|
|
Other
|
|
|
|
741
|
|
1%
|
|
|
1,624
|
|
5%
|
|
Net
revenue
|
|
$ |
56,882
|
|
100%
|
|
$ |
36,016
|
|
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 and HDTV consumer electronic markets. The increase of $21.7
million, or 63% in net revenue from SoCs for the three months ended May 3, 2008
compared to the corresponding period in the prior fiscal year was due primarily
to increased demand in sales of IPTV products and Blu-ray players.
Other: We derive revenue
from other products and services, including engineering support services for
both hardware and software, engineering development for customization of SoCs
and other accessories and wireless devices. The decrease of $0.9
million or 54% for the three months ended May 3, 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 |
|
|
|
May
3,
|
|
%
of
|
|
May
5,
|
|
%
of
|
|
|
|
2008
|
|
Net
Revenue
|
|
2007
|
|
Net
Revenue
|
|
Asia
|
|
$
|
31,125
|
|
55%
|
|
$
|
21,787
|
|
61%
|
|
Europe
|
|
|
22,076
|
|
39%
|
|
|
10,876
|
|
30%
|
|
North
America
|
|
|
3,656
|
|
6%
|
|
|
3,300
|
|
9%
|
|
Other
regions
|
|
|
25
|
|
*
|
|
|
53
|
|
*
|
|
Net
revenue
|
|
$
|
56,882
|
|
100%
|
|
$
|
36,016
|
|
100%
|
|
|
*
|
These
regions provided less than 1% of our net revenue in these
periods
|
Asia: Our net revenue
in absolute dollars from Asia increased $9.3 million, or 43% in
the three months ended May 3, 2008 compared to the corresponding period in the
prior fiscal year. Our net revenue from Asia represented 55% and 61%
of our net revenue for the three months ended May 3, 2008 and May 5, 2007,
respectively. This 6% decrease as a percentage of revenue was
primarily due to the disproportionate increase in sales into Europe during
the three months ended May 3, 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
|
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Singapore
|
|
|
15% |
|
|
|
* |
|
|
Korea
|
|
|
* |
|
|
|
22% |
|
|
Japan
|
|
|
12% |
|
|
|
* |
|
|
China
|
|
|
10% |
|
|
|
* |
|
|
Taiwan
|
|
|
* |
|
|
|
10% |
|
|
|
*
|
Net
revenue from this country was less than 10% of our net
revenue
|
Europe: Our
net revenue in absolute dollars from Europe increased $11.2 million, or 103% for
the three months ended May 3, 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. 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
|
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
France
|
|
|
17% |
|
|
|
19% |
|
|
Netherlands
|
|
|
13% |
|
|
|
* |
|
|
|
*
|
Net
revenue from this country was less than 10% of our net
revenue
|
North
America: Our net revenue
from North America increased $0.4 million, or 11% for the three months ended May
3, 2008 compared to the corresponding period in the prior fiscal
year. The increase in the comparative three month period was
primarily attributable to increased demand for our SoC solutions for the IPTV
market and partially offset by the continuation of the trend that companies
located in North America who incorporate our products in their finished goods
are moving their production orders to large designers and manufacturers located
in the Asia or Europe regions. 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 SoC’s into their
products.
For the
three months ended May 3, 2008 and May 5, 2007, our net revenue generated
outside North America was 94% and 91% of our net revenue,
respectively.
Major
Customers
The
following table sets forth the major customers that accounted for 10% or more of
our net revenue:
|
|
|
Three
Months Ended
|
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
Customer
|
|
2008
|
|
|
2007
|
|
|
Cisco
Systems
|
|
|
16% |
|
|
|
15% |
|
|
MTC
Singapore
|
|
|
15% |
|
|
|
* |
|
|
Macnica,
Inc.
|
|
|
11% |
|
|
|
* |
|
|
Freebox
SA
|
|
|
11% |
|
|
|
12% |
|
|
Uniquest
Corp.
