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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 April 28, 2012
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 Boulevard,
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  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 o
Accelerated filer  R
Non-accelerated filer  o
Smaller reporting company o
   
(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 o  No R

As of May 30, 2012, the Company had 32,904,078 shares of Common Stock outstanding.

 
1

 
 
SIGMA DESIGNS, INC.
TABLE OF CONTENTS
 
   
Page No.
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Unaudited Condensed Consolidated Financial Statements:
 
     
 
Unaudited Condensed Consolidated Balance Sheets as of April 28, 2012 and January 28, 2012
3
     
 
Unaudited Condensed Consolidated Statements of Operations for the three months ended April 28, 2012 and April 30, 2011
4
     
  Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended April 28, 2012 and April 30, 2011
4
     
 
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended April 28, 2012 and April 30, 2011
5
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33
     
Item 4.
Controls and Procedures
34
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
34
     
Item 1A.
Risk Factors
34
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
46
     
Item 3.
Defaults upon Senior Securities
46
     
Item 4.
Mine Safety Disclosures
46
     
Item 5.
Other Information
46
     
Item 6.
Exhibits
47
     
Signatures
48
   
Exhibit index
49
 
 
2

 
 
PART I.         FINANCIAL INFORMATION

ITEM 1.         UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SIGMA DESIGNS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
   
April 28, 2012
   
January 28, 2012
 
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
79,050
   
$
44,283
 
Short-term marketable securities
   
7,329
     
42,134
 
Restricted cash
   
1,769
     
1,769
 
Accounts receivable, net
   
23,575
     
21,180
 
Inventories
   
18,611
     
22,037
 
Deferred tax assets
   
4,831
     
4,832
 
Prepaid expenses and other current assets
   
7,353
     
7,234
 
Total current assets
   
142,518
     
143,469
 
                 
Long-term marketable securities
   
52,825
     
62,022
 
Software, equipment and leasehold improvements, net
   
18,153
     
19,609
 
Intangible assets, net
   
43,577
     
45,656
 
Deferred tax assets, net of current portion
   
16,598
     
16,595
 
Notes receivable, net of current portion
   
2,750
     
3,000
 
Long-term investments
   
6,444
     
6,443
 
Other non-current assets
   
496
     
430
 
Total assets
 
$
283,361
   
$
297,224
 
                 
Liabilities and Shareholders' Equity
               
Current liabilities:
               
Accounts payable
 
$
7,764
   
$
8,438
 
Accrued liabilities
   
21,512
     
24,081
 
Total current liabilities
   
29,276
     
32,519
 
                 
Other long-term liabilities
   
15,031
     
15,168
 
Long-term deferred tax liabilities
   
1,062
     
1,062
 
Total liabilities
   
45,369
     
48,749
 
                 
Commitments and contingencies (Note 11)
               
                 
Shareholders' equity:
               
Preferred stock
   
     
 
Common stock and additional paid-in capital
   
463,127
     
460,246
 
Treasury stock
   
(85,941)
     
(85,941)
 
Accumulated other comprehensive income
   
941
     
603
 
Accumulated deficit
   
(140,135
)
   
(126,433)
 
Total shareholders' equity
   
237,992
     
248,475
 
                 
Total liabilities and shareholders' equity
 
$
283,361
   
$
297,224
 

See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 
3

 
 
SIGMA DESIGNS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
   
Three Months Ended
 
   
April 28, 2012
   
April 30, 2011
 
Net revenue
 
$
40,258
   
$
60,632
 
Cost of revenue
   
19,163
     
30,840
 
Gross profit
   
21,095
     
29,792
 
                 
Operating expenses:
               
Research and development
   
21,789
     
21,596
 
Sales and marketing
   
6,888
     
8,501
 
General and administrative
   
6,379
     
5,435
 
Total operating expenses
   
35,056
     
35,532
 
Loss from operations
   
(13,961)
     
(5,740)
 
                 
Interest and other income, net
   
491
     
819
 
Loss before income taxes
   
(13,470)
     
(4,921)
 
Provision for income taxes
   
232
     
749
 
Net loss
 
$
(13,702)
   
$
(5,670)
 
                 
Net loss per share:
               
Basic
 
$
(0.42)
   
$
(0.18)
 
Diluted
 
$
(0.42)
   
$
(0.18)
 
                 
Shares used in computing net loss per share:
               
Basic
   
32,661
     
31,731
 
Diluted
   
32,661
     
31,731
 
 
SIGMA DESIGNS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
 
   
Three Months Ended
 
   
April 28, 2012
   
April 30, 2011
 
Net loss
 
$
(13,702)
   
$
(5,670)
 
                 
Other comprehensive income:
               
Accumulated translation adjustment
   
71
     
638
 
Unrealized gain on marketable securities
   
267
     
168
 
Other comprehensive income
   
338
     
806
 
                 
Comprehensive loss
 
$
(13,364)
   
$
(4,864)
 
 
See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 
4

 
 
SIGMA DESIGNS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
   
Three Months Ended
 
   
April 28, 2012
   
April 30, 2011
 
Cash flows from operating activities:
           
Net loss
 
$
(13,702)
   
$
(5,670)
 
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
5,117
     
7,437
 
Stock-based compensation
   
2,826
     
3,191
 
Provision for excess and obsolete inventory
   
303
     
167
 
Provision for (release of) sales discounts and doubtful accounts
   
149
     
(44)
 
Loss on disposal of equipment
   
34
     
47
 
Accretion of contributed leasehold improvements
   
(69)
     
(60)
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(2,544)
     
(5,936)
 
Inventories
   
3,123
     
(644)
 
Prepaid expenses and other current assets
   
(113)
     
(727)
 
Other non-current assets
   
182
     
15
 
Accounts payable
   
(1,605)
     
(1,343)
 
Accrued liabilities
   
392
     
(3,826)
 
Other long-term liabilities
   
(1,019)
     
839
 
Net cash used in operating activities
   
(6,926)
     
(6,554)
 
                 
Cash flows from investing activities:
               
Restricted cash
   
     
(5
)
Purchases of marketable securities
   
(10,393)
     
(20,104
)
Sales and maturities of marketable securities
   
54,662
     
17,571
 
Purchases of software, purchased IP, equipment and leasehold improvements
   
(2,667)
     
(5,233
)
Net cash provided by (used in) investing activities
   
41,602
     
(7,771
)
                 
Cash flows from financing activities:
               
Net proceeds from exercise of employee stock options
   
55
     
1,164
 
Net cash provided by financing activities
   
55
     
1,164
 
                 
Effect of foreign exchange rate changes on cash and cash equivalents
   
36
     
248
 
Increase (decrease) in cash and cash equivalents
   
34,767
     
(12,913)
 
                 
Cash and cash equivalents at beginning of period
   
44,283
     
72,732
 
Cash and cash equivalents at end of period
 
$
79,050
   
$
59,819
 
                 
Supplemental disclosure of cash flow information:
               
                 
Cash paid for income taxes
 
$
468
   
$
197
 

See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
 
 
5

 
 
SIGMA DESIGNS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.             Organization and summary of significant accounting policies

Organization and nature of operations:  Sigma Designs, Inc. (referred to collectively in these consolidated financial statements as “Sigma,” “we,” “our” and “us”) is a leader in connected media platforms.  We specialize in chipset solutions that serve as the foundation for some of the world’s leading internet protocol television, or IPTV, set-top-boxes, connected media players, residential gateways and home control systems.  We sell our products to manufacturers, designers and, to a lesser extent, to distributors who, in turn, sell to manufacturers.

Basis of presentation:  The 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 of America, or US GAAP, for interim financial information and the rules and regulations of the Securities and Exchange Commission, or SEC.  They do not include all disclosures required by US GAAP for complete financial statements.  However, we believe that the disclosures are adequate and fairly present the information.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended January 28, 2012 included in our Annual Report on Form 10-K.

The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in our opinion, are necessary to present fairly our consolidated financial position at April 28, 2012 and January 28, 2012, the consolidated results of our operations for the three months ended April 28, 2012 and April 30, 2011, and the consolidated cash flows for the three months ended April 28, 2012 and April 30, 2011.  The results of operations for the three months ended April 28, 2012 are not necessarily indicative of the results to be expected for future quarters or the year.

Accounting period:  Each of our fiscal quarters presented herein includes 13 weeks and ends on the last Saturday of the period.  The first quarter of fiscal 2012 ended on April 28, 2012.  The first quarter of fiscal 2011 ended on April 30, 2011.
 
Reclassifications:  Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.  In the first quarter of fiscal 2013, we concluded that it was appropriate to reclassify our purchased intellectual property, or IP, that is incorporated into our products, from software, equipment and leasehold improvements to intangible assets.  The reclassification has no effect on previously reported Consolidated Condensed Statements of Operations for any period and does not materially affect previously reported cash flows from operations or from financing activities in the Consolidated Condensed Statements of Cash Flows.  For comparability purposes, the corresponding gross assets and accumulated amortization of $22.2 million and $5.9 million, respectively, have been reclassified as of January 28, 2012.  Such reclassifications had no effect on previously reported results of operations or retained earnings.
 
Software, equipment and leasehold improvements:  Software, equipment and leasehold improvements are stated at cost.  Depreciation and amortization for software, equipment and leasehold improvements is computed using the straight-line method based on the useful lives of the assets (one to five years) or the remaining lease term if shorter.  Any allowance for leasehold improvements received from the landlord for improvements to our facilities 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-lived assets:   The amounts and useful lives assigned to finite lived intangible assets acquired, other than goodwill, impact the amount and timing of future amortization.  Long-lived assets include intellectual property that we purchase for incorporation into our product designs.  We begin amortizing such intellectual property at the time that we begin shipment of the associated products into which it is incorporated.  We amortize the intellectual property over the estimated useful life of the associated products, which is generally two to three years.  We assess the carrying value of long-lived assets, including purchased intangible assets, whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets 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.

Use of estimates:  The preparation of the consolidated financial statements in conformity with US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances.  Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.
 
 
6

 
 
Revenue recognition: We derive our revenue primarily from product sales.  Our products, which we refer to as chipsets, consist of highly integrated semiconductors and embedded software that enables real-time processing of digital video and audio content, which we refer to as real-time software.  We do not deliver software as a separate product in connection with product sales.  We recognize revenue for product sales when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured.

Inventories:  Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market value.  We evaluate our ending inventories for excess quantities and obsolescence on a quarterly basis.  This evaluation includes analysis of historical and estimated future unit sales by product as well as product purchase commitments that are not cancelable.  We develop our demand forecasts based, in part, on discussions with our customers about their forecasted supply needs.  However, our customers usually only provide us with firm purchase commitments for the current period and not our entire forecasted period.  Additionally, our sales and marketing personnel provide estimates of future sales to prospective customers based on actual and expected design wins.  A provision is recorded for inventories in excess of estimated future demand.  In addition, we write off inventories that are obsolete.  Obsolescence is determined from several factors, including competitiveness of product offerings, market conditions and product life cycles.  Provisions for excess and obsolete inventory are charged to cost of revenue.  At the time 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-cost inventory is subsequently sold, we will realize higher gross margins for those products.
 