|
|
|
* |
|
|
|
22% |
|
|
|
*
|
These
customers provided less than 10% of our net revenue in these
periods
|
Gross
Profit and Gross Margin
The
following table sets forth gross profit and gross margin (in
thousands):
|
|
Three
Months Ended
|
|
|
May
3,
|
|
%
|
|
May
5,
|
|
|
2008
|
|
change
|
|
2007
|
|
Gross
profit
|
$
|
25,633
|
|
44%
|
|
$
|
17,810
|
|
Gross
margin
|
|
45%
|
|
|
|
|
49%
|
Our gross
profit for the three months ended May 3, 2008 was $25.6 million, representing a
gross margin of 45%, as compared to $17.8 million, representing a gross margin
of 49%, for the corresponding period of the prior fiscal year. The 4
percentage point decrease in gross margin during the three months ended May 3,
2008 compared to the three months ended May 5, 2007 was the result of a 12%
decline in our average selling price per unit, which was partially offset by a
4.0% decline in our average cost per unit. The decrease in our
average selling prices was primarily due to our customers achieving volume
pricing targets and general market pricing pressures. The reduction
of our average cost per unit was achieved through reduced prices and
manufacturing efficiencies related to increased unit production volume with our
manufacturers. In addition, the gross margin for the three months
ended May 3, 2008 included intangible amortization costs of $0.5 million from
our acquisitions, charges of $0.8 million from a provision for excess inventory
and approximately $0.6 million associated with inventory acquired in the VXP
Group acquisition.
Operating
Expenses
The
following table sets forth operating expenses and percent change in operating
expenses (in thousands):
|
|
Three
Months Ended
|
|
|
May
3,
|
|
%
|
|
May
5,
|
|
|
2008
|
|
change
|
|
2007
|
|
Research
and development expenses
|
$
|
10,856
|
|
78%
|
|
$
|
6,089
|
|
Sales
and marketing expenses
|
|
2,641
|
|
21%
|
|
|
2,187
|
|
General
and administrative expenses
|
|
6,468
|
|
51%
|
|
|
4,294
|
|
Acquired
in-process R&D
|
|
1,571
|
|
100%
|
|
|
—
|
|
Total
operating expenses
|
$
|
21,536
|
|
71%
|
|
$
|
12,570
|
Research and
development expenses: Research and
development expenses increased by $4.8 million, or 78%, during the three months
ended May 3, 2008 as compared with the corresponding period in the prior fiscal
year. This increase
is primarily attributable to an increase of $3.3 million in wages and other
compensation expenses, including an increase of $0.7 million in
share-based compensation expense, primarily due to increased headcount from both
hiring and from employees joining as part of the acquisition of assets of the
VXP Group; an increase of $1.3 million in license fees, consulting services,
supplies and non-recurring engineering costs to develop our products; and an
increase of $0.2 million in depreciation and amortization and other
expenses.
Sales and
marketing expenses: Sales and marketing expenses increased by
$0.5 million, or 21%, during the three months ended May 3, 2008 as compared with
the corresponding period in the prior fiscal year. This increase is
primarily attributable to an increase of $0.4 million in wages and compensation
expense including an increase of $0.2 million in share-based compensation
expense and commissions primarily due to increased headcount and increased
sales.
General and
administrative expenses: General and
administrative expenses increased by $2.2 million, or 51%, during the three
months ended May 3, 2008 as compared with the corresponding period in the prior
fiscal year. This increase is primarily attributable to an increase
of $2.6 million in share-based compensation expense due primarily to a fully
vested option grant during the current quarter resulting in $2.4 million in
expense for the period; an increase of $0.7 million in professional fees related
to audit, tax and other services; an increase of $0.2 million in insurance
expense primarily due to insurance and other expenses; an increase of $0.1
million in wages and compensation expense primarily due to increased headcount;
an increase of $0.1 million in other employee benefits and travel and
entertainment expenses; all of which was partially offset by a decrease of $1.5
million in legal and professional fees, which were higher in the same quarter of
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 for 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 condensed consolidated statements of operations (in
thousands):
|
|
|
Three
Months Ended
|
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cost
of revenue
|
|
$ |
83 |
|
|
$ |
88 |
|
|
Research
and development expenses
|
|
|
1,411 |
|
|
|
685 |
|
|
Sales
and marketing expenses
|
|
|
358 |
|
|
|
208 |
|
|
General
and administrative expenses
|
|
|
2,902 |
|
|
|
345 |
|
|
Total
share-based compensation
|
|
$ |
4,754 |
|
|
$ |
1,326 |
|
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 $0.5 million and $0.2 million for acquired developed technology for
three months ended May 3, 2008 and May 5, 2007, respectively, is classified as
cost of sales. Amortization expense of $0.2 million and $0.1 million
for other purchased intangible assets for the three months ended May 3, 2008 and
May 5, 2007, respectively, is classified as sales and marketing
expense. At May 3, 2008, the unamortized balance from purchased
intangible assets was $13.5 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
|
|
|
May
3,
|
|
%
|
|
May
5,
|
|
|
2008
|
|
change
|
|
2007
|
|
Interest
and other income, net
|
$
|
2,168
|
|
578%
|
|
$
|
320
|
The
increase of $1.8 million, or 578%, for the three months ended May 3, 2008
compared with the corresponding period in the prior fiscal year was due
primarily to an increase in interest income earned on cash, cash equivalents and
marketable securities, the balances of which increased significantly during
fiscal 2008 as a result of cash generated from operations and our follow-on
public offering of our common stock that was completed in October
2007.