Inventory write-downs inherently involve assumptions and judgments as to amount of future sales and selling prices.  As a result of our inventory valuation reviews, we charged approximately $0.3 million and $0.2 million to cost of revenue for the three months ended April 28, 2012 and April 30, 2011, respectively.  Although we believe that the assumptions we use in estimating inventory write-downs are reasonable, significant future changes in these assumptions could produce a significantly different result.  There can be no assurances that future events and changing market conditions will not result in significant inventory write-downs.

Income taxes:  Income taxes are accounted for under an asset and liability approach.  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 reported for income tax purposes, and any operating losses and tax credit carry forwards.  Deferred tax liabilities are recognized for future taxable amounts and deferred tax assets are recognized for future deductions, net of any valuation allowance, to reduce deferred tax assets to amounts that are considered more likely than not to be realized.  

The impact of an uncertain income tax position on an 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. 

Recent accounting pronouncements:  There have been no significant changes in accounting pronouncements as compared to the recent accounting pronouncements described in our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

2.             Cash, cash equivalents and marketable securities

Cash, cash equivalents and marketable securities consist of the following (in thousands):

   
April 28, 2012
   
January 28, 2012
 
   
Book
Value
   
Net Unrealized
Gain (Loss)
   
Fair
Value
   
Book
Value
   
Net Unrealized
Gain (Loss)
   
Fair
Value
 
Corporate bonds
 
$
51,537
   
$
438
   
$
51,975
   
$
91,829
   
$
192
   
$
92,021
 
Money market funds
   
46,616
     
     
46,616
     
20,876
     
     
20,876
 
Corporate commercial paper
   
     
     
     
1,946
     
     
1,946
 
US agency discount notes
   
6,505
     
(2)
     
6,503
     
8,506
     
(4)
     
8,502
 
Municipal bonds and notes
   
1,654
     
22
     
1,676
     
1,668
     
19
     
1,687
 
Total cash equivalents and marketable securities
 
$
106,312
   
$
458
   
$
106,770
   
$
124,825
   
$
207
   
$
125,032
 
                                                 
Cash on hand held in the United States
                   
5,414
                     
1,030
 
Cash on hand held overseas
                   
27,020
                     
22,377
 
Total cash on hand
                   
32,434
                     
23,407
 
Total cash, cash equivalents and marketable securities
                 
$
139,204
                   
$
148,439
 
                                                 
Reported as:
                                               
Cash and cash equivalents
                 
$
79,050
                   
$
44,283
 
Short-term marketable securities
                   
7,329
                     
42,134
 
Long-term marketable securities
                   
52,825
                     
62,022
 
                   
$
139,204
                   
$
148,439
 
 
 
7

 
 
The amortized cost and estimated fair value of cash equivalents and marketable securities, by contractual maturity, are as follows (in thousands):  
 
   
April 28, 2012
   
January 28, 2012
 
   
Book
Value
   
Fair
Value
   
Book
Value
   
Fair
Value
 
Due in 1 year or less
 
$
53,912
    $
53,945
   
$
62,970
   
$
63,010
 
Due in greater than 1 year
   
52,400
     
52,825
     
61,855
     
62,022
 
Total
 
$
106,312
     
106,770
   
$
124,825
   
$
125,032
 
 

3.             Fair values of assets and liabilities

Fair value is defined 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.  The accounting standards establish a consistent framework for measuring fair value and disclosure requirements about fair value measurements and among other things, requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Fair value hierarchy

The accounting standards discuss 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 standards utilize 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 estimate of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Determination of Fair Value

Our cash equivalents and marketable securities are classified within Level 1 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, money market securities and certain corporate obligations with high credit ratings and an ongoing trading market.

Our foreign currency derivative instruments are classified as Level 2 because they are valued using quoted prices and other observable data of similar instruments in active markets.
 
 
8

 
 
The table below presents the balances of our assets and liabilities measured at fair value on a recurring basis as of April 28, 2012 and January 28, 2012 (in thousands):

   
As of April 28, 2012
 
         
Quoted Prices In Active Markets for Identical Assets
   
Significant Observable Inputs
   
Significant Unobservable Inputs
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Corporate bonds
 
$
51,975
     
51,975
   
$
   
$
 
Money market funds
   
46,616
     
46,616
     
     
 
US agency discount notes
   
6,503
     
6,503
     
     
 
Municipal bonds and notes
   
1,676
     
1,676
     
     
 
Total cash equivalents and marketable securities
   
106,770
     
106,770
     
     
 
Restricted cash
   
1,769
     
1,769
     
     
 
Derivative instruments
   
(9)
     
     
(9)
     
 
Total assets measured at fair value
 
$
108,530
     
108,539
   
$
(9)
   
$
 
 

   
As of January 28, 2012
 
         
Quoted Prices In Active Markets for Identical Assets
   
Significant Observable Inputs
   
Significant Unobservable Inputs
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Corporate bonds
 
$
92,021
   
$
92,021
   
$
   
$
 
Money market funds
   
20,876
     
20,876
     
     
 
US agency discount notes
   
8,502
     
8,502
     
     
 
Corporate commercial paper
   
1,946
     
1,946
     
     
 
Municipal bonds and notes
   
1,687
     
1,687
     
     
 
Total cash equivalents and marketable securities
   
125,032
     
125,032
     
     
 
Restricted cash
   
1,769
     
1,769
     
     
 
Derivative instruments
   
(121)
     
     
(121)
     
 
Total assets measured at fair value
 
$
126,680
   
$
126,801
   
$
(121)
   
$
 
 
Assets measured and recorded at fair value on a non-recurring basis

Our non-marketable convertible promissory note and preferred stock investments in privately-held venture capital funded technology companies are recorded at fair value only if an impairment charge is recognized.  In fiscal 2009 and 2010, we purchased shares of preferred stock in a privately-held venture capital funded technology company at a total investment cost of $2.0 million and we purchased a convertible note receivable from the same company with a face value equal to the cost of $3.0 million, convertible into the issuer’s preferred stock under certain circumstances, bearing interest at a rate of 9% per annum which became callable on November 30, 2009.  During our second quarter of fiscal 2011, the issuer of the $3.0 million convertible promissory note and the $2.0 million of preferred stock determined that additional funding would be required to continue operations.  This convertible note receivable was classified within Level 3.  This issuer held discussions with various parties, and a third party made a preliminary offer to purchase substantially all of the issuer’s assets at a price that would not allow us to collect any amount on our investments.  Based on the available information, we determined that the value of our investments in this issuer had suffered an other-than-temporary decline in value.  Accordingly, at July 31, 2010, we recorded an impairment charge of $5.2 million to fully write down the carrying value of the convertible promissory note, accrued interest and preferred stock investment due to our expected inability to recover any value from it.  Subsequently, this issuer was liquidated in bankruptcy and we received no amounts.

As of April 28, 2012, we held equity investments in six, and promissory notes receivable in two, privately held venture capital funded technology companies with face values equal to cost of $6.4 million and $3.5 million, respectively.  Each of these investments constituted less than a 20% ownership position.  Furthermore, we do not believe that we have the ability to exert significant influence over any of these companies.


4.             Derivative financial instruments

Foreign exchange contracts are recognized either as assets or liabilities on the balance sheet at fair value at the end of each reporting period.  Changes in fair value of the derivatives are recorded as operating expenses or other income (expense), or as accumulated other comprehensive income, or OCI. 
 
 
9

 
 
We currently use and expect to continue to use foreign currency derivatives such as forward and option contracts as hedges against certain anticipated transactions denominated in Israeli shekels, or NIS.  For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  Gains and losses on derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

We do not assess these derivate contracts that are used in managing NIS denominated transactions for hedge effectiveness and thus such contracts do not qualify for hedge accounting.  As of April 28, 2012, we had foreign exchange contracts to sell up to approximately $8.2 million for a total amount of approximately NIS 30.2 million, that mature on or before March 27, 2013.  As of January 28, 2012, we had foreign exchange contracts to sell up to approximately $10.2 million for a total amount of approximately NIS 37.0 million, that mature on or before December 27, 2012.  For the three months ended April 28, 2012 and April 30, 2011, we recognized gains of approximately $0.1 million and $0.5 million, respectively, as a result of foreign exchange contracts.

The following table presents the fair value of our outstanding derivative instruments as of April 28, 2012 and January 28, 2012 (in thousands):
 
Derivative Assets
 
Balance Sheet Location
 
April 28, 2012
   
January 28, 2012
 
Foreign exchange contracts not designated as cash flow hedges
 
Current liabilities
  $ (9 )   $ (121 )
Total fair value of derivative instruments
      $ (9 )   $ (121 )


The effects of derivative instruments on income and accumulated other comprehensive income for the three months ended April 28, 2012 and April 30, 2011 are summarized below (in thousands):

  
 
 
Gains recognized in accumulated other comprehensive income on derivatives (Effective Portion)   Gains reclassified from accumulated other comprehensive income into earnings
 
Gains (Losses) recognized
in earnings on derivatives (Including Ineffective Portion)
Derivative Instruments
 
Amount   Amount  
Location
 
Amount
 
Location
 
 
             
 
       
Three months ended April 28, 2012 foreign exchange contracts
 
$
  $
 
Operating expenses and cost of revenue
 
$
82
 
Interest and other income, net
Three months ended April 30, 2011 foreign exchange contracts
 
$
11
  $
74
 
Operating expenses and cost of revenue
 
$
450
 
Interest and other income, net
  
 
5.             Restricted cash

As of April 28, 2012 and January 28, 2012, we had $1.8 million of restricted cash related to deposits pledged to a financial institution in connection with our foreign exchange forward hedging transactions and an office operating lease.


6.             Investments in and Notes receivable from privately held companies
 
Issuer A

During fiscal 2009, we purchased shares of preferred stock in a privately held venture capital funded technology company (“Issuer A”) at a total investment cost of $2.0 million.  In the third quarter of fiscal 2010, we purchased a convertible note from Issuer A with a face value equal to the cost of $3.0 million, which is convertible into the issuer’s preferred stock under certain circumstances, bears interest at a rate of 9% per annum and became callable after November 30, 2009.  

Three of our four directors held equity interests in Issuer A in which we had invested an aggregate of $5.0 million and one of these directors was also a director of Issuer A.  In the aggregate, these equity and debt interests did not rise to the level of a material or a controlling interest in Issuer A.  Our board of directors appointed our director who had no interest in Issuer A to evaluate each investment in Issuer A and to recommend appropriate action to the board of directors.  All investment transactions with Issuer A were approved and recommended by this independent director and made as the result of an arms-length negotiation process between Issuer A and us, with our negotiations led by our non-interested director.  We viewed this investment as a strategic investment in a technology platform into which we could potentially sell our chipset solutions.  In connection with this investment, we entered into a commercial agreement with Issuer A as well.

 
10

 

During the second quarter of fiscal 2011, Issuer A determined that additional funding would be required to continue operations.  Issuer A held discussions with various parties, and a third party made a preliminary offer to purchase substantially all of its assets at a price that would not allow us to collect any amount on our investments in Issuer A.  Based on the available information, we determined that the value of our investment in Issuer A had suffered an other-than-temporary decline in value.  Accordingly, at July 31, 2010, we recorded an impairment charge of $5.2 million to fully write down the carrying value of the preferred stock equity investment and fully reserve the convertible note receivable, including accrued interest, due to our expected inability to collect any amounts in connection with these investments.  Subsequently, this issuer was liquidated in bankruptcy and we received no amounts.  Accordingly, as of April 28, 2012 and January 28, 2012, the convertible note in Issuer A was valued at zero.

Issuer B, C, D, E, F and G

During fiscal 2009, we purchased shares of preferred stock in a privately held venture capital funded technology company (“Issuer B”) at a total investment cost of $1.0 million.  In the fourth quarter of fiscal 2010, we purchased additional shares of preferred stock in Issuer B at a cost of $1.0 million. 

In the third quarter of fiscal 2011, we purchased shares of preferred stock in another privately held technology company (“Issuer C”) at a total investment cost of $1.0 million. 

 In the fourth quarter of fiscal 2011, we purchased shares of preferred stock in another privately held technology company (“Issuer D”) at a total investment cost of $1.0 million.  

In the fourth quarter of fiscal 2011, we also purchased a convertible note from another privately held technology company (“Issuer E”) with a face value equal to the cost of $0.3 million.  This amount of $0.3 million will convert to a quantity of equity upon any closing of financing prior to December 31, 2012.  

In the second quarter of fiscal 2012, we purchased shares of preferred stock in another privately held technology company (“Issuer F”) at a total investment cost of $2.0 million.

In the third quarter of fiscal 2012, we made an equity investment of $0.2 million in a privately held joint venture (“Issuer G”).

As of April 28, 2012 and January 28, 2012, our equity investments in privately held companies were valued at $6.4 million, representing their cost, net of reserve for impairment.

Notes receivable from privately held companies

In November 2010, we loaned $1.0 million to Issuer B and received a secured promissory note.  This promissory note is secured by the assets of Issuer B, bearing interest at a rate of 5% per annum, and is scheduled to be fully repaid by June 2013.  In January 2012, we loaned $2.5 million to a privately held venture capital funded technology company (“Issuer H”), pursuant to a strategic agreement dated January 25, 2012.  We made this loan in exchange for a secured promissory note, bearing interest at a rate of 3% per annum.  The note plus the accrued interest is due 36 months from the agreement date.  The note is secured by the assets of Issuer H.  Additionally, pursuant to this agreement we have the right, subject to certain conditions, for one year from the agreement date, to acquire all the outstanding securities of Issuer H for $11.2 million.  As of April 28, 2012, these conditions had not been met and we had not determined whether we intend to exercise this right.  This right will expire in January 2013.  We have a variable interest in Issuer H and it is a variable interest entity, however, we have concluded that we are not the primary beneficiary of Issuer H because we do not have the power to direct the activities that most significantly impact Issuer H’s financial performance.  As of April 28, 2012, our maximum exposure to loss as a result of our involvement with Issuer H was limited to our $2.5 million note receivable.  None of our directors held any interest in these issuers from whom we purchased notes.

As of April 28, 2012 and January 28, 2012, our notes receivable from privately held companies were valued at $3.5 million, representing their cost.  We made each of the above-described investments because we viewed the issuer as either having strategic technology or a business that would complement our technological capabilities or help create an opportunity for us to sell our chipset solutions.  In each case, we entered into a commercial or strategic agreement in connection with our investment.  None of our directors held any interest in each of the issuers described above.
 
The following table sets forth the value of investments in and notes receivable from privately held companies as of April 28, 2012 and January 28, 2012:

 
11

 

Equity investments
 
April 28, 2012
   
January 28, 2012
 
Issuer A
  $ --     $ --  
Issuer B
    2,000       2,000  
Issuer C
    1,000       1,000  
Issuer D
    1,000       1,000  
Issuer E
    300       300  
Issuer F
    2,000       2,000  
Issuer G
    144       143  
Total equity investments
  $ 6,444     $ 6,443  

Notes receivable
 
April 28, 2012
   
January 28, 2012
 
Issuer B
  $ 1,000     $ 1,000  
Issuer H
    2,500       2,500  
Total notes receivable
  $ 3,500     $ 3,500  
                 
Total Investments and Notes
  $ 9,944     $ 9,943  

 
7.             Inventories

Inventories consist of the following (in thousands):
 
 
 
April 28, 2012
   
January 28, 2012
 
Wafers and other purchased materials
 
$
10,696
   
$
11,006
 
Work-in-process
   
890
     
191
 
Finished goods
   
7,025
     
10,840
 
Total
 
$
18,611
   
$
22,037
 
 
8.             Acquisitions

On March 21, 2011, we executed a definitive agreement to acquire certain assets, including intangible assets and products, from a business division of a large computer manufacturer for $5.0 million in cash, which we paid on May 3, 2011.  None of our directors had an interest in this large computer manufacturer.

The assets we acquired include a low-power High Definition, or HD, video encoder processor aimed at capturing HD video for visual telephony between set-top boxes, connected media players, Voice over Internet Protocol, or VoIP, devices, video phones, video conferencing TV’s and video surveillance devices.

In connection with this acquisition, we obtained a valuation of the assets acquired in order to allocate the purchase price.  The total purchase price was allocated to the net tangible and identified intangible assets based upon fair values as of March 21, 2011.  The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill.  The purchase price in the transaction was allocated as follows (in thousands, except years):
 
   
Amount
   
Purchase consideration:
         
Cash
 
$
5,000
   
           
Net tangible assets
 
$
752
   
           
         
Estimated
Useful Life
Identifiable intangible assets:
         
Developed technology:
         
Technology
   
1,250
 
5 years
Technology leveraged
   
1,680
 
8 years
Customer relationships
   
750
 
5 years
In-process research and development
   
370
 
Goodwill
   
198
 
Total consideration
 
$
5,000
   
 
 
12

 
 
9.             Intangible assets
 
In the first quarter of fiscal 2013, we concluded that it was appropriate to reclassify our purchased intellectual property, or IP, that is incorporated into our products, from software, equipment and leasehold improvements to intangible assets.  The reclassification has no effect on previously reported Consolidated Condensed Statements of Operations for any period and does not materially affect previously reported cash flows from operations or from financing activities in the Consolidated Condensed Statements of Cash Flows.  For comparability purposes, corresponding gross assets and accumulated amortization of $22.2 million and $5.9 million, respectively, have been reclassified as of January 28, 2012.
 
 As of January 28, 2012, we included under software, the third party purchased IP that we acquire for incorporation into our product designs.  During the first fiscal quarter of fiscal 2013, we reclassified $16.3 million, net of purchased IP from software, equipment and leasehold improvements to intangible assets.  We begin amortizing such intellectual property at the time that we begin shipment of the associated products into which it is incorporated.  We amortize the intellectual property over the estimated useful life of the associated products, which is generally two to three years.
 
The table below presents the balances of our intangible assets as of April 28, 2012 and January 28, 2012:


   
April 28,
2012
   
January 28,
2012
 
Acquired intangible assets
 
$
75,978
   
$
75,978
 
Purchased IP
   
22,519
     
22,204
 
Total
 
$
98,497
   
$
98,182
 
Accumulated amortization
   
(54,920)
     
(52,526)
 
Intangible assets, net
 
$
43,577
   
$
45,656
 


We assess the carrying value of long-lived assets whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.  As of October 29, 2011, we performed a review of the carrying value of our acquired intangible assets due to continued reductions in our profitability and sales forecasts, and negative cash flows from operations.  In performing this review, we developed a forecast of the total undiscounted cash flow expected to be generated by each acquired intangible asset group and compared the result to the carrying value.  The results of this review indicated that two of these intangible asset groups, consisting primarily of certain developed technology and customer relationship intangibles related to our CopperGate acquisition, were not fully recoverable.  Therefore, we performed the second step of the analysis by developing a discounted cash flow analysis for each of the individual identifiable assets in these two groups to determine the amount of impairment.  Our analysis resulted in an intangible asset impairment charge of $55.1 million during the third quarter of fiscal 2012.  In addition, as a result of our review of indefinite-lived intangible assets, we recorded an impairment charge for our in-process research and development intangible assets of $11.1 million during the third quarter of fiscal 2012.

Acquired intangible assets, subject to amortization, were as follows as of April 28, 2012 and January 28, 2012 (in thousands, except for years): 

   
April 28, 2012
 
   
Gross Value
   
Impairment
   
Accumulated Amortization and Effect of Currency Translation
   
Net Value
   
Weighted average remaining amortization period (years)
 
Developed technology
 
$
75,827
   
$
(24,614
)
  $
(29,984
)
 
$
21,229
   
4.5
 
Customer relationships
   
51,174
     
(30,486
)
   
(15,282
)
   
5,406
   
4.6
 
Purchased IP - amortizing
   
8,496
     
     
(6,405
)
   
2,091
   
1.7
 
Trademarks
   
2,677
     
     
(1,849
)
   
828
   
6.4
 
Non-compete agreements
   
1,400
     
     
(1,400
)
   
   
 
     
139,574
     
(55,100
)
   
(54,920
)
   
29,554
   
4.3
 
Purchased IP – not yet deployed
   
14,023
     
     
     
14,023
   
 
In-process research and development
   
11,070
     
(11,070
)
   
     
   
 
   
$
164,667
   
$
(66,170
)
 
$
(54,920
)
 
$
43,577
       

 
13

 
 
   
January 28, 2012
   
Gross Value
   
Impairment
   
Accumulated Amortization and Effect of Currency Translation
   
Net Value
 
Weighted average remaining amortization period (years)
Developed technology
 
$
75,827
   
$
(24,614
)
 
$
(28,455
)
 
$
22,758
 
4.7
Customer relationships
   
51,174
     
(30,486
)
   
(14,966
)
   
5,722
 
4.8
Purchased IP - amortizing
   
8,395
     
     
(5,900)
     
2,495
 
1.9
Trademarks
   
2,677
     
     
(1,805
)
   
872
 
6.6
Non-compete agreements
   
1,400
     
     
(1,400
)
   
 
     
139,473
     
(55,100
)
   
(52,526
)
   
31,847
 
4.8
Purchased IP – not yet deployed
   
13,809
     
     
     
13,809
 
In-process research and development
   
11,070
     
(11,070
)
   
     
 
   
$
164,352
   
$
(66,170
)
 
$
(52,526
)
 
$
45,656
   


Amortization expense related to acquired intangible assets was $1.9 million and $4.7 million for the three months ended April 28, 2012 and April 30, 2011, respectively.  Amortization expense related to purchased IP was $0.5 million and $0.6 million for the three months ended April 28, 2012 and April 30, 2011, respectively.  As of  April 28, 2012, we had $14.0 million of purchased IP, which we have not yet begun to amortize.  As of April 28, 2012, we expect the amortization expense in future periods to be as follows (in thousands):

Fiscal year
     
Purchased IP -
Amortizing
 
Developed
Technology
   
Customer
Relationships
   
Trademarks
   
Total
 
Remainder of 2013
    $
1,033
 
$
4,586
   
$
949
   
$
133
   
$
6,701
 
2014
     
762
   
5,378
     
1,265
     
119
     
7,524
 
2015
     
260
   
3,892
     
1,265
     
118
     
5,535
 
2016
     
36
   
3,860
     
1,109
     
118
     
5,123
 
2017
     
   
3,019
     
818
     
118
     
3,955
 
Thereafter
     
   
494
     
     
222
     
716
 
      $
2,091
 
$
21,229
   
$
5,406
   
$
828
   
$
29,554
 
 
 
10.          Product warranty

In general, we sell products with a one-year limited warranty that our 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 hardware repair and/or replacement and software support costs and is included in accrued liabilities on the consolidated balance sheets.