Provision
for income taxes
We
recorded a provision for income taxes of $1.6 million for the first quarter of
fiscal 2009 and $0.2 million for the same period in fiscal 2008. The
effective tax rate was approximately 25.5% and 3.4% respectively. Our
fiscal 2009 effective tax rate differs from the combined federal and state
statutory rate of 41% primarily due to our international operations strategy,
which resulted in 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):
|
|
|
May
3,
|
|
|
February
2,
|
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
92.6 |
|
|
$ |
174.1 |
|
|
Short-term
marketable securities
|
|
|
45.3 |
|
|
|
44.4 |
|
|
|
|
$ |
137.9 |
|
|
$ |
218.5 |
|
As of May
3, 2008, our principal sources of liquidity consisted of cash and cash
equivalents and short-term marketable securities of $137.9 million, which
represents a decrease of $80.6 million from $218.2 million at February 2,
2008. The decrease in cash and cash equivalents and marketable
securities was primarily the result of our repurchase of 3.8 million shares of
our common stock for approximately $80.6 million, which we completed during the
three months ended May 3, 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):
|
|
|
Three
Months Ended
|
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net
cash (used in) provided by:
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
13.9 |
|
|
$ |
(0.3 |
) |
|
Investing
activities
|
|
|
(17.8 |
) |
|
|
0.0 |
|
|
Financing
activities
|
|
|
(77.7 |
) |
|
|
1.5 |
|
|
Effect
of foreign rate changes on cash and cash equivalents
|
|
|
0.1 |
|
|
|
0.1 |
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
$ |
(81.5 |
) |
|
$ |
1.3 |
|
Net cash
provided by operating activities was $13.9 million for the three months
ended May 3, 2008. The cash provided by our operating activities for
the three months ended May 3, 2008 was primarily due to net income of $4.7
million, non-cash charges of $9.1 million, a decrease in accounts receivable of
$7.6 million, an increase in other long-term liabilities of $0.3 million and a
decrease in prepaid expenses and other current assets of $0.1 million and which
was partially offset by an increase in inventory of $5.6 million, a decrease in
accounts payable $1.2 million, a decrease in accrued liabilities and others of
$0.9 million and an increase in other non-current assets of $0.2 million. The
decrease in accounts receivable for the three months ended May 3, 2008 was a
result of decreased billings due to decreased product shipments during the
quarter and was partially offset by the heavier weighting of shipments to the
last month of the quarter. The inventory increase for the three
months ended May 3, 2008 was due to the acquisition of VXP inventories and the
overall decrease in inventory turns due to decreased shipments.
Net cash
used in operating activities was $0.3 million for the three months ended
May 5, 2007. The cash used in our operating activities in the three
months ended May 5, 2007 was primarily due to decrease in accounts payable of
$6.3 million and increase in account receivable of $1.8 million, which was
partially offset by net income of $5.4 million and non-cash expenses of $2.4
million.
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 $17.8 million for the three months ended
May 3, 2008 which was primarily due to cash paid in connection with acquisition
of VXP Group of $18.6 million, purchases of marketable securities of
$24.2 million and capital equipment of $3.1 million, which was partially
offset by sales or maturity of marketable securities of $28.1
million.