Details of the change in accrued warranty as of April 28, 2012 and April 30, 2011 are as follows (in thousands):
 
Three Months Ended
 
Balance
Beginning
of Period
   
Additions
   
Deductions
   
Balance
End of
Period
 
April 28, 2012
 
$
1,326
    $
124
    $
(325)
    $
1,125
 
April 30, 2011
   
1,300
     
206
     
(206)
     
1,300
 
 
 
14

 
 
11.          Commitments and contingencies

Commitments

Leases

Our primary facility in Milpitas, California is leased under a non-cancelable operating lease which expires in September 2012.  We also lease facilities in Canada, China, Denmark, France, Hong Kong, Israel, Japan, Singapore, Taiwan and Vietnam, and vehicles in Israel under non-cancelable operating leases.  Future minimum annual payments under operating leases are as follows (in thousands):


Fiscal years
 
Operating
Leases
 
Remainder of 2013
 
$
3,000
 
2014
   
2,177
 
2015
   
1,193
 
2016
   
840
 
2017
   
757
 
Thereafter
   
629
 
Total minimum lease payments
 
$
8,596
 

Purchase commitments

We place non-cancelable orders to purchase semiconductor products from our suppliers on an eight to twelve week lead-time basis.  As of April 28, 2012, the total amount of outstanding non-cancelable purchase orders was approximately $15.9 million.

Indemnifications

In certain limited circumstances, we have agreed and may agree in the future to indemnify certain customers against patent infringement claims from third parties related to our intellectual property.  In these limited circumstances, 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.  To date, we have not incurred or accrued any significant costs related to any claims under such indemnification provisions.

Royalties

We pay royalties for the right to sell certain products under various license agreements.  During the three months ended April 28, 2012 and April 30, 2011, we recorded royalty expense of $0.4 million and $0.6 million, respectively, which was recorded to cost of revenue.

Our wholly owned subsidiary, Sigma Designs Israel SDI Ltd. (formerly, Coppergate Communication Ltd.), participated in programs sponsored by the Office of the Chief Scientist of Israel's Ministry of Industry, Trade and Labor, or the OCS, for the support of research and development activities that we conducted in Israel.  Through April 28, 2012, we had obtained grants from the OCS aggregating to $4.8 million for certain of our research and development projects in Israel.  We completed the most recent of these projects in 2007.  We are obligated to pay royalties to the OCS, amounting to 3% to 4.5% of the sales of certain products up to an amount equal to 100% and 150% of the grants received.  As of April 28, 2012, our remaining obligation under these programs was $0.6 million.

Contingencies

Litigation

On August 6, 2011, Powerline Innovations, LLC, or Powerline, filed suit against us, certain of our subsidiaries and many other named defendants, including Qualcomm Incorporated, Qualcomm Atheros, Inc., Broadcom Corporation and ST Microelectronics N.V. in the United States District Court for the Easter District of Texas asserting infringement of U.S. Patent No. 5,471,190.  The Powerline complaint seeks unspecified monetary damages and injunctive relief.  At this time, we are unable to predict the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on our business, operating results, cash flows or financial position.
 
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 cause us to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to us or at all.  If an unfavorable outcome were 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.
 
 
15

 
 
Third-party licensed technology
 
We license technologies from various third parties and incorporate that technology into our products.  From time to time, we are audited by licensors of these technologies for compliance with the terms of these licenses.  Currently, we are under two such audits and have recently been notified of a third.  We have accrued estimated fees and penalties of $0.6 million in connection with these audits.  If we cannot resolve these audits in a cooperative manner with our license partners, we could be subject to revocation of the applicable license or other penalties, including additional cash penalties.


12.          Net loss per share

Basic net loss and diluted net loss per share for the periods presented is computed by dividing net loss by the weighted average number of common shares outstanding.  

The following table sets forth the basic and diluted net loss per share computed for the three months ended April 28, 2012 and April 30, 2011 (in thousands, except per share amounts):

   
Three Months Ended
 
   
April 28, 2012
   
April 30, 2011
 
Numerator:
           
Net loss, as reported
 
$
(13,702)
   
$
(5,670)
 
Denominator:
               
Weighted average common shares outstanding - basic
   
32,661
     
31,731
 
Effect of dilutive securities:
               
Stock options
   
     
 
Shares used in computation – diluted
   
32,661
     
31,731
 
Net loss per share:
               
Basic
 
$
(0.42)
   
$
(0.18)
 
Diluted
 
$
(0.42)
   
$
(0.18)
 
 
The following table sets forth the excluded anti-diluted and excluded potentially dilutive securities for the three months ended April 28, 2012 and April 30, 2011 (in thousands):
 
   
Three Months Ended
 
   
April 28, 2012
   
April 30, 2011
 
Stock options excluded because the effect of including would be anti-dilutive
   
153
     
611
 
Stock options excluded because exercise price is in excess of average stock price
   
5,547
     
3,437
 
                 
Restricted stock awards and units excluded because the effect of including would be anti-dilutive
   
21
     
 
Restricted stock awards and units excluded because potential buyback shares exceed weighted average restricted stock units and awards outstanding
   
733
     
 
 
13.           Equity incentive plans and employee benefits

Stock incentive plans

We have adopted equity incentive plans that provide for the grant of stock option awards to employees, directors and consultants which are designed to encourage and reward their long-term contributions to us and provide an incentive for them to remain with us.  These plans also align our employees’ interest with the creation of long-term shareholder value.  As of April 28, 2012, we have four stock option plans: the 2003 Director Stock Option Plan (the “2003 Director Plan”), the 2001 Stock Plan (the “2001 Plan”), the Amended and Restated 2009 Stock Incentive Plan (the “2009 Incentive Plan”) and the CopperGate Share Option Plan (the “CopperGate Plan”).  The 2009 Incentive Plan was approved by our shareholders in July 2009 along with the approval of a one-time stock option exchange program and on July 8, 2011, by shareholder approval, was amended and restated to increase the number of shares of common stock authorized for issuance by 2,000,000.  The CopperGate Plan was assumed by us in connection with the acquisition of CopperGate in November 2009.
 
 
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Our 2009 Incentive Plan provides for the grant of stock options, restricted stock, restricted stock units, other stock-related and performance awards that may be settled in cash, stock or other property.  In July 2009, 2,900,000 shares of common stock were reserved for issuance and in July 2011 an additional 2,000,000 shares were reserved for issuance under the 2009 Incentive Plan.  In addition, up to 1,000,000 shares of common stock subject to stock awards outstanding under the 2001 Plan but terminated prior to exercise and would otherwise be returned to the share reserves under our 2001 Plan may become available for issuance under the 2009 Incentive Plan. 
 
As of April 28, 2012, 2,179,568 shares were available for future grants under our stock incentive plans.  Additionally, up to 648,106 shares of common stock subject to stock awards outstanding under the 2001 Plan may become available for issuance under the 2009 Incentive Plan.  As of September 23, 2009, the 2001 Plan and the 2003 Director Plan were closed for future grants, however, these plans will continue to govern all outstanding options that we originally granted from each plan.

Stock Options

The total stock option activities and balances of our stock option plans are summarized as follows:
 
   
Number of
Shares
Outstanding
   
Weighted Average
Exercise Price
Per Share
   
Weighted Average
Remaining
Contractual Term
(Years)
   
Aggregate
Intrinsic
Value
 
Balance, January 28, 2012
   
5,846,027
   
$
12.47
     
6.16
   
$
885,840
 
Granted
   
-
     
-
                 
Cancelled
   
(152,654
)
   
11.33
                 
Exercised
   
(25,801
)
   
2.18
                 
Balance, April 28, 2012
   
5,667,572
   
$
12.54
     
6.03
   
$
710,739
 
                                 
Ending Vested and Expected to Vest
   
5,576,692
   
$
12.58
     
5.99
   
$
692,795
 
Ending Exercisable
   
3,784,702
   
$
13.15
     
5.25
   
$
582,881
 

The aggregate intrinsic value as of April 28, 2012, in the table above represents the total pretax intrinsic value, based on our closing stock price of $5.63 on that date 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 our stock option plans was $0.1 million and $0.6 million for the three months ended April 28, 2012 and April 30, 2011, respectively, determined as of the option exercise.  The total fair value of options which vested during the three months ended April 28, 2012 and April 30, 2011 was $1.5 million and $3.2 million, respectively.  

As of April 28, 2012, the unrecorded stock-based compensation balance related to stock options outstanding excluding estimated forfeitures was $17.0 million and will be recognized over an estimated weighted average amortization period of 2.8 years.  The amortization period is based on the expected remaining vesting term of the options.

Restricted Stock Awards

We value restricted stock awards, or RSAs, using the quoted market price of the underlying stock on the date of grant.  RSAs are granted under our 2009 Incentive Plan and reduce shares available to grant under the plan by 1.3 shares for every 1 share of restricted stock granted and consist of time-based restricted shares, which shares are subject to forfeiture until vested if length of service requirements are not met.  The majority of RSAs vest over five years according to the terms specified in the individual grants.  As of April 28, 2012, the unrecorded stock-based compensation balance related to RSAs outstanding excluding estimated forfeitures was $1.7 million and will be recognized over an estimated weighted average amortization period of 3.2 years.  The following table sets forth the shares of restricted stock awards outstanding as of April 28, 2012:

   
Restricted Stock Awards
   
Weighted Average
Grant Date
Fair Value per Unit
   
Aggregate
Value
 
Balance as of January 28, 2012
   
231,179
   
$
8.82
     
-
 
Granted
   
-
     
-
         
Balance as of April 28, 2012
   
231,179
   
$
8.82
   
$
2,038,473
 
 
 
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Restricted Stock Units

We value restricted stock units, or RSUs, using the quoted market price of the underlying stock on the date of grant.  RSUs are granted under our 2009 Incentive Plan and reduce shares available to grant under the plan by 1.3 shares for every 1 restricted stock unit granted and consist of time-based restricted stock units.  The RSUs granted under this plan vest over a period of four years according to the terms specified in the individual grants.  As of April 28, 2012, the unrecorded stock-based compensation balance related to RSUs outstanding excluding estimated forfeitures was $3.3 million and will be recognized over an estimated weighted average amortization period of 3.6 years.  The following table sets forth the shares of RSUs outstanding as of April 28, 2012:

   
Restricted Stock Units
   
Weighted Average Grant Date Fair Value per Unit
   
Aggregate Value
 
Balance as of January 28, 2012
    547,500     $ 5.92        
Granted
    23,075     $ 6.03        
Cancelled
    (7,600 )   $ 6.44        
Balance as of April 28, 2012
    562,975     $ 5.62     $ 3,169,549  


Employee stock purchase plan
 
As of April 28, 2012, we had reserved a total of 2,500,000 shares of common stock for issuance under the 2010 Purchase Plan, of which 682,451 shares had been issued.

Valuation of stock-based compensation

The fair value of RSA and RSU awards is based on the quoted market price of the underlying stock at the date of grant.  The fair value of stock option and employee stock purchase plan right awards is estimated at the grant date using the Black-Scholes option valuation model.  The determination of fair value of stock option and employee stock purchase plan right awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables.  These variables include, but are not limited to, our expected stock price volatility over the term of the awards and actual employee stock option exercise behavior.

The fair value of each option and employee stock purchase plan right was estimated on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:
 
   
Three Months Ended
 
   
April 28, 2012
   
April 30, 2011
 
   
Stock Option Plan
   
Employee Stock Purchase Plan
   
Stock Option Plan
   
Employee Stock Purchase Plan
 
Expected volatility
    -       46.03 %     51.31 %     37.52 %
Risk-free interest rate
    -       0.08 %     2.29 %     0.21 %
Expected term (in years)
    -       0.50       5.92       0.50  
Dividend yield
    -    
None
   
None
   
None
 
Weighted average fair value at grant date
    -     $ 1.85     $ 6.89     $ 2.94  
 
 
The computation of the expected volatility assumptions used in the Black-Scholes calculations for new stock option and employee stock purchase plan right awards is based on the historical volatility of our 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 of 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 stock-based payment awards and vesting schedules.  The expected term of employee stock purchase rights is the period of time remaining in the current offering period.  The dividend yield assumption is based on our history of not paying dividends and assumption that we will not pay dividends in the future.
 
 
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The following table sets forth the total stock-based compensation expense that is included in each functional line item in the condensed consolidated statements of operations (in thousands):
 
   
Three Months Ended
 
   
April 28, 2012
   
April 30, 2011
 
Cost of revenue
 
$
117
   
$
100
 
Research and development expenses
   
1,463
     
1,532
 
Sales and marketing expenses
   
472
     
594
 
General and administrative expenses
   
774
     
965
 
Total stock-based compensation
 
$
2,826
   
$
3,191
 
 
401(k) tax deferred savings plan

We maintain 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 $17,000 in calendar year 2012.  Employees age 50 or over may elect to contribute an additional $5,500.  We have a matching contribution program whereby we match employee contributions made by each employee at a rate of $0.25 per $1.00 contributed.  The matching contributions to the 401(k) tax deferred savings plan totaled $0.3 million and $0.3 million for the three months ended April 28, 2012 and April 30, 2011, respectively.  

Group registered retirement savings plan

We maintain a Group Registered Retirement Savings Plan, or GRRSP, for the benefit of qualified employees who are based in Canada.  Under the GRRSP, Canadian based employees may elect to reduce their annual taxable compensation up to the statutorily prescribed limit which is $22,970 Canadian in calendar year 2012.  We have a matching contribution program under the GRRSP whereby we match employee contributions made by each employee up to 2.5% of their annual salary.  The matching contributions to the GRRSP totaled $28,000 and $32,000 for the three months ended April 28, 2012 and April 30, 2011, respectively.  

Retirement pension plan

We maintain a Retirement Pension Plan for the benefit of qualified employees who are based in Denmark.  Under the Retirement Pension Plan, Denmark-based employees may elect to reduce their annual taxable compensation up to their annual salary.  We have a matching contribution program whereby we will contribute 3.0% of our employee’s annual salary and may elect to terminate future contributions at our option at any time.  The matching contribution to the Retirement Pension Plan totaled $47,000 and $42,000 for the three months ended April 28, 2012 and April 30, 2011, respectively.

Severance plan

We maintain a severance plan for 17 Israeli employees pursuant to Israel's Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment.  Upon termination of employment, employees are entitled to one-month salary for each year of employment or a portion thereof.  As of April 28, 2012, we have an accrued severance liability of $1.2 million partially offset by $1.2 million of severance employee funds.

 14.         Segment and geographical information

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.  We are organized as, and operate in, one reportable segment.  Our operating segment consists of our geographically based entities in the United States, Hong Kong, Israel and Singapore.  Our chief operating decision-maker reviews consolidated financial information, accompanied by information about revenue by product group, target market and geographic region.  We do not assess the performance of our geographic regions on other measures of income or expense or net income.

The following table sets forth net revenue for each geographic region based on the ship-to location of customers (in thousands):

 
   
Three Months Ended
 
   
April 28, 2012
   
April 30, 2011
 
Asia
 
$
36,604
   
$
57,614
 
North America
   
1,866
     
2,115
 
Other regions
   
1,199
     
61
 
Europe
   
589
     
842
 
Net revenue
 
$
40,258
   
$
60,632
 
 
 
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The following table sets forth net revenue to each significant country based on the ship-to location of customers (in thousands):

   
Three Months Ended
 
   
April 28, 2012
   
April 30, 2011
 
China, including Hong Kong
 
$
30,077
     
51,123
 
Rest of the world
   
10,181
     
9,509
 
   
$
40,258
     
60,632
 

The following table sets forth the major customers that accounted for 10% or more of our net revenue:
 
   
Three Months Ended
 
Customer
 
April 28, 2012
   
April 30, 2011
 
Flextronics
   
16%
     
*
 
Motorola
   
16%
     
20%
 
Gemtek
   
14%
     
30%
 
 
* This customer provided less than 10% of our net revenue in this period.

Three international direct customers accounted for 23%, 17%, and 16% of total accounts receivable as of April 28, 2012.  Four international direct customers accounted for 17%, 17%, 15% and 13% of total accounts receivable as of January 28, 2012.

15.          Subsequent event

On May 4, 2012, we completed our acquisition of certain assets from Trident Microsystems, Inc. and certain of its subsidiaries (collectively referred to as “Trident”) used in or related to Trident’s digital television and PC television businesses (the “DTV Business”) for a purchase price of $21.0 million plus additional cash consideration of $21.2 million as a result of adjustments based on the closing asset balance of the DTV Business, plus the assumption of certain employee related liabilities pursuant to an Asset Purchase Agreement dated March 23, 2012 (the “Purchase Agreement”).  

Pursuant to the Purchase Agreement, we acquired all of Trident’s DTV Business products, certain licensed intellectual property rights, specified tangible assets and other assets specified in the Agreement.  We also acquired the right to use facilities of Trident under short-term facilities use agreements for facilities located in Shanghai and Beijing, China; The Netherlands; Taiwan and California.  We hired approximately 320 employees whose services are used in the DTV Business.  Trident and we have also entered into a transition services agreement pursuant to which Trident will provide certain services to us following the closing.  We will also receive transition support services from the purchaser of Trident’s set-top box business.
 
Since the acquisition date occurred subsequent to April 28, 2012, the DTV Business assets acquired and liabilities assumed are not included in the unaudited condensed consolidated balance sheets as of April 28, 2012.  Due to the limited time since the acquisition date, it is not practicable to prepare the supplemental pro forma revenue and earnings information.  In addition, the initial purchase accounting for this business combination was incomplete as of the date of filing of this Quarterly Report.  Through April 28, 2012, we incurred an aggregate of approximately $0.5 million in expenses in connection with the DTV Business acquisition, and we expect to incur additional expenses relating to the integration of the DTV Business operation.
 
 
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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," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "predict," "potential," "plan," or the negative of these terms, and similar expressions intended to identify forward-looking statements.  These forward-looking statements, include, but are not limited to, statements about our capital resources and needs, including the adequacy of our current cash reserves, revenue, our expectations that our operating expenses will increase in absolute dollars as our revenue grows and our expectations that our gross margin will vary from period to period.  These forward-looking statements involve risks and uncertainties.  Our actual results may differ significantly from those projected in the forward-looking statements.  Factors that might cause future results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those discussed under Part II, Item 1A “Risk Factors” in this Form 10-Q as well as other information found in the documents we file from time to time with the Securities and Exchange Commission.  Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q.  Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

 Overview

Our goal is to be a leader in connected media platforms for use in home entertainment and control.  We focus on integrated chipset solutions that serve as the foundation for some of the world’s leading internet protocol television, or IPTV, set-top boxes, connected media players, residential gateways and home control systems.  We have four chipset product lines: media processor products, home networking products, video image processor and encoder products, and home control and energy management automation products.  We sell our products into five primary markets: IPTV media processor, home networking, home control and energy management, connected media player, and the prosumer and industrial audio/video markets.  We also sell a small amount of our chipsets into other markets, such as the digital signage, high definition television, or HDTV, projection TV and PC-based add-in markets, which we refer to as our other market.  We believe our software suite is a key differentiator within each of our target markets.  Our software suite provides a foundation for our customers to develop their products that incorporate our chipsets.


Our chipset products and target markets

Products

Our products are delineated into four primary lines of chipset products.  Our chipsets are targeted toward manufacturers and large volume original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, building products for the IPTV, home networking, home control and energy management, connected media player and prosumer and industrial audio/video consumer electronic markets.  For both the three months ended April 28, 2012 and April 30, 2011, we derived nearly all of our net revenue from sales of our chipset products.  We derive a minor portion of our revenue from other products and services, including software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.  The revenue derived from other products and services is not a significant portion of our total net revenue.

Media Processors

Our media processor product line consists of platforms that include highly integrated chipsets and reference system designs.  These products are based around media processing and typically combine video and audio decoding, graphics processing, display processing, security management, memory control, peripheral interfaces, and one or more application processors, or CPUs.  Our embedded software suite provides an operating environment and coordinates the real-time processing of digital video and audio content, is readily customizable by our customers and is interoperable with multiple standard operating systems.  Our reference system designs provide a hardware implementation of the circuit board, access to our embedded software suite, and sometimes provide a prototypical end-use product example for customer evaluation and use.

We believe our media processor chipsets deliver industry-leading performance in video and audio decoding along with display processing, which allows our customers to offer consumers a high-quality viewing experience.  We surround this media processing functionality with a security management solution, one or more on-chip CPUs, a high-speed memory interface and complementary system peripherals.  As a result, we believe our media processor solutions enable our customers to efficiently bring their consumer multimedia devices to market.  We believe IPTV set-top box and connected media player designers and other device manufacturers select our media processor solutions because of their high performance and ease of integration.
 