Net cash
used in our investing activities was $17,000 for the three months ended May 5,
2007, which was primarily due to purchases of marketable securities of $10.5
million and capital equipment of $0.2 million, which was offset by sales or
maturity of marketable securities of $10.7 million.
Cash
flows from financing activities
Net cash
used in financing activities was $77.7 million in the three months ended
May 3, 2008, which was the result of $80.6 million for the purchase of 3.8
million shares of our common stock, partially offset by $2.0 million of proceeds
from the exercise of employee stock options and stock purchase rights and $0.9
million of excess tax benefit from share-based compensation.
Net cash
provided by financing activities was $1.6 million in the three months ended
May 5, 2007, which primarily consisted of $1.6 million of proceeds from the
exercise of employee stock options, partially offset by our repayment of our
outstanding term loan of $53,000.
Liquidity
To date,
our primary sources of funds have been proceeds from common stock
issuances. In certain periods, including fiscal 2008 and the first
quarter of fiscal 2009, cash generated from operations has also been a source of
funds. While we generated cash from operations in the three months
ended May 3, 2008 and May 5, 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. However, it is possible that we may need to raise additional
funds to finance our activities during or beyond the next 12 months and our
future capital requirements may vary significantly from those currently
planned.
Based on
our currently anticipated cash needs, we believe that our current balances of
cash, cash equivalents and short-term marketable securities will be sufficient
to meet our anticipated working capital requirements, obligations, capital
expenditures, strategic investments and other cash needs for at least the next
twelve months. However, it is possible that we may need to raise
additional funds to finance our activities during or beyond the next 12 months,
and our future capital requirements may vary significantly from those currently
planned. Cash will continue to fluctuate based upon our ability to
grow revenue and 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.
At May 3,
2008, we held approximately $43.0 million of investments, currently
classified in our long-term marketable securities, with an auction reset
feature, which are referred to as "auction rate securities.” In
recent months the auctions failed for all of our auction rate
securities. 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 auction rate 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 auction rate securities were rated
AAA or Aaa at the time of purchase, the highest rating, by a rating
agency. As of May 3, 2008, all of our auction rate securities
remained rated AAA or Aaa. If the issuers of these auction rate
securities 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 auction rate securities has not been impacted
by the reduced liquidity of these investments. Based on our expected
operating cash flows, and our other sources of cash, we do not anticipate the
potential lack of liquidity on these investments will affect our ability to
execute our current business plan.
Contractual
obligations and commitments
We do not
have guaranteed price or quantity commitments with 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,
only after 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 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 May 3, 2008 (in thousands):
|
|
|
Payments
Due by Period
|
|
|
|
|
1
year
|
|
|
1
- 3
|
|
|
3
- 5
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
or
less
|
|
|
years
|
|
|
years
|
|
|
thereafter
|
|
|
Total
|
|
|
Operating
leases
|
|
$ |
1,591 |
|
|
$ |
3,277 |
|
|
$ |
2,868 |
|
|
$ |
3,671 |
|
|
$ |
11,407 |
|
|
Non-cancelable
purchase orders
|
|
|
31,064 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,064 |
|
|
|
|
$ |
32,655 |
|
|
$ |
3,277 |
|
|
$ |
2,868 |
|
|
$ |
3,671 |
|
|
$ |
42,471 |
|
Off-balance
sheet transactions
As of May
3, 2008, we did not have any off-balance sheet arrangements.
Recent
accounting pronouncements
In
February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159
provides companies with an option to report selected financial assets and
liabilities at fair value. The standard’s objective is to reduce both
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities
differently. The standard requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of the company’s choice to use fair value on
its earnings. It also requires companies to display the fair value of
those assets and liabilities for which the company has chosen to use fair value
on the face of the balance sheet. The new standard does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in SFAS No.
157, Fair Value Measurements,
and SFAS No. 107, Disclosures about Fair Value of
Financial Instruments. SFAS 159 is effective for fiscal years
beginning after November 15, 2007, and we did not elect to adopt the fair
value option under SFAS 159.
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. SFAS 141R is effective for fiscal years beginning
after December 15, 2008. We have adopted SFAS 141R beginning
February 3, 2008 and there is no material impact on our condensed consolidated
financial statements.