 
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Home Networking

Our home networking product line consists of wired home networking controllers that are designed to provide connectivity solutions between various home entertainment products and incoming video streams.  We believe these connectivity solutions provide consumers additional connection choices with greater flexibility and allow system integrators and service providers an opportunity to reduce their time and cost of home networking installations.  Our home networking solutions are based on the HomePNA, or HPNA, HomePlug AV, or HPAV, and G.hn standards.  HPNA and HPAV are two of the current leading technology standards used for transferring internet protocol, or IP, content across coaxial cables, phone lines and power lines.  G.hn is the next generation ITU standard ratified in 2010 to create a unified global standard across coaxial cables, phone lines and power lines.  Products based on these technologies enable service providers such as telecommunication carriers, cable operators and satellite providers to deliver IPTV solutions and other media-rich applications such as HDTV, Voice over Internet Protocol, or VoIP, and fast internet throughout the home.

Video Image Processors and Encoders

Our video image processor and encoder products consist of our VXP brand video image processor chipsets and our video encoder chipsets.  Our VXP chipsets are standalone high performance semiconductors that provide studio-quality video output or input for professional, prosumer and consumer applications and address applications including audio/video receivers, broadcast studios, digital cinema, digital signage, front-projection home theatre televisions, HDTV, medical imaging and video conferencing systems.  Our video encoder chipsets are designed to capture video for visual telephony between set-top boxes, connected media players, VoIP devices, video conferencing TVs and video surveillance devices.

Home Control and Energy Management Automation

Our home control and energy management automation product line consists of our wireless Z-Wave chipsets.  These chipsets enable consumers to enjoy advanced home control and energy management automation functionality, such as home security, environmental and energy control and monitoring, within both new and existing homes.  These devices consist of wireless transceiver devices along with a mesh networking protocol.  Our Z-Wave chipsets utilize a low-bitrate, low-power, low-cost RF communication technology that provides an interoperable connected home security, monitoring and automation solution.

Target Markets

IPTV Media Processor Market

The IPTV media processor market consists primarily of telecommunication carriers that deploy IPTV set-top boxes for delivering video services over a DSL network.  We serve this market primarily with our media processor products.  We are a leading provider of high definition digital media processors for set-top boxes in the IPTV media processor market in terms of units shipped.  Our media processor products are used by leading IPTV set-top box providers, such as Cisco Systems, Motorola, Netgem and Samsung.  IPTV set-top boxes incorporating our media processors are deployed by telecommunications carriers globally including carriers in Asia, Europe and North America, such as AT&T, Deutsche Telekom, NTT and SFR.  We work with these carriers and set-top box providers as well as with systems software providers, such as Microsoft and various Android and Linux providers, to design solutions that address carriers' specific requirements regarding features and performance.  In connection with our efforts to expand our IPTV media processor market, we have development projects underway to address the hybrid set-top box opportunities that result from combining IPTV with cable and terrestrial broadcast reception.

Home Networking Market

The home networking market consists of communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP or data through wired connectivity.  Our home networking products are currently used in IPTV set-top boxes as well as residential gateways, optical network terminals, multiple-dwelling unit, or MDU, masters and network adapters by leading OEMs, such as Actiontec, Cisco Systems, Pace and Motorola.  Set-top boxes containing our home networking products are deployed globally, primarily in North America, by telecommunications carriers, such as AT&T, Bell Aliant, Bell Canada, Century Link and Telus.  To date, we have not generated significant revenue from our products based on HPAV or G.hn technologies.
 
 
22

 
 
Home Control and Energy Management Market

The home control and energy management market consists of communication devices that use a standard protocol to connect equipment inside the home through wireless connectivity.  Our wireless Z-Wave home control and energy management automation products are used in a wide variety of consumer products such as thermostats, light switches and door locks.  These consumer products are designed by leading industry participants such as Danfoss, Ingersoll-Rand (Schlage and Trane), Leviton and Cooper Wiring.

Connected Media Player Market

The connected media player market consists primarily of digital media adapters, or DMAs, portable media devices and wireless streaming PC to TV devices that perform playback of digital media.  We target this market with our media processor products.  Our media processors are used by consumer electronics providers, such as IO-Mega, Netgear and Western Digital in applications such as DMAs and other connected media player devices.

Prosumer and Industrial Audio/Video Market

The prosumer and industrial audio/video market consists of studio quality audio/video receivers and monitors, video conferencing, digital projectors and medical video monitors.  We target this market with our video image processor and video encoder product lines.  Our VXP video image processor products are one of the leading solutions for studio-quality video image processing and are used by leading industry participants, such as Harris, Panasonic, Polycom and Sony.  Our video encoder products are used in security and video conferencing systems.

Other Markets

We also sell products into other markets, such as the digital signage, high definition television, or HDTV, projection TV and PC-based add-in markets, which we refer to as our other market.  We derive minor revenue from sales of our products into these other markets.

Characteristics of Our Business
 
We do not enter into long-term commitment contracts with our customers and generate substantially all of our net revenue based on customer 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 direct customers serve.  We work with both our direct customers and these carriers to address the market demands and the necessary specifications for our technologies.  However, our failure to accurately forecast demand can lead to product shortages that can impede production by our customers and harm our relationship with these customers or lead to excess inventory, which could negatively impact our gross margins in a particular period.  During the year ending January 28, 2012, we recorded provisions for excess inventory of $9.0 million primarily due to a large end customer’s transition to a next generation product sold by one of our competitors.

Our business is substantially dependent upon being designed into set-top boxes of large telecommunications carriers.  If we are not designed into a particular generation of set-top boxes for our large target end customers, our operating results can be materially and adversely affected.  We must spend a considerable amount of resources to compete for these design wins and the failure to obtain a design win for a particular generation of set-top boxes, and in particular for our large target end customers, means we likely would not recover a substantial portion of our expenses in competing for these design wins.  However, if we do obtain these design wins, it is often the case that our end customer and direct customer will continue to incorporate our chipset solutions for that generation of set-top boxes.  The set-top box industry is cyclical due to product transitions from generation to generation.  Each generation typically incorporates emerging technologies, and so we must expend a considerable amount of research and development resources in order to compete in each of these cycles.  Our failure to obtain a design win in a particular generation does not mean we necessarily will be unable to obtain a design win in the next generation.  For example, our sales in the IPTV media processor market decreased in the past four fiscal quarters as a result of our inability to obtain certain design wins for our last generation of chipset solutions.  However, we are in the process of competing for the next generation of set-top boxes, and we believe our chipset solutions contain features and prices that compete favorably with competitive offerings.

Many of our target markets are characterized by intense price competition.  The semiconductor industry is highly competitive and, as a result, we expect our average selling prices to decline over time.  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 chipsets 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 gross 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 and average costs, volume order discounts, mix of product sales, amount of development revenue and provisions for inventory excess and obsolescence.
 
 
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Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based on our unaudited condensed consolidated financial statements which have been prepared in accordance with United States generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts and disclosures of the assets and liabilities at the date of the unaudited condensed consolidated financial statements and also 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 January 28, 2012 reflect the more significant judgments and estimates used in preparation of our annual and interim financial statements except for the updated policies below.
 
Reclassifications:  Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.  In the first quarter of fiscal 2013, we concluded that it was appropriate to reclassify, prospectively, our purchased intellectual property, or IP, that is incorporated into our products, from software, equipment and leasehold improvements to intangible assets.  The reclassification has no effect on previously reported Consolidated Condensed Statements of Operations for any period and does not materially affect previously reported cash flows from operations or from financing activities in the Consolidated Condensed Statements of Cash Flows.  For comparability purposes, the corresponding gross assets and accumulated amortization of $22.0 million and $5.9 million, respectively, have been reclassified as of January 28, 2012.  Such reclassifications had no effect on previously reported results of operations or retained earnings.
 
Software, equipment and leasehold improvements:  Software, equipment and leasehold improvements are stated at cost.  Depreciation and amortization for software, equipment and leasehold improvements is computed using the straight-line method based on the useful lives of the assets (one to five years) or the remaining lease term if shorter.  Any allowance for leasehold improvements received from the landlord for improvements to our facilities 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-lived assets:   The amounts and useful lives assigned to finite lived intangible assets acquired, other than goodwill, impact the amount and timing of future amortization.  Long-lived assets include intellectual property that we purchase for incorporation into our product designs.  We begin amortizing such intellectual property at the time that we begin shipment of the associated products into which it is incorporated.  We amortize the intellectual property over the estimated useful life of the associated products, which is generally two to three years.  We assess the carrying value of long-lived assets, including purchased intangible assets, whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets 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.


Results of Operations

The following table is derived from our unaudited condensed consolidated financial statements and sets forth our historical operating results as a percentage of net revenue for each of the periods indicated (in thousands, except percentages):
 
   
Three Months Ended
 
   
April 28, 2012
   
% of
Net Revenue
   
April 30, 2011
   
% of
Net Revenue
 
Net revenue
 
$
40,258
     
100%
   
$
60,632
     
100%
 
Cost of revenue
   
19,163
     
48%
     
30,840
     
51%
 
Gross profit
   
21,095
     
52%
     
29,792
     
49%
 
Operating expenses:
                               
Research and development
   
21,789
     
54%
     
21,596
     
35%
 
Sales and marketing
   
6,888
     
17%
     
8,501
     
14%
 
General and administrative
   
6,379
     
16%
     
5,435
     
9%
 
Total operating expenses
   
35,056
     
87%
     
35,532
     
58%
 
Loss from operations
   
(13,961)
     
(35%
)
   
(5,740)
     
(9%)
 
Interest and other income, net
   
491
     
1%
     
819
     
1%
 
Loss before income taxes
   
(13,470)
     
(34%
)
   
(4,921)
     
(8%)
 
Provision for income taxes
   
232
     
*
     
749
     
1%
 
Net loss
 
$
(13,702)
     
(34%
)
 
$
(5,670)
     
(9%)
 
 
* The percentage of net revenue is less than one percent.
 
 
24

 
 
Net revenue

Our net revenue for the three months ended April 28, 2012 decreased $20.4 million, or 34%, compared to the corresponding period in the prior fiscal year.  The decrease was due primarily to a 29% decrease in average selling price, or ASP, primarily as a result of a shift in product mix, and a 7% decrease in units shipped.  The units shipped for our home networking and home control and energy management products, which have lower ASPs than our media processor products, increased and the units shipped for our media processor products decreased.  We expect our total net revenue to increase in future periods as we recognize the benefit of acquired products from our acquisition of assets used in the digital TV business from Trident Microsystems.
 
 
Net revenue by target market

We sell our products into five primary target markets, which are the IPTV media processor market, home networking market, home control and energy management market, connected media player market, and the prosumer and industrial audio/video market.  We also sell a small amount of our chipsets into other markets, such as the digital signage, high definition television, or HDTV, projection TV and PC-based add-in markets, which we refer to 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, except percentages):

 
   
Three Months Ended
 
   
April 28, 2012
   
% of
Net Revenue
   
April 30, 2011
   
% of
Net Revenue
 
Home networking
 
$
20,838
     
52%
   
$
24,820
     
41%
 
IPTV media processor
   
10,390
     
26%
     
22,308
     
37%
 
Home control and energy management
   
3,184
     
8%
     
2,590
     
4%
 
Connected media player
   
3,152
     
8%
     
7,855
     
13%
 
Prosumer and industrial audio/video
   
2,571
     
6%
     
2,883
     
5%
 
Other
   
123
     
*
     
176
     
*
 
Net revenue
 
$
40,258
     
100%
   
$
60,632
     
100%
 

* This market provided less than 1% of our net revenue in this period.