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 May 3, 2008 and February 2, 2008, we held
approximately $190.1 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 May
3, 2008, we held approximately $43.0 million of investments, currently
classified in our long-term marketable securities, with an auction reset
feature, which are referred to as "auction rate securities.” In late
February and March 2008, auctions failed for all of our auction rate securities
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 auction rate securities, 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 auction
rate securities 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 auction rate securities have
not been impacted by the reduced liquidity of these investments. We
are continuing to evaluate the credit quality, classification and valuation of
our auction rate securities; 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 auction rate securities
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. 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 the 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 average 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 and Euro are
the financial currencies of our subsidiaries in Hong Kong 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 and
Euro. If foreign exchange rates were to weaken against the U.S.
dollar immediately and uniformly by 10% from the exchange rate at May 3, 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 May 3, 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 three months
ended May 3, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
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
of our current and former directors and officers have been named as defendants
in several shareholder derivative actions filed in the United States District
Court for the Northern District of California, which have been 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 allege that the individual defendants breached
their fiduciary duties to us 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
assert 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 there under. They also
allege that the individual defendants aided and abetted one another's alleged
breaches of fiduciary duty and violated California Corporations Code section
25402 and bring claims for an accounting and rescission. In the State
Action, plaintiffs also allege that the individual defendants wasted corporate
assets. Both Actions seek to recover unspecified money damages,
disgorgement of profits and benefits and equitable relief. The
Federal Action also seeks treble damages, rescission of certain defendants'
option contracts, imposition of a constructive trust over executory option
contracts and attorney's fees. We are named as a nominal defendant in
both the Federal and State Actions; thus, no recovery against us is
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 our 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. The settlement, which is subject to the
approval of the United States District Court for the Northern District of
California, will result in dismissal of both the Federal Action and the State
Action. The parties filed a Joint Motion for Preliminary Approval of
Settlement on May 29, 2008. At a hearing on this motion held on June
6, 2008, the Court requested that the parties revise certain documents and
submit them for the Court’s review. The parties fulfilled this
request and expect an order on the joint motion to be entered by June 30,
2008.
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. The
settlement, which is subject to the approval of the United States District Court
for the Northern District of California, will result in dismissal of both the
Federal Action and the State Action. On June 9, 2008, pursuant to
joint stipulation, the Court ordered that the State Action continue to be stayed
pending entry of an Order and Final Judgment approving the settlement in the
Federal Action.
We
previously disclosed that the SEC has initiated an informal inquiry into our
stock option granting practices. The SEC has requested that we
voluntarily produce documents relating to, among other things, our stock option
practices. We are cooperating with the SEC.
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. The focus of the IRS employment tax audit relates 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 have been meeting with the IRS to determine if an
informal settlement may be reached as to the tax, penalty and interest due in
respect of the employment taxes for the 2004 and 2005 audit years as well as
2006.
In August
2007, the IRS began an income tax audit for our fiscal 2005. The IRS
has not yet proposed any tax deficiency, interest or penalty amounts in respect
of this audit.
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 enter into individual purchase orders with our
customers. 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 three
months ended May 3, 2008, Cisco Systems, MTC Singapore, Macnica and Freebox SA
accounted for 16%, 15%, 11% and 11%, respectively, of our net
revenue. For three months ended May 5, 2007, Uniquest, Cisco Systems
and Freebox SA accounted for 22%, 15% and 12%, 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.
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. 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 ended May 3, 2008, sales of
our SoCs represented 99% 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 are in the process of implementing a
new enterprise resource management system in connection with our efforts to
address the material weakness in our internal control over financial
reporting. 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 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. 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 current litigation and
related inquiries, please see the section entitled "Legal Proceedings" under
Part I, Item 3. 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. 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
litigation, regulatory proceedings or government enforcement actions relating to
our past stock option practices. The resolution of these matters will
be time consuming, expensive and may distract management from the conduct of our
business. Furthermore, if we are subject to adverse findings in
litigation, 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 in 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.
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 ended May 3, 2008, we derived 94%
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.
Litigation
due to stock price volatility or other factors, such as the current shareholder
derivative lawsuits against certain of our current and former officers and
directors, 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. In addition, we and certain of our
current and former officers and directors are subject to various shareholder
derivative lawsuits. A description of these lawsuits can be found under
the section entitled “Legal Proceedings” under Part I, Item 3. Although we
recently executed a definitive settlement agreement that provides for dismissal
of these shareholder derivative lawsuits, the agreement remains subject to court
approval. If this settlement is not approved, we would be required to
continue to litigate these matters. These lawsuits are, and 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.