Home networking market:   For the three months ended April 28, 2012, net revenue from sales of our products into the home networking market decreased $4.0 million, or 16%, compared to the corresponding period in the prior fiscal year.  This decrease was primarily the result of a decrease in ASP in the home networking market which was partially offset by an increase in units shipped.  Our revenue from the home networking market as a percentage of our total net revenue for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year increased by 11 percentage points primarily as a result of the increase in demand in the home networking market as well as the decline in demand in the connected media player and IPTV media processor markets.  We expect our revenue from the home networking market to fluctuate in future periods based on changes in inventory levels at contract manufacturers who manufacture equipment incorporating our products for deployment by telecommunication providers.

IPTV media processor market:  For the three months ended April 28, 2012, net revenue from sales of our products into the IPTV media processor market decreased $11.9 million, or 53%, compared to the corresponding period in the prior fiscal year.  This decline was attributable to a decline in both ASP and units shipped as a result of reduced demand for our chipsets in the IPTV media processor market as a result of competitive factors in connection with product transitions at telecommunications service providers to the next generation IPTV media processor solutions.  Our revenue from the IPTV media processor market as a percentage of our total net revenue for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year decreased by 11 percentage points primarily as a result of the decrease in demand for our chipsets in the IPTV media processor market.  We expect our revenue from the IPTV media processor market to fluctuate in future periods as this revenue is dependent on IPTV service deployments by telecommunication service providers, adoption of our newer and future generations of our technology, changes in inventory levels at the contract manufacturers that supply them and competitive market pressures.  Additionally, due to decreases in the ASPs of our newer generation products relative to our older generation products, we must increase unit shipments of our products substantially in order to increase our revenue.  We do not expect an increase in our revenue from the IPTV media processor market until at least the second half of fiscal 2013.  We believe a large telecommunication service provider, whom we target as a significant end customer, is in the process of shifting to another generation of products in the near term and we are competing for this business.

 
25

 

Home control and energy management market:   For the three months ended April 28, 2012, net revenue from sales of our products into the home control and energy management market increased $0.6 million, or 23%, compared to the corresponding period in the prior fiscal year.  This increase was primarily the result of higher demand in the home control and energy management market and an increase in ASP.  Our revenue from the home control and energy management market as a percentage of our total net revenue for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year increased by 4 percentage points primarily as a result of the increase in demand in the home control and energy management market as well as the decline in demand in the connected media player and IPTV media processor markets.  We expect our revenue from the home control and energy management market to increase in fiscal 2013.

Connected media player market:  For the three months ended April 28, 2012, net revenue from sales of our products into the connected media player market decreased $4.7 million, or 60%, compared to the corresponding period in the prior fiscal year.  The decrease in revenue was the result of a decrease of 60% in units shipped, which was primarily due to competitive factors.  Our revenue from the connected media player market as a percentage of our total net revenue for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year decreased by 5 percentage points primarily as a result of the overall decrease in units shipped into the connected media player market.  We expect our revenue from the connected media player market to fluctuate in future periods primarily due to the timing and nature of new product introductions by consumer electronics companies that incorporate our products and their transition to our newer generation products.  Additionally, due to decreases in the ASPs of our newer generation products relative to our older generation products, we must increase unit shipments of our products substantially in order to increase our revenue.

Prosumer and industrial audio/video market:  For the three months ended April 28, 2012, net revenue from sales of our products into the prosumer and industrial audio/video market decreased $0.3 million, or 11%, compared to the corresponding period in the prior fiscal year.  The decrease was attributable to a decrease in ASP, which was primarily due to a shift in product mix to lower ASP next-generation products.  Our revenue from sales into the prosumer and industrial audio/video market as a percentage of total net revenue increased by 1 percentage point for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year.  We expect our revenue from the prosumer and industrial audio/video market to fluctuate based on our ability to obtain design wins in our customers' newer generation products, broad economic trends affecting business spending on video conferencing and high end audio/video products and also discretionary consumer spending.

Other markets:  Our other markets consist of HDTV, PC add-in boards, development contracts, services and other ancillary markets.  The revenue derived from our other markets was not a significant portion of our total net revenue.


Net revenue by product group

Our primary product group consists of our chipsets.  Our chipsets are targeted toward manufacturers and large volume designer and manufacturer customers building products for the IPTV, home networking, home control and energy management, connected media player, and prosumer and industrial audio/video consumer electronic markets.  Sales of our chipsets accounted for approximately 99% and 99% of our net revenue for the three months ended April 28, 2012 and April 30, 2011, respectively.

We derive a minor portion of our revenue from other products and services, including software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.  The revenue derived from other products and services was not a significant portion of our total net revenue.

 
26

 

Net revenue by geographic region

The following table sets forth net revenue for each geographic region based on the ship-to location of customers (in thousands, except percentages):
 

   
Three Months Ended
 
   
April 28, 2012
   
% of
Net Revenue
   
April 30, 2011
   
% of
Net Revenue
 
Asia
 
$
36,604
     
91%
   
$
57,614
     
95%
 
North America
   
1,866
     
5%
     
2,115
     
4%
 
Other regions
   
1,199
     
3%
     
61
     
*
 
Europe
   
589
     
1%
     
842
     
1%
 
Net revenue
 
$
40,258
     
100%
   
$
60,632
     
100%
 
 
* The percentage of net revenue is less than one percent.

Asia:  Our net revenue in absolute dollars from Asia decreased $21.0 million, or 36%, for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year.  The decrease in net revenue from Asia in absolute dollars was primarily attributable to lower demand in the IPTV media processor market.  Our net revenue from Asia as a percentage of our total net revenue for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year decreased by 4 percentage points.  

As a percentage of total net revenue by country in the Asia region, China, including Hong Kong, represented 75% and 84% for the three months ended April 28, 2012 and April 30, 2011, respectively. 

North America:  Our net revenue in absolute dollars from North America decreased $0.2 million, or 12%, for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year.  Our net revenue from North America increased 1 percentage point as a percentage of our total net revenue for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year.  The decrease in our net revenue from North America in absolute dollars was primarily attributable to lower demand for our SoC solutions for the prosumer and industrial audio/video and connected media player markets.

For the three months ended April 28, 2012 and April 30, 2011, our net revenue generated outside North America was 95% and 96% of our total net revenue, respectively.

Other regions: Our net revenue in absolute dollars from other regions increased $1.1 million for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year.  Our net revenue from other regions increased by 3 percentage points as a percentage of our net revenue for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year.  The increase in our net revenue from other regions in both absolute dollars and as a percentage of our total net revenue was primarily attributable to higher demand for our SoC solutions for the home networking market.

Europe:  Our net revenue in absolute dollars from Europe decreased $0.3 million, or 30%, for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year.  Our net revenue from Europe as a percentage of our total net revenue for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year was unchanged.  The decrease in our net revenue from Europe in absolute dollars was primarily attributable to lower demand for our SoC solutions for the IPTV media processor market.
 
Major Customers

The following table sets forth the major customers that accounted for 10% or more of our net revenue:
 
   
Three Months Ended
Customer
 
April 28, 2012
   
April 30, 2011
Flextronics
   
16%
     
*
Motorola
   
16%
     
20%
Gemtek
   
14%
     
30%

* This customer provided less than 10% of our net revenue in this period.


Gross Profit and Gross Margin

The following table sets forth our gross profit and gross margin (in thousands, except percentages):
 
   
Three Months Ended
 
   
April 28, 2012
   
% change
   
April 30, 2011
 
Gross profit
 
$
21,095
     
(29%
)
 
$
29,792
 
Gross margin
   
52.4%
             
49.1%
 
 
 
27

 
 
The $8.7 million decrease in gross profit for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year was primarily due to a decline in revenue in the IPTV and connected media player markets.  These declines resulted in an increase in revenue as a percentage of total revenue in the home networking market which has lower average cost per chipsets, or ACU, and overall yields a high margin.  Our ASP declined by 29%, units shipped decreased by 7%, and our ACU declined by 53%.  The decrease in ASP was primarily due to the increase, as a percentage of total net revenue, of sales of our home networking and home control and energy management automation products and our new generation media processor products compared to sales of our older generation media processor products, which had higher ASPs.  The decrease in units shipped was primarily due to competitive factors and the timing of new product introductions at telecommunications service providers and other consumer electronics companies.  The decrease in ACU was primarily due to the same reasons noted for our ASP decline and also due to a $1.1 million benefit from the sale of previously written down products.  The decreases were partially offset by an increased percentage of fixed costs per unit due to the 7% decrease in units shipped.  Fixed costs include such items as depreciation and amortization and compensation costs for operations.

The 3.3 percentage point increase in gross margin for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year was primarily due to the $1.1 million, or 2.8 percentage points benefit from the sale of inventory which was previously written down and the shift in product mix to higher margin HPNA products.

Research and development expense

Research and development expense consists primarily of compensation and benefits for our employees engaged in research, design and development activities, stock-based compensation expense, engineering design tools, mask and prototyping costs, testing and subcontracting costs, and costs for facilities and equipment.

The following table sets forth details of research and development expense for the three months ended April 28, 2012 and April 30, 2011 (in thousands, except percentages):
 
   
Three Months Ended
   
Three Months Ended
         
   
April 28,
2012
   
% of Net
Revenue
   
April 30,
2011
   
% of Net
Revenue
   
Increase
(Decrease)
 
%
Change
Compensation and benefits
 
$
13,513
     
33%
   
$
12,105
     
20%
     
1,408
 
12%
Development and design costs
   
3,276
     
8%
     
3,975
     
7%
     
(699)
 
(18%)
Depreciation and amortization
   
1,948
     
5%
     
2,315
     
4%
     
(367)
 
(16%)
Stock-based compensation
   
1,463
     
4%
     
1,532
     
2%
     
(69)
 
(5%)
Other
   
1,589
     
4%
     
1,669
     
2%
     
(80)
 
(5%)
Total research and development expenses
 
$
21,789
     
54%
   
$
21,596
     
35%
     
193
 
1%
 
For the three months ended April 28, 2012, compensation and benefits increased primarily due to an increase in headcount to support new product development as well as salary increases.  The decrease in development and design costs was mainly due to a reduction in masks and shuttle purchases.  Other expenses decreased mainly due to a decrease in IT infrastructure expenses.  We expect our research and development expense to increase in absolute dollars as a result of our acquisition of assets used in the digital TV business from Trident Microsystems, but to remain relatively constant as a percentage of revenue as we grow our revenue as a result of this acquisition.
 