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:
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accurately
predict market requirements and evolving industry
standards;
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accurately
design new SoC products;
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timely
complete and introduce new product
designs;
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timely
qualify and obtain industry interoperability certification of our products
and the equipment into which our products will be
incorporated;
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ensure
that our subcontractors have sufficient foundry, assembly and test
capacity and packaging materials and achieve acceptable manufacturing
yields;
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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.
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. Although we have contracts with both of these
manufacturers, those contracts do not require them to manufacture our products
or perform services on our behalf on a long-term basis, in any specific quantity
or at any specific price. Neither TSMC nor ASE has provided
contractual assurances to us that adequate capacity will be available for us to
meet future demand for 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 SoC’s. 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. 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:
|
|
• potential
disruption of our ongoing business and the diversion of management
resources from other business
concerns;
|
|
|
• unexpected
costs or incurring unknown
liabilities;
|
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|
• difficulties
relating to integrating the operations and personnel of the acquired
businesses;
|
|
|
• adverse
effects on the existing customer relationships of acquired companies;
and
|
|
|
•
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.
|
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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•
|
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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•
|
changes
in share-based compensation
expense;
|
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•
|
changes
in generally accepted accounting principles;
and
|
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•
|
our
ability to use net operating losses of acquired companies to the fullest
extent.
|
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 quarter of
fiscal 2009, leading to liquidity issues and failed auctions in the auction rate
securities 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 May 3, 2008 were auction rate
securities 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 auction rate securities
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.
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:
|
|
• market
acceptance of our products;
|
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|
• the
need to adapt to changing technologies and technical
requirements;
|
|
|
• the
existence of opportunities for
expansion;
|
|
|
• access
to and availability of sufficient management, technical, marketing and
financial personnel; and
|
|
|
• the
number of shares we repurchase under our share repurchase
program.
|
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 three months ended May 3, 2008, we
used an aggregate of $80.6 million to purchase 3.8 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:
|
|
•
|
new
product introductions by us and our
competitors;
|
|
|
•
|
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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•
|
expenses
related to our compliance efforts with Section 404 of the Sarbanes-Oxley
Act of 2002;
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•
|
expenses
related to implementing and maintaining a new enterprise resource
management system and other information
technologies;
|
|
|
•
|
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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•
|
the
loss of one or more significant
customers;
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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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•
|
write-downs
of accounts receivable;
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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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•
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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; and
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•
|
continuing
impact and expenses related to our stock option review and its
resolution.
|
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 $15.31 on April 14,
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 May 3, 2008, 1.2 million authorized shares
remained available for repurchase. We repurchased common stock in
the first quarter of fiscal year 2009 using available cash resources as
follows:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plans
|
Maximum
Number of Share that May Yet Be Purchased under the
Plan
|
Month
#1
(February
3, 2008 - March 2, 2008)
|
—
|
—
|
—
|
—
|
Month
#2
(March
3, 2008 - April 2, 2008)
|
—
|
—
|
—
|
—
|
Month
#3
(April
3, 2008 - May 3, 2008)
|
3,836,025
|
$21.01
|
3,836,025
|
1,163,975
|
|
Total:
|
3,836,025
|
$21.01
|
3,836,025
|
1,163,975
|
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
The
following exhibits are filed herewith:
|
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.
|
|
|
|
|
31.2
|
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.
|
|
|
|
|
32.1
|
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)
|
|
|
|
|
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.
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:
June 12, 2008
|
|
|
|
|
By:
|
/s/
Thinh
Q. Tran |
|
|
|
Thinh
Q. Tran
|
|
|
|
|
|
|
|
Chairman
of the Board, President and Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
|
|
|
By:
|
/s/
Thomas
E. Gay III |
|
|
|
Thomas
E. Gay III
|
|
|
|
|
|
|
|
Chief
Financial Officer and Secretary (Principal
Financial and Accounting Officer)
|
|
|
|
|
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.
|
|
|
|
|
31.2
|
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.
|
|
|
|
|
32.1
|
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)
|
|
|
|
|
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.
47