 
Sales and marketing expense

Sales and marketing expense consists primarily of compensation and benefits costs, including commissions to our direct sales force, stock-based compensation expense, trade shows, travel and entertainment expenses and external commissions.
 
The following table sets forth details of sales and marketing expense for the three months ended April 28, 2012 and April 30, 2011 (in thousands, except percentages):
 
   
Three Months Ended
   
Three Months Ended
         
   
April 28,
2012
   
% of Net
Revenue
   
April 30,
2011
   
% of Net
Revenue
   
Increase
(Decrease)
 
%
Change
Compensation and benefits
 
$
4,370
     
11%
   
$
3,796
     
6%
     
574
 
15%
Depreciation and amortization
   
429
     
1%
     
2,094
     
4%
     
(1,665)
 
(80%)
Trade shows, travel and entertainment
   
696
     
2%
     
919
     
2%
     
(223)
 
(24%)
Stock-based compensation
   
472
     
1%
     
594
     
1%
     
(122)
 
(21%)
External commissions
   
161
     
*
     
368
     
*
     
(207)
 
(56%)
Other
   
760
     
2%
     
730
     
1%
     
30
 
4%
Total sales and marketing expenses
 
$
6,888
     
17%
   
$
8,501
     
14%
     
(1,613)
 
(19%)

 * The percentage of net revenue is less than one percent.
 
 
28

 
 
For the three months ended April 28, 2012, compensation and benefits increased primarily due to salary increases and an increase in headcount.  Depreciation and amortization decreased due to lower amortization of acquired intangible assets as a result of related acquired intangible assets impairment charges recorded in our third quarter of fiscal 2012.  Trade shows, travel and entertainment expenses decreased primarily as a result of our efforts to reduce travel expenses.  Stock-based compensation decreased primarily due to the timing of options and awards grants and option cancellations.  External commissions decreased due to lower net revenues of products sold through external sales representatives.  Other expenses remained unchanged.  We expect our sales and marketing expense to increase in absolute dollars as a result of our acquisition of assets used in the digital TV business from Trident Microsystems, but to remain relatively constant as a percentage of revenue as we grow our revenue as a result of this acquisition.

General and administrative expense

General and administrative expense consists primarily of compensation and benefits costs, stock-based compensation expense, legal, accounting and other professional fees and facilities expenses.

The following table sets forth details of general and administrative expense for the three months ended April 28, 2012 and April 30, 2011 (in thousands, except percentages):
 
   
Three Months Ended
   
Three Months Ended
             
   
April 28,
2012
   
% of Net Revenue
   
April 30, 2011
   
% of Net Revenue
   
Increase
(Decrease)
   
%
Change
 
Compensation and benefits
 
$
2,068
     
5%
   
$
2,144
     
4%
     
(76)
     
(4%)
 
Legal and accounting fees
   
1,753
     
4%
     
1,027
     
2%
     
726
     
71%
 
Stock-based compensation
   
774
     
2%
     
965
     
2%
     
(191)
     
(20%
)
Facilities and infrastructure
   
714
     
2%
     
492
     
*
     
222
     
45%
 
Other
   
1,070
     
3%
     
807
     
1%
     
263
     
33%
 
Total general and administrative expenses
 
$
6,379
     
16%
   
$
5,435
     
9%
     
944
     
17%
 

* The percentage of net revenue is less than one percent.

For the three months ended April 28, 2012, compensation and benefits decreased primarily due to a reduction in headcount.  The increase in legal and accounting fees is primarily due to legal fees incurred in connection with our acquisition of assets used in the digital TV business from Trident Microsystems.  The decrease in stock-based compensation expenses is primarily due to the timing of options and awards grants and option cancellations.  The increase in facilities and infrastructure is primarily due to higher IT infrastructure expenses.  Other expenses increased primarily due to a bad debt reserve recorded in April 2012.  We expect our general and administrative expense to increase in absolute dollars as a result of our acquisition of assets used in the digital TV business from Trident Microsystems, but to remain relatively constant as a percentage of revenue as we grow our revenues as a result of this acquisition.

Goodwill and indefinite-lived intangible assets impairment

As of October 29, 2011, we concluded that an interim review of the carrying value of our goodwill and indefinite-lived intangible assets should be performed due to continued reductions in our profitability, sales forecasts and market capitalization.  As a result, we recognized a goodwill impairment charge of $45.1 million and an impairment charge for our indefinite-lived in-process research and development intangible assets of $11.1 million during the third quarter of fiscal 2012.

Impairment, reclassification and amortization of intangible assets
 
In the first quarter of fiscal 2013, we concluded that it was appropriate to reclassify our purchased intellectual property, or IP, that is incorporated into our products, from software, equipment and leasehold improvements to intangible assets.  The reclassification has no effect on previously reported Consolidated Condensed Statements of Operations for any period and does not materially affect previously reported cash flows from operations or from financing activities in the Consolidated Condensed Statements of Cash Flows.  For comparability purposes, the corresponding gross assets and accumulated amortization of $22.2 million and $5.9 million, respectively, have been reclassified as of January 28, 2012.
 
 
29

 
 
 As of January 28, 2012, we included under software, the third party purchased IP that we acquire for incorporation into our product designs.  During the first fiscal quarter of fiscal 2013, we reclassified $16.3 million, net of purchased IP from software, equipment and leasehold improvements to intangible assets.  We begin amortizing such intellectual property at the time that we begin shipment of the associated products into which it is incorporated.  We amortize the intellectual property over the estimated useful life of the associated products, which is generally two to three years.
 
The table below presents the balances of our intangible assets as of April 28, 2012 and January 28, 2012:
 
   
April 28,
2012
   
January 28,
2012
 
Acquired intangible assets
 
$
75,978
   
$
75,978
 
Purchased IP
   
22,519
     
22,204
 
Total
 
$
98,497
   
$
98,182
 
Accumulated amortization
   
(54,920)
     
(52,526)
 
Intangible assets, net
 
$
43,577
   
$
45,656
 

During the third quarter of fiscal 2012, we performed a review of the carrying value of our acquired intangible assets due to continued reductions in our profitability and sales forecasts, and negative cash flows from operations.  As a result, we recognized an intangible asset impairment charge of $55.1 million.
 
We classify our expense from the amortization of acquired developed technology of $1.5 million and $2.7 million for the three months ended April 28, 2012 and April 30, 2011, respectively, as cost of revenue.  We classify our expense from the amortization of purchased IP of $0.5 million for the three months ended April 28, 2012, as cost of revenue.  Amortization for purchased IP was $0.4 million for the three months ended April 30, 2011.  We classify our amortization expense for acquired customer relationships and trademarks of $0.4 million and $2.0 million for the three months ended April 28, 2012 and April 30, 2011, respectively, as sales and marketing expense.  As of April 28, 2012, the unamortized balance from our intangible assets was $43.6 million, which we intend to amortize to future periods based on the remaining estimated useful life of each acquired intangible asset.  If we purchase additional intangible assets in the future, our cost of revenue or other operating expenses may increase from the amortization of those assets.

Acquired intangible assets subject to amortization were as follows as of April 28, 2012 (in thousands, except for years):


   
April 28, 2012
   
Gross Value
   
Impairment
   
Accumulated Amortization and Effect of Currency Translation
   
Net Value
 
Weighted average remaining amortization period (years)
Developed technology
 
$
75,827
    $
(24,614
)
  $
(29,984
)
  $
21,229
 
4.5
Customer relationships
   
51,174
     
(30,486
)
   
(15,282
)
   
5,406
 
4.6
Capitalized IP - amortizing
   
8,496
     
     
(6,405
)
   
2,091
 
1.7
Trademarks
   
2,677
     
     
(1,849
)
   
828
 
6.4
Non-compete agreements
   
1,400
     
     
(1,400
)
   
 
     
139,574
     
(55,100
)
   
(54,920
)
   
29,554
 
4.3
Capitalized IP – not yet amortizing
   
14,023
     
     
     
14,023
 
In-process research and development
   
11,070
     
(11,070
)
   
     
 
   
$
164,667
   
$
(66,170
)
 
$
(54,920
)
 
$
43,577
   

 
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Stock-based compensation expense

The following table sets forth the total stock-based compensation expense that is included in each functional line item in the condensed consolidated statements of operations (in thousands):
 
   
Three Months Ended
 
   
April 28, 2012
   
April 30, 2011
 
Cost of revenue
 
$
117
   
$
100
 
Research and development
   
1,463
     
1,532
 
Sales and marketing
   
472
     
594
 
General and administrative
   
774
     
965
 
Total stock-based compensation
 
$
2,826
   
$
3,191
 
 
The expensing of employee stock options, restricted stock awards and restricted stock units grants will continue to have an adverse impact on our results of operations.

Interest and other income, net

The following table sets forth net interest and other income and the related percentage change (in thousands, except percentages):
 
   
Three Months Ended
 
   
April 28, 2012
   
% change
   
April 30, 2011
 
Interest and other income, net
 
$
491
     
(40%
)
 
$
819
 
 
Our other income and expense primarily consists of interest income from marketable securities, income from refundable research and development credits, gains or losses on foreign exchange transactions, gains or losses on sales of marketable securities and gains or losses on currency hedging activities.  The decrease of $0.3 million, or 40%, for the three months ended April 28, 2012 compared to the corresponding period in the prior fiscal year was due primarily to foreign exchange losses as a result of the U.S. dollar weakening compared to the Euro, Danish krone, and Canadian dollar and a decrease in investment income in connection with market value fluctuations.  The decreases were partially offset by gains from hedging activities.

Provision for income taxes

We recorded a provision for income taxes of $0.2 million and $0.7 million for the three months ended April 28, 2012 and April 30, 2011, respectively.  Included in our provision for income taxes  are foreign exchange gains or losses on unsettled income tax liabilities.

Liquidity and Capital Resources
 
The following table sets forth the balances of cash and cash equivalents and short-term marketable securities (in thousands):

   
April 28, 2012
   
January 28, 2012
 
Cash and cash equivalents
  $
79,050
     
44,283
 
Short-term marketable securities
   
7,329
     
42,134
 
    $
86,379
     
86,417
 
 
As of April 28, 2012, our principal sources of liquidity consisted of cash and cash equivalents and short-term marketable securities of $86.4 million. The balance was unchanged from $86.4 million at January 28, 2012 as the result of $6.9 million of cash used in our operating activities and $2.7 million in purchases of software, equipment and leasehold improvements.  These outflows of cash, cash equivalents and short-term marketable securities were partially offset by $9.6 million of transfers from long-term marketable securities.  During the first quarter of fiscal 2013, we liquidated a significant portion of our short-term marketable securities to generate sufficient cash in anticipation of our asset acquisition from Trident Microsystems, which was completed on May 4, 2012.  We used a total of $42.2 million in cash for this acquisition in the second quarter of fiscal 2013.

As of April 28, 2012, we held $52.8 million of long-term marketable securities.  Although these marketable securities have maturities of greater than one year, we classify them as available-for-sale and may access these funds prior to their contractual maturities.
 
 
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